Palladium Trade Body Warns of Supply Pinch in London
Reprinted from the FT – 18/08/2020
Industry group says the market is tighter now than it has been for more than 20 years. The body charged with overseeing London’s palladium market has issued a stern warning to its members to ensure trading still functions as it should, as fears grow over a chronic shortage of the metal used in catalytic converters.
The price of palladium has surged by 80 per cent over the past year to surpass the price of gold, making it one of the most valuable precious metals on earth, worth about $2,400 an ounce.
The rally has been driven by growing demand from carmakers, who have to use more palladium-rich catalysts to meet tighter standards on harmful emissions in Europe and China.
This week physical palladium in London surged to a premium of over $200 to the price of futures expiring in March — the widest spread in at least 20 years, according to Refinitiv data.
John Metcalf, chairman of the London Platinum and Palladium Market, whose members include banks such as HSBC and JPMorgan, said that “extremely turbulent trading conditions” threatened liquidity in the London market, according to a letter seen by the Financial Times. In the letter, Mr. Metcalf, who works for the German chemical giant BASF, said there is likely to be a “prolonged” shortage of palladium metal in London, adding that the situation appeared worse than when Russian exports were restricted in the late 1990s, following the collapse of the Soviet Union.
Mr. Metcalf urged members to bear this in mind when pricing physical metal “for the sake of the London market’s reputation and continued functioning.” Palladium is traded in London by banks and buyers in an over-the-counter market, meaning trading is conducted directly between two parties.
Mr. Metcalf said similar conditions prevailed between 1997 and 2000 when delays in exports from Russia led to shortages. But these were eventually resolved by a resumption of shipments from the country, he said.
“Although there is no way of obtaining definitive numbers, the level of stocks available to the market today is likely far lower as supply/demand analysis has shown significant fundamental deficits . . . for a number of years,” he said, in the letter. “With that in mind and the fact that today there is no such delay in Russian exports, it is unclear whether there can be a swift solution to resolve the current tightness we are witnessing and indeed it seems possible it may be prolonged.”
In a sign of the growing shortage, the cost of borrowing palladium for one month from banks in London has surged to an annual rate of over 30 per cent, more than five times the levels of 2018. That has amplified concerns over the proper functioning of the market.
Banks in London often use palladium futures to offset their price exposures, using so-called “exchange-for-physical” contracts.
The CME Group, which owns the Nymex metals exchange, said there was a total of 996 such trades in palladium on Tuesday. That is equivalent to more than three times the amount of physical metal stored in registered warehouses.
Tai Wong, head of metals trading at BMO Capital Markets in New York, said he had “never seen a rupture” like current prices in his 15 years of trading. “It’s not a normal market and will not act like a normal market for some time,” he said.