Palladium's record breaking rally to fade next year: Reuters poll

LONDON (Reuters) - Palladium will cost an average $485 an ounce more than platinum this year - a record breaking premium - but the gap will narrow in 2020 as the rally fizzles out and platinum recovers after an eight year downturn, a Reuters poll showed.

FILE PHOTO: Employees place an ingot of 99.98 percent pure palladium into water for cooling at a plant owned by Krastsvetmet, one of the world's biggest manufacturers of non-ferrous metals, in Krasnoyarsk, Russia April 9, 2019. REUTERS/Ilya Naymushin

A shortfall of palladium and a surplus of platinum have reversed the traditional hierarchy between the two metals, both used mainly in vehicle exhausts to curb harmful emissions.

Palladium surged from a low of $449.55 an ounce in early 2016 to record highs above $1,600 in March, though prices have since fallen back to around $1,400.

The poll of 27 analysts and traders conducted this month returned a median forecast for palladium to average $1,350 this year - its highest annual average ever - and $1,275 in 2020.

That prediction is higher than a similar poll three months ago which forecast prices of $1,200 this year and $1,150 in 2020.

But it would still see palladium fall behind gold, which a parallel Reuters poll forecast will average $1,322 an ounce this year and $1,369 in 2020.

“The fundamentals (for palladium) are very very strong,” analysts at Italpreziosi said.

Consultants Metals Focus forecast a 789,000-ounce shortfall this year in the 10 million ounce-a-year market – the eighth consecutive annual deficit - and shortfalls of a similar size for several years after that.

Also helping palladium has been a switch from diesel to gasoline car engines following an emissions scandal in 2015. Both palladium and platinum are used in vehicle exhausts but palladium loadings are higher in gasoline engines.

But a slowdown in car sales in key markets including the United States and China could undercut prices, said INTL FCStone analyst Edward Meir.

“This will likely be a drag on demand despite palladium’s compelling supply-side deficits,” he said.

Another risk is that automakers will cut costs by using more platinum and less palladium.

There has been little sign of this, but investors expecting substitution have increased bets on higher platinum prices, lifting the metal from near decade lows around $800 an ounce to a little under $900.

Platinum will struggle to hold on to those gains, the poll found. Analysts and traders returned a median forecast of $865 for this year - the lowest annual average since 2004 - and $925 in 2020.

That prediction - which is slightly higher than forecasts of $856 this year and $900 in 2020 from the poll three months ago - implies that palladium will cost on average $350 an ounce more than platinum in 2020.

Weighing on platinum is a persistent supply surplus. The World Platinum Investment Council expects a surplus of 680,000 ounces this year in the 8-million-ounce market - the third straight year of oversupply.

“Platinum’s supply/demand profile is not as constructive as that of palladium and so we see the complex struggling on the upside for a little while longer,” said INTL FCStone’s Meir.

Reporting by Peter Hobson and K. Sathya Narayanan; Additional reporting by Nallur Sethuraman and Asha Sistla; Editing by Veronica Brown and Elaine Hardcastle