LONDON -- Palladium prices, which have lost 50 percent of their value over the last year, will remain depressed for some time to come, hit by oversupply and low demand from car manufacturers, analysts said on Wednesday.
Prices of the precious metal, used mainly to clean car exhaust emissions but also in the dental and electronics sector, held just above 5-1/4 year lows at $195 an ounce on Wednesday morning, not far from Tuesday's low of $183.
The metal fell to its lowest level since December 1997 as disgruntled car manufacturers continued to shun the metal they had pushed in September 2001 to more than $1,000 an ounce in favor of what some still see as a more secure supply of substitute platinum.
"Icarus palladium is now a text book case study for commodity watchers. We summarize it with the mantra 'the higher the mountain, the deeper the valley'," JP Morgan's metals analyst, Nick Moore said.
Although both metals are interchangeable in petrol-based vehicles, palladium cannot currently be used in diesel cars.
The latest tumble in palladium, long bedevilled by worries about supply from major producer Russia, has been exaggerated by illiquid market conditions and the general flight away from safe-haven commodities such as gold and platinum group metals.
"It has been hit surprisingly hard and it certainly reflects the lack of buying interest," said Kamal Naqvi, precious metals analyst with Maquarie Bank. "A relatively modest amount of selling, in line with selling across all precious metals, has had a disproportionate effect on the price."
Although palladium may recover marginally and limp back over the $200-an-ounce level, dire fundamentals look set to keep the metal under pressure for years, analysts said.
DEMAND SCARCE AMID OVERSUPPLY
Car makers, the metal's main consumer, are thought to have ample stocks despite having offloaded inventories last year and demand prospects for that sector are less than rosy.
U.S. giant Ford announced a 17 percent cut in second-quarter output two weeks ago, while General Motors estimated a drop of 10.5 percent for the same period.
On top of that, consumer confidence in the United States fell last week to nine-year lows.
Sales of new cars in Western Europe fell 5.3 percent in the first two months of 2003, with Britain suffering the worst decline in February, where sales dropped 5.8 percent and are down 8.1 percent for the first two months of the year.
"Given the oversupply situation in palladium and no signs of auto manufacturers willing to switch back to palladium at this point, it is looking pretty tough still," Ingrid Sterby, metals analyst with Barclays Capital said.
John Reade, precious metals analyst with UBS Warburg said that palladium looked an attractive buy below $200 an ounce in the medium term. "But you could see further declines in the price before it gets back above there," he added.
Despite the massive $450 price difference between palladium and its sister metal platinum, analysts said consumers were still reluctant to switch back to the cheaper of the two as they had been badly burned by the supply disruptions in the 1990's.
Peter Holodny, president of London-based Norimet -- the marketing arm of Russian metals giant Norlisk Nickel, told Reuters he saw an eventual switch back to palladium.
"People are beginning to understand that Norilsk Nickel will be a reliable partner...I think that in general prices tend to overreact and we will see greater demand come back," he said.
Holodny said Norilsk has now contracted out around 70 percent of its production to end users via long-term supply contracts.
Analysts believed that Norilsk, which essentially stopped spot sales of palladium since the second half of 2001, remain off the spot market.
"I hate to use words like never and always. Our general strategy is to contract our metal with end-consumers...but we will sell spot deals to end-consumers. However, we do have a general policy of staying away from the spot market," he said.