The palladium price has trebled in three years, making it even more valuable than gold
Bloomberg | January 21, 2020 | SmallCapPower: Palladium is the most valuable of the four major precious metals, with an acute shortage driving prices to fresh records. A key component in pollution-control devices for cars and trucks, the metal’s price has trebled in three years, bringing it at first level with the price of gold, then lifting it way beyond.
(Originally published on Bloomberg.com on January 20, 2020)
- What is palladium?
It’s a lustrous white material, one of the six platinum-group metals (along with ruthenium, rhodium, osmium, iridium and platinum itself). About 85% of palladium ends up in catalytic converters in car exhausts, where it helps turn toxic pollutants into less-harmful carbon dioxide and water vapor. It is also used in electronics, dentistry and jewelry. The metal is mined primarily in Russia and South Africa, and mostly extracted as a secondary product from operations that are focused on other metals, such as platinum or nickel.
- Why is it getting more expensive?
Supply has lagged demand for almost a decade. Usage is increasing as governments, especially China’s, tighten regulations to crack down on pollution from vehicles, forcing automakers to increase the amount of precious metal they use. In Europe, consumers bought fewer diesel cars, which mostly use platinum, and instead chose gasoline-powered vehicles, which use palladium, following revelations that makers of diesel cars cheated on emissions tests and as concerns about diesel pollution intensified.
Palladium prices have soared to a record on supply shortages
- Why is supply so tight?
Palladium’s status as a byproduct to platinum or nickel mining means producers aren’t quick to respond to price changes. In fact, output is projected to fall short of demand for a ninth straight year in 2020. That’s helped drive prices to successive records. While some obscure metals like rhodium are still more valuable, palladium traded above gold for most of the past year.
Palladium has been in deficit since 2012
Source: Metals Focus
- Are speculators driving up the price?
Partly. Since August 2018, hedge funds have been betting that prices will rise. Yet palladium for immediate delivery trades at a premium to material for delivery later and lease rates have spiked, suggesting manufacturers are scrambling for supply. And palladium-backed exchange-traded funds saw net outflows over the past five years as investors withdrew metal, then lent it to users at lucrative rates. There has also been anecdotal evidence of stockpiling in China, the biggest buyer in the automotive sector.
- Who are the winners and losers?
While Russia’s MMC Norilsk Nickel PJSC is the biggest palladium producer, the rally is also good news for South Africa’s platinum miners, who dig it up alongside their primary metal. On the other hand, carmakers are having to pay more for the metal and may eventually pass the increase on to consumers. There’s been a surge in thefts of catalytic converters from vehicles in the U.K. because of soaring palladium prices.
- Is palladium usually this volatile?
Yes, and not just palladium. Precious metals used in small quantities by the auto industry have a history of price spikes when demand outstrips supply. In the decade following 1998, platinum soared more than 500% as a shortage caught the attention of speculative buyers. Rhodium, which rallied more than 4,000% over a similar period before carmakers found ways to use less, has again spiked toward a record. Palladium itself jumped nine-fold from its lows in 1996 to a peak in 2001 as users worried Russian sales would slow.
- Can automakers use an alternative?
It’s true that palladium’s rise relative to platinum might prompt some carmakers to work on substitution. However, there are no signs of that happening yet and it’s unclear when such a switch might happen. Research into the use of platinum shows that technological advances are needed before it can match the performance of existing palladium-based autocatalysts, according to Johnson Matthey Plc, which makes the devices. And the likes of Daimler AG are more focused on electrification and batteries than a metal that represents a relatively small part of costs.
- Where do electric cars fit into the picture?
Electric cars don’t burn fuel, don’t have exhaust pipes and don’t use palladium. Still, most analysts believe the electrification of the majority of the world’s automotive fleet is many years in the future. In the meantime, palladium use in hybrid vehicles is also a growing source of demand.
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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