Given the record short position in palladium futures, Sibanye's production curtailment could prompt a short squeeze, making PALL a speculative buy.
In June, I upgraded my view of the abrdn Physical Palladium Shares ETF (NYSEARCA:PALL) to a hold, pending a potential supply response from one of the largest platinum and palladium miner in the world, Sibanye Stillwater (SBSW). As one of the few primary Platinum Group Metal ("PGM") miners in the world, Sibanye controls a substantial share of the PGM market and their actions can directly affect the price of palladium (Figure 1).
Sibanye's rumored production cut was confirmed in the company's H1 earnings report, when the company announced that it would curtail production of PGMs in Sibanye's U.S. operations by 200k oz/year.
I believe this production cut will help balance the palladium markets and may spark a short-covering rally in palladium prices, as there is currently a record short position in financial futures. I am raising my rating on PALL to a speculative buy.
The abrdn Physical Palladium Shares ETF is an investment trust that holds physical palladium bars in vaults in Zurich and London. The PALL ETF holds over 292 million oz of palladium, worth over $300 million at current prices (Figure 2).
There is an old saying in commodity trading that the cure for low prices is low prices. What this means is that when commodity prices stay low for an extended period, producers cannot make economic profits and must curtail production to stem losses. Lowered production ultimately tightens the market and raises prices.
In the case of palladium, due to the shrinking end-user demand for PGMs from automotive applications (PGMs are primarily used in catalytic converters in gasoline/diesel vehicles which are being phased out by electric vehicles), the price of palladium has been on a steep decline since peaking after the COVID-19 pandemic (Figure 3).
This has caused the PALL ETF to decline precipitously in sympathy since PALL basically tracks the price of palladium (Figure 4).
The most interesting thing about the palladium market is that palladium and other PGMs are usually produced as a byproduct of nickel sulfide mines that primarily mine nickel, copper, and silver. When palladium prices surged in the 2010s, primary nickel and silver miners did not increase production to garner more palladium credits (Figure 6).
Likewise, during the recent price collapse, primary nickel and silver miners did not reduce their production because their palladium credits decreased. In effect, palladium supply is relatively inelastic with the exception of a few primary PGM producers like Sibanye Stillwater.
What caused me to upgrade my view of the PALL ETF in June was the news that Sibanye was considering curtailing the production of PGMs due to persistently low prices. This news was recently confirmed in the company's H1 earnings results, when Sibanye said it would cut production at its Stillwater mine in the U.S. by 200k oz/year beginning in 2025 (Figure 6).
According to the company's earnings release, The Stillwater West mine will be placed on care & maintenance (i.e. mothballed), while Stillwater East and the Boulder mines are expected to produce a combined ~265k oz beginning in 2025. These actions are expected to reduce all-in-sustaining-cost ("AISC") of production by ~40%.
While the production cut of 200k oz is only 2% of the ~10 million oz market for palladium, it should help to balance the markets and help boost prices. Sibanye expects PGMs to be in supply-deficit in the medium term, especially with its recent production cuts (Figure 7).
Given the record short position in financial futures tied to palladium prices, I believe Sibanye's production curtailment news may spark a short squeeze (Figure 8).
As I mentioned in my prior article, commodity markets are currently driven by Commodity Trading Advisors ("CTAs"), momentum hedge funds that take long and short bets on commodity futures. CTAs buy assets that are going up and short assets that are declining, without much thought on the reflexivity of their actions. That is why we had the comical rallies in cocoa and coffee futures earlier this year and currently the largest short position on record in palladium futures.
However, once the price momentum changes for palladium, investors should expect CTAs to quickly cover their shorts, irrespective of the bearish long-term fundamentals of the commodity due to EV substitution.
A supply response from Sibanye was confirmed in the company's recent H1 earnings report, with Sibanye expected to curtail production of PGMs by 200k oz/year beginning in 2025. I believe Sibanye's actions may spark a short-covering rally in palladium prices and the PALL ETF, as there is currently a record short position in financial futures. I am upgrading PALL to a speculative buy.