SINGAPORE (BLOOMBERG) - Palladium burst above US$1,500 (S$2,030) to hit a record, extending a powerful rally driven by an acute shortage of supply as car manufacturers scramble to get hold of the material to meet stringent emissions controls.

Spot palladium climbed as much as 1.3 per cent to an all-time high of US$1,500.36 an ounce, and traded at US$1,499.46 at 10.01am in Singapore. Prices are set for a seventh monthly gain and have advanced 45 per cent in the past year.

The global deficit looks set to "widen dramatically" this year, according to Johnson Matthey, a maker of autocatalysts. Tighter supplies of the metal, used mainly to curb emissions in gasoline vehicles, have prompted users to lease material from exchange-traded fund holders to meet their needs.

Heraeus, a precious metals refiner, said physical palladium ETF holdings fell to 700,000 ounces at the end of 2018, down from a peak of 2.9 million in 2014. It is hard to gauge the exact level of global stockpiles, but various sources have estimated a range between 10 million and 18 million ounces, which equates to roughly one to two years of demand, Heraeus said.

CHINA QUESTIONS

Still, some analysts are questioning the durability of the rally. Car sales in China continued to drop in January after their first full-year slump in more than two decades. Plus, markets in Europe and North America are shrinking as ride-hailing and car-sharing services make it less necessary to own a vehicle.

Tighter emissions legislation "is outweighing the weakness in global auto sales and the growing threat from EVs (electric vehicles)," said Mr Matthew Turner, a commodities strategist at Macquarie Group. "So while we've known about deficits and projected deficits for years, the market's ability to adjust to them is unusually constrained."

Palladium is a rare metal produced mostly in two countries, so it may not be possible to boost output immediately to meet demand. More than 80 per cent of global supply comes as a by-product from nickel mining in Russia and platinum mining in South Africa, so supplies are dependent on the extraction level and investment in other minerals.

Still, the metal's stunning rally could be due for a pullback.

"While we share the view of undersupply and likewise see little substitution potential, we believe this is already priced into palladium," Mr Carsten Menke, an analyst at Julius Baer Group, said in a report. "Due to the prevailing positive sentiment, short-term price risks still seem skewed to the upside", but these levels are not sustainable in the longer term, he said, adding that the bank's 12-month target is unchanged at US$1,000 an ounce.