LONDON – Palladium has been one of the hottest commodities for a while now, but analysts think this year may be the time to book profits.

Prices have rallied to fresh records on tighter supplies of the material mainly used in gasoline vehicle autocatalysts. But analysts surveyed by Bloomberg see the metal ending the year 16% lower than now, partly as shortages are priced in and car sales in key markets slow.

Prices have jumped in recent years as autocatalyst manufacturers scrambled to get hold of the metal to meet more stringent emissions controls, particularly in China. That’s also helped fuel even bigger gains in lesser known sister metal, rhodium. For palladium, scarce supplies have created a lucrative business where investors lease out metal from exchange-traded funds to meet demand.

“Palladium is the most overrated precious metal,” said Georgette Boele, co-coordinator of FX and precious metals strategy at ABN Amro Bank. “First, the shortage is more than reflected in the price. Second, prices don’t yet reflect the weaker outlook on the global car sector.”

What’s fueling the rally and drivers to watch for Palladium’s in an eighth straight annual shortage, helped by stricter emissions legislation around the world. Above-ground stockpiles dropped about 40% in eight years through 2018, consultant Metals Focus Ltd. estimates. But there are signs of weakness from China, the top car market, where passenger  car sales fell 17% last month. The rally has spurred speculation that users may start switching to platinum, which is cheaper and has similar properties.

Palladium may fall to about $1 350 an ounce by year-end, down from $1 604 now, according to the average estimate of nine analysts surveyed by Bloomberg. That would wipe out much of the 27% rally so far this year. Three analysts expect prices to end the year higher than now.

RHODIUM
Demand for autocatalyst metals has been even more supportive for rhodium, which is much less liquid and not traded on an exchange. Prices are up 33% this year to $3 280 an ounce, according to Johnson Matthey. Mined with other platinum-group metals, rhodium should see long-term structural deficits as supplies dwindle and demand rises, said Nicky Shiels, a commodity strategist at Bank of Nova Scotia.

Analysts are mixed on the outlook though. Two surveyed by Bloomberg see prices falling by year-end and two expect further gains. Capital Economics’s Ross Strachan is among those who remain cautious.

“The rally in the price of both these metals has become significantly overdone as fears about supply have become exaggerated,” Strachan said. “In the case of rhodium, there have also been surpluses in recent years which means the amount of stock is still considerable.”