On Friday, prices for the June contract
PAM22,
+8.92%
settled at $2,981.90 an ounce, up $251.10, or 9.2%, scoring the highest most-active contract finish since May 2021, based on records going back to November 1984, according to Dow Jones Market Data.

Russia produced an estimated 74,000 kilograms of palladium last year, according to the U.S. Geological Survey. That is equal to 2.4 million troy ounces, representing nearly 40% of the world’s total palladium mine production. The data showed Russia as the biggest producer in 2020, while South Africa topped Russian output in 2021.

“Palladium prices remain sensitive to the situation and the disruption to production and exports” in a market where supplies haven’t been able to meet demand, says Shaun Murison, senior market analyst at online trading platform IG.

Specialty chemicals company Johnson Matthey estimated the 2021 market deficit at 829,000 troy ounces, bigger than 728,000-ounce deficit in 2020. Palladium also saw a supply deficit in 2019.

“Palladium has been in deficit long before the Russia-Ukraine situation reached crisis level,” says Murison. The risk to palladium is “becoming too costly for the automotive industry, and the metal’s use in catalytic converters forces change to another more cost-effective metal such as platinum,” he says.

About 25% of palladium can routinely be substituted for platinum in diesel catalytic converters, according to the USGS, with that proportion potentially climbing to as much as 50% in some applications. But Russia is also the world’s second largest producer of platinum.

For 2021, Johnson Matthey estimated autocatalyst demand at 9.45 million troy ounces, up from 8.55 million the year before, and industrial demand at 1.69 million, up from 1.56 million. There are some indications that supply-chain disruptions that hindered new vehicle sales, are starting to abate, says Murison. That suggests improving demand for the metal from light-duty vehicles, which use catalytic converters to lower harmful emissions, he says.

As to whether Russia would use palladium as a “ransom in war”—that is not a certainty, given that oil and natural gas shortages would have a more far reaching economic impact than the precious metal, he says.

However, the West has moved to cut off major Russian bank access to the U.S. dollar and other reserve currencies and will remove some Russian banks from the SWIFT payments system. That removal and other banking sanctions can “inhibit trade, if exemptions aren’t given for these products,” says Murison.

If supply disruptions affecting palladium dovetail with soaring demand, then record-high prices for the metal are the “obvious historical target,” he says.

Prices have already managed to just top the previous settlement record high of $2,981.40 from May 3, 2021, but their record intraday high was at $3,019.00, set on May 4, 2021.

Prices posted significant increases every year since 2016, with the exception of last year during the pandemic, and prices have more than quadrupled since the settlement at $683.25 on Dec. 30, 2016. This year as of March 4, they have gained 56%. The Aberdeen Standard Physical Palladium Shares exchange-traded fund
PALL,
+8.12%
has climbed by around 57%.

Murison expects palladium prices to remain “volatile in lieu of the continuing geopolitical tension, with risk skewed to the upside. Semiconductor shortages, if they do continue to abate, could see demand for the precious metal increasing with light vehicle sales.”