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Palladium Outlook 2022: Auto Demand to Determine Price Movement

Click here to read the previous palladium outlook.Palladium prices entered 2021 elevated by supply issues from the previous year, a factor that was further compounded by a resurgence in automotive demand amid historically low inventories.Tailwinds pushed.

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Click here to read the previous palladium outlook.

Palladium prices entered 2021 elevated by supply issues from the previous year, a factor that was further compounded by a resurgence in automotive demand amid historically low inventories.

Tailwinds pushed prices from US$2,336 per ounce in January to an all-time high of US$2,842 at the end of April.

While lingering supply chain disruptions benefited the platinum-group metal during the first half of last year, values for the autocatalyst metal were pushed lower during H2.


“The rise in palladium prices in the first half of (2021) was predominantly due to expectations of supply tightness amid strengthening global economic activity and anticipation of a surge in palladium demand from the auto sector,” Steven Burke, economist at FocusEconomics, told the Investing News Network (INN).

“Prices peaked in early May, in tandem with global manufacturing PMIs, and have since trended lower — hitting the lowest level since early 2020 in recent weeks,” he added.


2021 palladium price performance

By the end of September, palladium prices had sunk to a year-to-date low of US$1,786. The metal, which had started Q3 at US$2,740, had shed 34 percent by the end of the quarter. At the end of December, palladium was still holding in the US$1,800 range, although it was some 21 percent lower than its January value.

 Palladium trends 2021: Supply surplus drags price lower


Optimism around economic recovery paired with a 2020 production curtailment at Anglo American Platinum’s (LSE:AAL,OTC Pink:AGPPF) South African operations aided in palladium’s H1 2021 price positivity.

As the semiconductor shortage stretched into the year, the palladium market, which had been in a supply deficit, swung into a surplus for the first time since 2010, according to Metals Focus consultant Dale Munro.

“Russia contributes around 40 percent of primary palladium mine supply,” he said via email. “Thus, the two major incidents at Nornickel (MCX:GMKN) in early 2020 — a concentrator building collapse and mine flooding — had a major impact on global supply, estimated to be around 400,000 ounces of production lost for the year.”

Residual supply issues out of Russia weren’t enough to offset rising production out of South Africa as Anglo American Platinum processed stockpiled ore.

“280,000 ounces of semi-finished inventory accumulated as a result of the Anglo converter plant shutdown in 2020, boosted country output,” Munro said. “In general, across all regions, mine operations were successful at navigating the COVID pandemic challenges with only marginal direct impact on production volumes.”

As South African miners upped output, they also benefited from higher prices early in the year. “Meanwhile, the high basket price, particularly from increased rhodium prices, pushed margins up and allowed miners operational flexibility to pursue higher-cost production,” Munro said. “This was particularly relevant in South Africa.”

With supply growing, prices were impacted by softening demand throughout H2 2021, particularly in the automotive industry. “The biggest factor that impacted palladium demand this year is the protracted and deepening chip shortage,” said Wilma Swarts, director of platinum-group metals at Metals Focus, in December. “Vehicle production forecasts for 2021 were cut by around 10 million vehicles from the start of the year until now.”

For his part, Ralph Aldis, portfolio manager at US Global Investors (NASDAQ:GROW), told INN that palladium's H2 decline was largely facilitated by reports of its substitution in the automotive industry.

“We've seen some stories where the auto industry is beginning the substitution process, and that is what's helping platinum a little bit, but it's coming at the expense of the palladium price,” he said.

Ironically, palladium became the automotive metal of choice to reduce emissions in catalytic converters when platinum prices trended into the US$1,000 per ounce range in the early 2000s. Now the industry is pivoting back to platinum after prices for palladium neared US$3,000 in April 2021.

Due to its close ties to the automotive sector, palladium also faced headwinds from the global semiconductor shortage, which has impeded growth across numerous sectors.

“The palladium prices drifted lower also on the back of auto demand being curtailed because of the chip shortage,” Aldis added. “So that was a knock-on effect for palladium there.”

Palladium outlook 2022: Chip shortage fueling uncertainty


It is estimated that the semiconductor shortage cost the global auto sector US$210 billion in lost revenue in 2021 as producers cut output by 13 percent.

“The ongoing semiconductor shortage has hammered auto production, and in turn demand for palladium, which has weighed on prices,” Burke of FocusEconomics explained to INN. “Given that the shortage of chips is expected to linger into (2022), demand for palladium from the auto sector should only rise at a modest pace (this year) — after declining markedly in 2021.”

While 2022 is expected to bring some relief in terms of the chip shortage, Burke noted that the auto sector sits near the bottom of the list in terms of importance to chip manufacturers.

“Without increased global capacity levels, the market will remain extremely tight and keep auto production relatively downbeat,” he said. “A major issue for securing semiconductors in the auto sector at the moment is linked to low margins for suppliers. Chip makers’ profit margins for supplying semiconductors to the auto industry are extremely low in comparison to other sectors and make up a small fraction of revenue, which makes them less attractive for suppliers to produce in the best of times.”

As a result, the chip issue is expected to be “a headache for automakers for the foreseeable future,” as further supply headwinds pose additional downside risks for the auto sector, and thus demand for palladium.

Metals Focus is a bit more optimistic, forecasting an uptick in both auto demand and production in 2022.

“From a demand perspective we are expecting a recovery in vehicle production, which will lift demand,” Swarts said. “However, the revised light-duty production forecast for 2022 is still well below the production forecast previously anticipated, and will accordingly still weigh on demand from the automotive sector.”

Palladium outlook 2022: Volatility to weigh on price growth 


By the end of December 2021, palladium prices had declined by 32 percent from July’s value of US$2,724. Prices for the metal continued to hold in the US$1,850 to US$1,900 range at the start of 2022.

Although vehicle manufacturing is anticipated to remain below pre-pandemic levels in 2022, Metals Focus is calling for palladium values to rise to a quarterly average of US$2,300 by Q4.

According to Munro, the move will likely be triggered by the replenishing of inventories, which will consume a majority of the surplus material. 2022’s forecast surplus could also be smaller than expected, as he pointed out.

“(2022’s) palladium mine supply is expected to increase on growth from Russia as Nornickel returns to full production,” he said. “Q1 is a seasonally weak quarter for South Africa due to the holiday season; however, annual output is expected to be broadly flat for the full year.”

The Metals Focus consultant continued, “Strong basket pricing is facilitating increased sustaining capital expenditure, which should help bring production stability. The ramp up of development projects is required to offset declining volumes from mature operations; these volumes are inherently more risked, so there is potential for some guidance misses.”

In the years ahead, new production will be key in meeting sector demand. For US Global Investors’ Aldis, this means looking to Australia — specifically, Chalice Mining (ASX:CHN,OTCQB:CGMLF), which Aldis noted has made a significant platinum, palladium, cobalt and nickel discovery at its Julimar project in Western Australia.

As South African operations age and Russian miners deal with issues around melting permafrost destabilizing infrastructure, these new discoveries will become more important in meeting future demand.

“You're going to have other sources of palladium to choose from in the future other than South Africa and Russia," said Aldis, also pointing to North American producers. “You've got several companies that are in that space actively trying to add more production or find a deposit that can be monetized somewhat.”

Echoing the forecast of Metals Focus, FocusEconomics is calling for palladium to average US$2,300 in 2022, a US$134 decline from 2021’s estimate of US$2,434.

“Substitution of palladium for platinum should outweigh substitution of rhodium for palladium,” Burke commented to INN. “Moreover, tepid demand from the auto sector and electric vehicles’ rising global share of automobile sales should weigh on palladium prices.”

Don't forget to follow us @INN_Resource for real-time updates!

Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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Economics

AT&T down 10% despite topping estimates

AT&T (NYSE: T) has revealed that Q4 results indicated continued users for the HBO MAX, wireless and fiber segments. In addition, the company gained more postpaid phone users for the whole year than the last ten years adding one million fiber subscribe

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AT&T (NYSE: T) has revealed that Q4 results indicated continued users for the HBO MAX, wireless and fiber segments. In addition, the company gained more postpaid phone users for the whole year than the last ten years adding one million fiber subscribers. Similarly, the company beat its high-end outlook for international HBO Max and HBO users with almost 74 million subscribers as of December 31, 2021.

CEO John Stankey said:

We ended 2021 the way we started it – by growing our customer relationships, running our operations more effectively and efficiently, and sharpening our focus. Our momentum is strong and we’re confident there is more opportunity to continue to grow our customer base and drive costs from the business.

Q4 2021 revenue dropped 10% YoY

Consolidated revenue in Q4 2021 was $40.96 billion beating consensus estimates $40.68 but dropping 10% YoY, which reflects the impact of divested segments and low Business Wireline revenues. In the third quarter, the company divested US Videos, and in Q4, it divested Vrio. The drop was partially offset by high Warner Media revenues, recovery from pandemic impacts, and high Consumer Wireline and Mobility revenues. Stankey commented:

We’re at the dawn of a new age of connectivity. Our focus now is to be America’s best connectivity provider and also ensure our media assets are positioned to grow and truly become a global media distribution leader. Once we do this, we’ll unlock the true value of these businesses and provide a great opportunity for shareholders.

AT&T reported Q4 net income (loss) attributable to $5 billion or $0.69 per diluted shared share. On an adjusted basis, including merger-amortization fees, a share of DirecTV intangible amortization, gain on benefit plans, and related items, the company had an EPS of $0.78 topping consensus estimate of $0.76 per share.

AT&T had total revenue of $168.9 billion in 2021

AT&T’s consolidated revenues were $168.9 billion in 2021, compared to $171.8 billion a year ago, reflecting the split of the U.S Video division in Q3 2021, as well as the effects of other divested operations. However, higher revenues in WarnerMedia and Communications somewhat offset these declines.

For the full-year, net income (loss) attributable to commons shares was $19.9 billion or $2.76 p were per diluted share. On an adjusted basis, FY 2021 earnings per share were $3.4.

La notizia AT&T down 10% despite topping estimates era stato segnalata su Invezz.

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Economics

New home sales surge, while house price measures decelerate; expect deceleration or even downturns in each

  – by New Deal democratSince I didn’t post yesterday, let me catch up today with a note on both new home sales and prices.New home sales (blue in the graph below) for December rose sharply to 811,000 on an annualized basis. This is the higher monthly…

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 - by New Deal democrat

Since I didn’t post yesterday, let me catch up today with a note on both new home sales and prices.


New home sales (blue in the graph below) for December rose sharply to 811,000 on an annualized basis. This is the higher monthly number since March, and while it is well above the trend since the Great Recession, it is still well below its levels from late 2020:


The red line is inventory. When it comes to new homes, inventory lags not only sales but also prices, so it is not surprising that inventory has increased sharply to a 10 year+ high.

While new home sales are the most leading of all housing metrics, they are very noisy and heavily revised. So in the below graph I compare them with single family permits (red), which have also increased in the last few months, but also are not at 2020 levels:


Because mortgage rates have increased significantly in the past several months, I do not expect this surge in new home buying to last much longer.

Sales lead prices, and for most of 2021 sales were down. So it should not be a surprise that on a YoY basis, price increases are at last abating, shown both monthly (blue) and quarterly (black) in the graph below:


In December, prices were only up 3.4% from one year prior. Since the data is noisy on a monthly basis, the quarterly number, still high at just under 15%, but well below the sharp gains earlier in the year, is more telling.

The deceleration in YoY price gains, which nevertheless are still very high, was also the story yesterday in both the Case Shiller and FHFA house price indexes (light and dark blue in the graph below, /2 for scale). Also shown are the YoY% gains in rent of primary residence and owner’s equivalent rent (how the CPI measures housing inflation)(light and dark red):


My purpose in the above graph is to show that both house price indexes track one another closely, as do both “official” measures of housing inflation. Additionally, as I’ve previously pointed out, house price increases tend to bleed over into the official inflation measures with about a 12 to 18 month lag. Thus on a YoY basis price increases bottomed in 2019, but did not bottom in the official measures of rent until the beginning of 2021. Since the YoY% increase in house prices peaked in mid year 2021, we can expect the “official” CPI housing measure to continue to increase on a YoY basis through roughly late 2022.

This doesn’t necessarily mean that the *total* inflation measure will continue to increase throughout this year. Below I again show the YoY% change in owners’ equivalent rent as above, but also the total inflation index (gold). Most importantly, note that sometimes they track in tandem, but also that generally during the entire house price boom, bubble, and bust from 1995 to 2015 they tended to move in opposite directions:


Why did this happen? Sometimes, as during 1995-2015, home ownership and apartment renting are alternative goods. When more people decide to leave apartments and move into houses, house prices increase while rents flatten. This is generally what happened during the boom and bubble. Then during the bust people were forced to abandon houses and move back into apartments. This is shown in the below graph of homeownership:


Note the huge upward surge until the housing bubble popped, followed by the equally sharp deflation.

Finally, let’s factor in interest rates set by the Fed, shown in black below:


As CPI increases, the Fed typically increases interest rates. By the time the fully effect in owners’ equivalent rent is felt, Fed rate hikes have typically cooled the economy, meaning that the remaining majority of the overall consumer inflation index declines.

Bringing our discussion back to the present, we see that total inflation has been rising sharply since just after the pandemic hit. Owners’ equivalent rent started to rise about 9 months ago. Part of the delay was the big increase in the homeownership rate during that time, driving rents and house prices in opposite directions. The consensus is that the Fed will raise rates several times this year, perhaps starting as early as this spring. If they indeed do so, they will probably continue to embark on hiking rates until the economy slows or even reverses, enough so that price increases - other than rents - decelerate considerably. But while rent measures will continue to accelerate this year, house price increases themselves are likely to continue to decelerate, or even stall in the months ahead.

 

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Government

Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says “Economic Slack Now Absorbed”

Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says "Economic Slack Now Absorbed"

For once, the majority of forecasters was correct, and moments ago the Bank of Canada kept rates unchanged at 0.25, in line with that 24 of 31 analyst

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Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says "Economic Slack Now Absorbed"

For once, the majority of forecasters was correct, and moments ago the Bank of Canada kept rates unchanged at 0.25, in line with that 24 of 31 analysts expected. The bank also said that while it is keeping holdings on its balance sheet constant, once it begins rising interest rates, it "will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds."

In its statement, the Bank of Canada said that with overall economic slack now absorbed, "the Bank has removed its exceptional forward guidance on its policy interest rate" but the Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds roughly constant

Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.

Some more from the BoC:

The global recovery from the COVID-19 pandemic is strong but uneven. The US economy is growing robustly while growth in some other regions appears more moderate, especially in China due to current weakness in its property sector. Strong global demand for goods combined with supply bottlenecks that hinder production and transportation are pushing up inflation in most regions. As well, oil prices have rebounded to well above pre-pandemic levels following a decline at the onset of the Omicron variant of COVID-19. Financial conditions remain broadly accommodative but have tightened with growing expectations that monetary policy will normalize sooner than was anticipated, and with rising geopolitical tensions. Overall, the Bank projects global GDP growth to moderate from 6¾ % in 2021 to about 3½ % in 2022 and 2023.

On inflation, the BoC said that "CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation."

The central bank also said that it will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.

A redline comparison of the BoC statement:

Commenting on the move, Bloomberg's Ven Ram writes that this is a lot more dovish outcome from the Bank of Canada than one might have imagined. Not only did the central bank hold its rate, but it didn’t paint itself into a corner on when it may push the button: “Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.”

Add to that this guidance on balance-sheet runoff: “The Bank will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.”

Net-net this isn’t screaming, “Buy the loonie” and sure enough, in immediate reaction, the canada 2Y yields declined and the loonie weakened, dropping from 1.2560 before the BOC to 1.2640 before paring some of the losses, amid some trader disappointment that the bank did not hike.

* * * Earlier:

In what may be a teaser of what to expect from the Fed later today, the Bank of Canada rate decision is due at 10:00am EST followed by Governor Macklem press conference at 11:00am EST. While the bank is expected to leave rates unchanged, there is the risk of a surprise rate hike. Indeed, about a quarter, or 7/31 analysts, surveyed by Reuters expect a hike. If left unchanged, attention turns to guidance.

Below is a recap of what to expect from the BOC courtesy of Newsquawk

SUMMARY:

  • The Bank of Canada is expected to leave rates unchanged at 0.25% although there is the risk for a hike with 7/31 surveyed analysts expecting a 25bp hike to 0.50% at the January meeting, ahead of the current BoC guidance for the middle quarters of 2022.
  • If the rate is left unchanged, attention turns to guidance to see whether this is bought forward to the end of Q1 (ie March).
  • Market pricing looks for rates to be left unchanged, although this has unwound heavily from last week which saw up to a 90% chance of a 25bp hike in January after the BoC survey and CPI data.
  • The MPR will also be released, analysts at TD securities see 2022 growth being revised lower, while inflation is expected to be revised 0.1% higher for 2022 but revised down by 0.1% in 2023.

LIFT-OFF: The latest Reuters survey saw analysts generally believe the BoC will leave rates unchanged in January, although 7 of 31 surveyed expect a hike will occur. Therefore, the expectation for January is for rates to be left unchanged, although the risk of a hike is there. If the rate is left unchanged, attention will turn to its forward guidance, which currently looks for lift-off “sometime in the middle quarters of 2022”. If it is bought forward to the end of Q1, it will signal a March lift-off is coming. Analysts are currently split on whether the BoC will hike in March with 16/31 calling for rates to be left unchanged again, while the other 15 expect it will rise to 0.50% or more, however, all analysts noted the risk to the pace of rate hikes this year is that they come faster than expected. The median forecast is for the BoC to raise rates to 0.75% by the end of Q2 2022.

SURVEYS: The Business Outlook Survey sounded the alarm on inflation with 67% of firms expecting inflation to be above 3% over the next two years, although most predict it will return to target within one to three years. It also noted that demand and supply bottlenecks are expected to keep upward pressure on prices over the year ahead. However, the overall survey saw a continued improvement in business sentiment to see the indicator hit a record high, although it was held back by labour shortages and supply chain issues. Note, the Canadian labour market is back at pre-pandemic levels and has been for a while. A separate BoC survey showed consumer inflation expectations hitting a record high of 4.89% over the next year, noting most people are more concerned about inflation post-COVID than before, where consumers believe it is more difficult to control. Analysts at ING highlight that the latest survey saw respondents note they expect supply disruptions through H2 this year and that labour shortages are constraining output. ING write “where the economic outlook is robust, the jobs market is red hot and inflation is at generational highs, we see little reason for the BoC to delay tightening monetary policy.” Meanwhile, ING adds that Ontario has announced a three-step plan to allow a full reopening from COVID restrictions from the end of January “which should be the final green light for the central bank to hike rates 25bps”.

INFLATION: The latest CPI report saw the headline M/M and Y/Y metrics in line with expectations, although the core Y /Y measure saw a sharp rise to 4.0%, while the BoC eyed measures rose to 2.93% from 2.73%. Analysts at RBC, who expect the Bank to leave rates unchanged at this meeting, say “Inflation trends have evolved largely in line with the BoC’ s forecasts from the October Monetary Policy Report (4.8% vs actual 4.7% for Q4)”. However, this still shows price growth above the 2% target rate and RBC’s own tracking suggests not all that pressure can be explained by pandemicrelated distortions. As such, RBC expects rates to rise soon and believe the BoC will use this meeting to signal the start of lift-off.

MPR: The MPR will also be released, analysts at TD securities see 2022 growth being revised lower, while inflation is expected to be revised higher for 2022, before being revised marginally lower in 2023. In October, the MPR saw 2021 growth at 5.1%, 2022 at 4.3%, and 2023 at 3.7%. CPI was seen at 3.4% for 2021, while 2022 is expected to be revised higher to 3.5% (prev. 3.4%), and 2023 CPI is expected to be revised down to 2.2% from 2.3%. In the October MPR, the output gap was estimated at about -2.25% to -1.25% and is expected to close sometime in the middle quarters of 2022

Tyler Durden Wed, 01/26/2022 - 10:10

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