Palladium, relatively unknown precious metal in Pakistan, has lately emerged one of the most valuable four precious metals around the world. Its price has doubled in a little more than one year, making it more expensive than gold. Analysts say an acute shortage of the commodity is driving its prices to record levels and remain on upward trajectory in the near future. Speculative positioning remains relatively muted, suggesting genuine industrial demand is driving the prices.
Palladium price is likely to rise still higher after growing demand from automakers and a gaping supply shortfall pushing prices to record levels above US$1,700 an ounce lately. Shortages of metal eased this summer, causing prices to dip, but auto manufacturers, who account for 80% of palladium consumption, have ramped up purchases in recent weeks.
Palladium is riding the coattails of a wider boom in precious metals prices as investors seek shelter from economic uncertainty in assets traditionally seen as safe, said Philip Newman at consultants Metals Focus.
Analysts predict 2019 to be the eighth consecutive annual shortfall. They also don’t see the deficit disappearing as above ground stocks had fallen to around 13 million ounces from around 18 million ounces at the end of 2010.
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 the exhaust systems in cars, 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 hasn’t responded to growing demand. 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.
Why is supply so tight?
Palladium’s status as a byproduct to platinum or nickel mining means output tends to lag price gains. In fact, the amount produced is projected to fall short of demand for an eighth straight year in 2019. That’s helped drive prices to successive records. While some obscure metals are still more valuable, palladium traded above gold for most of this year.
Are speculators driving up the price?
Since August 2018, hedge funds have increased bets that prices will rise. Yet palladium for immediate delivery trades at a premium to material for delivery later, suggesting manufacturers are scrambling for supply. And palladium-backed exchange-traded funds saw net-outflows this year as investors withdrew metal, then leased 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 especially good news for South Africa’s platinum miners, who dig it up alongside their primary metal and are dealing with platinum prices hovering near decade lows. On the other hand, car makers are having to pay more for the metal and may eventually pass the increase on to consumers.
Is palladium usually this volatile?
Yes and no, 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 rallied more than 4,000% over a similar period before car makers found ways to use less. 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 car makers to work on substitution. However, it’s uncertain when a switch will happen. Research into the use of platinum shows that technological advances are needed before it can match the performance of existing palladium-based catalytic converters, according to Johnson Matthey Plc, which makes the devices. Analysts have said it could take up to 18 months to incorporate a switch. 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 boosting demand.