UBS lifts palladium forecasts as supply squeeze bites

UBS has increased its short-term predictions for palladium prices due to a tighter-than-expected supply situation, which is expected to provide a floor for the metal. Despite this, UBS acknowledges that palladium's long-term prospects are declining. The Swiss bank reported that palladium prices have performed better than initially expected, with recent trading at $1,327 an ounce.

Palladium's significance lies in its role as a key component in catalytic converters used in cars to remove harmful gases from petrol vehicle exhausts. Approximately 80% of global palladium demand is derived from this single application, linking the metal's fortunes to the automobile market and environmental emission regulations.

This makes palladium a key indicator of two major forces reshaping the global economy - the transition to electric vehicles and the struggle over industrial supply chains. As a highly concentrated resource, mined primarily in Russia and South Africa, the market is vulnerable to disruptions in just a few locations. UBS highlighted that the supply squeeze is worsening, with global mine output declining in 2025 and expected to decrease further this year, due to declining ore quality in Russia and South African producers curbing investment to preserve cash.

Although recycling is assisting, it's not enough to alleviate the deficiency. Demand, however, has been more persistent than anticipated, driven by the increase in hybrid cars running on petrol engines, which are still prevalent in markets such as the United States and Brazil. Moreover, the decreasing premium of palladium compared to platinum is encouraging car manufacturers to revert to platinum in petrol engines.

Consequently, UBS forecasts the market to be slightly undersupplied rather than oversupplied, contrasting with the surplus they had previously anticipated. For the longer term, UBS remains pessimistic as the gradual shift towards electric vehicles is likely to permanently diminish palladium's primary market.