Palladium prices have surged 1520% since 2009 due to tight supply and higher emission standards, and analysts at the Bank of America forecast the metal could rise to US$3,500 per oz. in the fourth quarter of 2020 from the current spot price of US$2,302.75 per ounce.
The bank estimates that palladium will rise to an average price of US$2,450 per oz. in the first quarter and to US$3,000 per oz. during the second and third quarters for a full-year average price of US$2,988 per oz. in 2020.
The metal is a key component in catalytic converters used in conventional gasoline-fueled combustion vehicles. The average auto-catalyst contains about US$420 worth of platinum group metals (PGMs), the bank estimates.
"PGM loadings have increased in various countries as car manufacturers have put more metal in the catalysts to comply with tighter regulations," the report states.
"With inelastic demand meeting inelastic supply, deficits have long been plugged by inventories, squeezing palladium violently higher," the B of A notes. "Having been in deficit for almost a decade, palladium demand keeps increasing on the drive to make the economy greener ... miners churn out less metal at present than in 2004, although recyclers have been picking up some of the slack."
The bank is quick to point out, however, that "there is only limited scope for a step-up in recycling palladium."
Meanwhile, producers haven't started substituting palladium with platinum, according to the bank.
"Many car producers have so far been slow to do that, partially because it was challenging enough to meet tighter emission standards, especially in Europe, so a reconfiguration of catalysts would just have added another dimension of complexity ... even if car manufacturers may ultimately be able to change PGM loadings, we believe this may take at least until the end of the year."
Palladium is mostly a by-product of nickel mines in Canada, South Africa and Russia.
Its forecast for the platinum price is US$900 per oz. in the first quarter of 2020, US$1,100 per oz. in the second quarter, and US$1,200 per oz. in the third and fourth quarter of the year.
At press time platinum was trading at US$960.64 per ounce.