Investing.com – Prices are expected to lag other precious metals, according to UBS analysts.
The analysts pointed to palladium’s volatility, which has caused prices to hover above $1,000 an ounce in recent weeks.
They added that given the high short positions in the market, this volatility is likely to persist in the near term.
UBS pointed to several factors contributing to a tighter palladium market, which contrasts with their long-term outlook.
A decline in electric vehicle sales this year has maintained demand for palladium in automotive catalysts, a sector responsible for more than 90% of palladium consumption.
Furthermore, upcoming supply cuts from a US palladium mine are expected to tighten the market further next year, prompting UBS to increase their price forecasts by $100 per ounce.
Despite the short-term tightening, the long-term outlook for palladium remains bleak.
The shift from combustion engines to battery electric vehicles is expected to cause an oversupply of metal as demand from the automotive catalyst sector declines.
The analysts pointed out that while global automotive electrification has stalled, consumers are increasingly preferring hybrid vehicles, which still rely on automotive catalysts and therefore palladium.
Supply dynamics also contribute to the expected tighter market. UBS noted that the fourth-largest palladium producer, with a 14% market share, plans to restructure its US operations due to unfavorable prices.
This restructuring will lead to a reduction in the group’s metal production, particularly palladium, with an expected reduction of approximately 150,000 ounces, representing approximately 2.3% of the mine supply in 2023.
While UBS has adopted a more neutral outlook on palladium due to these short-term factors, they warn that the metal is likely to underperform compared to other precious metals.
This perspective is reinforced by an expected increase in the scrap supply of automotive catalysts for old cars next year, as well as by a continued trend of substitution in automotive catalysts for new cars, with platinum being favored over palladium.
