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Palladium prices have surged to record levels and many analysts expect a further run towards $3,000 per ounce as automakers ramp up purchases of the metal used to neutralize harmful exhaust fumes, worsening a supply shortage.

A shift to electric vehicles may eventually erode demand, but in recent years tightening environmental rules have forced carmakers to use more and more palladium in their gasoline engines.

Chronic undersupply shot prices from around $500 an ounce in 2016 to $2,875.50 an ounce just before the coronavirus struck - turning what had long been the cheapest major precious metal into the priciest, far above gold and platinum.

Expectations of a deeper deficit have pushed up prices 20% since mid-March, with palladium touching a new all-time peak of $2,891.20 on Wednesday.

Sparking the rise was an announcement by Russian producer Nornickel that flooding at its mines would cut its 2021 output by more than half a million ounces - around 5% of global supply.

Demand from the auto industry is meanwhile rising and expected to climb further as a semiconductor chip shortage that has curtailed vehicle production eases later this year.

Analysts at Citi said they advised clients to buy palladium and expected it to reach $3,200 within three months.

Automakers will overproduce vehicles when chips become available to make up for underproduction during the shortage, they said, adding that this will require more palladium and speculators will bid up prices in advance.

Nornickel this week said the flooding would impact output less than it first warned, but StoneX analyst Rhona O’Connell said she still expected shortfalls of about 700,000 ounces this year and around 500,000 ounces in 2022.

However, the cost of borrowing palladium has so far remained steady, suggesting there is no acute shortage. Traders said metal was available.

Stockpiles have always been found to satisfy demand and manufacturers are starting to switch from palladium to platinum, a sister metal, to save money, taking some pressure off the market, said Jim Steel, an analyst at HSBC.

“There always seems to be that little bit more metal around than we estimate,” he said.

“The market for the foreseeable future is likely to remain tight, but whether we can galvanize much more out of the price is questionable.”

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