With palladium trading near 16-year highs, at around $900/oz, the market remained bemused by the drivers behind the spot strength, with the futures market signalling around a $30/oz backwardation, sources said.
"There is spot tightness in London and Zurich, with metal being shipped to Asia...but the price defies me. The palladium market is broken," one trader said.
Spot palladium was trading around $887/oz as of 1030 GMT, having hit $925/oz last Friday.
Commerzbank analysts said they saw no justification for the strong palladium price, "especially as the Chinese market -- the second key automotive market for palladium -- is faltering".
Palladium, largely a byproduct of nickel production, is a key autocatylst ingredient in gasoline-powered engines.
According to data from the China Association of Automobile Manufacturers, 1.75 million cars were sold in China in May, down 2.6% year on year.
"This was the second consecutive month with negative year-on-year change rates," Commerzbank said.
German trading house Heraeus said that, sooner or later, speculative investors will likely unwind positions, though it was cautious to say when.
"The operating companies in the palladium market will try to return some liquidity and thus decrease some pressure," Heraeus told clients.
According to Citi's Agate, in terms of primary mine supply, sources of palladium are already highly concentrated, "where [about] 80% of global production is derived from just 10 mines, the largest of which are in Russia."
SUPPLY
"Constructive supply themes continue to drive investor sentiment in the short term as Russia dominates global palladium mine output. Recent palladium supply tightness is largely a function of squeezed market liquidity in addition to lackluster mine output," Nell Agate, precious metals strategist at Citi, told clients Tuesday.
Agate said anecdotal evidence pointed to a physical shortage of exchange deliverable bars for spot settlement, "as well as news flow that suggests trading houses remain reluctant to lend metal, impacting near-term supply".
That correlated with what one senior banker recently said, noting that lease rates, or the interest on borrowed metal, had ballooned out to around 4% from 1.5%.
One banker in Japan said current market conditions were a "once every decade" occurrence.
