When palladium prices started to rise in the later half of 2019, some experts worried we were getting a live look at a precious metal bubble. Over time, however, it became clear that the “palladium bubble” was a myth, and the reality was a trend towards a new normal for palladium.
Back in September of 2019, the metals investment world was curiously regarding the at-the-time
impressive rise of palladium prices to all-time highs above US $1,600/oz after sitting just below US $1,000/oz a year earlier. By November, curiosity turned to astonishment as the
precious metal was soaring above US $1,800/oz, easily outpacing gold and appearing on everyone’s radar.
Each month brought
new highs to palladium prices, and with them, new investors and skeptics alike. December saw prices rise above US $1,900/oz, and January upped the ante further to a jaw-dropping US $2,500/oz. Today we hover closer to $2,300/oz as the trend might have finally hit the roof and started to settle, but with no sign that the momentum was short-lived or about to reverse, the skeptics have started converting into palladium believers.
What we’re left with is a precious metal that has seen prices rise 80% since January 2019 (and 20% in the first month of 2020 alone). Compared to prices of the commodity in August 2018,
palladium prices have increased by 172% in a year and a half.
(Price of palladium in $US/ounce from Feb. 1, 2017 - Feb. 1, 2020)
To understand where the palladium market is going, it’s important to look back on how it got here. Palladium wasn’t always the hot commodity it is today, usually being mined alongside its historically more popular sibling metal platinum as part of the platinum group metals (PGMs), which also includes rhodium.
Palladium, as an extremely light yet ductile precious metal that is extremely resistant to corrosion, has found uses in many different products. From jewelry and electronics to dentist equipment and even fuel cells, the precious metal can be found in many surprising places. But the biggest use, accounting for
more than 80% of global palladium supply, is in catalytic converters for vehicles, and here we can see the market forces at play.
Catalytic converters convert up to 90% of the harmful gases in automobile exhaust into less noxious gases, including nitrogen and water vapor. Since their first widespread adoption in the 1970’s, catalytic converters have become imperative products for the automotive industry that are mandated for essentially all gasoline and diesel vehicles worldwide.
Because palladium makes up a significant portion of catalytic converters, they’ve also
been targets for theft. As the price of palladium has risen, so too has the
number of headlines bemoaning
increases in catalytic converter thefts. In Edmonton, more than 500 converters were
stolen from vehicles in the last three months of 2019 alone.
Market forces behind the palladium price surge
But while thieves targeting palladium products make for news headlines, it’s the increasing demand for palladium itself that is one of the key driving forces behind the metal’s price surge.
(Catalytic converter on the underside of a vehicle)
Over the last decade, there’s been a push from automotive regulators worldwide to drastically reduce vehicle emissions. Automakers looking to produce more efficient gasoline and hybrid vehicles to meet the new demand and increasingly stringent regulations need more effective catalytic converters, and therefore, more palladium.
It’s easy to imagine the global shift as being long and protracted, but the massive European and Chinese markets have been moving far more quickly. In Europe, the
diesel emissions scandal fresh in the minds of consumers has driven more to replace diesel-powered vehicles with gasoline-powered vehicles. Both utilize palladium in their catalytic converters, but gasoline converters use far more (diesel converters use primarily platinum).
Meanwhile, the Chinese market has been
increasingly stringent on vehicle emissions over the last few years and shows no signs of slowing down. Tighter and tighter regulations have demanded better converters for new vehicles, to the point that China has quickly become
the largest purchaser of palladium, despite not having any production of the metal itself.
Of course, China would be producing if it
could, but palladium is hard to come by. The majority of palladium supply is mined in two places, the Bushveld Igneous Complex in South Africa and the Norilsk Complex in Russia, which together account for more than 75% of global palladium market supply. Canada and the US are the third and fourth largest producers of palladium, with deposits coming mainly from the Stillwater Complex in Montana and the Sudbury Basin and Thunder Bay District in Ontario.
(Palladium mine production worldwide by country 2014-2018 | Source: Statista)
However, while palladium demand has increased steadily over the last decade, the supply has fallen behind. For the majority of the last decade, the
palladium market has been in deficit, and the situation has quickly snowballed. Standard Chartered analyst Suki Cooper told Reuters that she
expects 700,000 oz shortfalls of palladium for both 2020 and 2021.
What’s become increasingly clear to the market is that the current supply isn’t cutting it anymore. South Africa, traditionally the world’s largest producer of palladium, has been lowering production and
running into difficulties. Recently, the country released data that showed output of PGMs (palladium included) fell 13.5% in November from 2018 figures.
And the world’s largest single palladium producer, Russia’s
Norilsk Nickel (
OTC:NILSY), is a big question mark weighing on market analysts. For starters, the Russian company’s palladium is mined as a by-product of nickel mining so severe it is regarded as one of the biggest sources of pollution on the planet. More pressing is that Norilsk’s supply of palladium is unverified and uncertain, with fear that the company’s leftover reserves are less than it lets on.
(Smoke from the chimneys of the Norilsk Nickel plant overlooking the city of Norilsk, Russia)
Norilsk hasn’t increased its palladium output to match the growing market demand yet, but the increasingly constrained supply has forced its hand. On Jan. 29, the company announced it would deliver
three extra tonnes of palladium ingots to the market to “provide a short-term relief to tight supplies,” but then went on to say that it believes the market “has over-reacted.” Analysts, however, were
quick to disagree, pointing out that temporary relief for the lease-rates market wouldn’t solve the fundamental drivers that pushed prices higher in the first place.
The hunt for more palladium
By now we’ve reached a point of acceptance that sky-high palladium prices are here to stay, and already the effects are being felt. Automakers have felt the
brunt of the price increase as costs for producing catalytic converters have skyrocketed. Palladium producers have looked to shore up their supplies, with Canadian producer
North American Palladiumbeing acquired by South Africa’s
Impala Platinum Holdings (
OTC:IMPUY) for $1.0 billion back in October. And
recycling of catalytic converters is growing as a percentage of global PGM supply, on trend to reach 30%.
Regardless of where it comes from, the hunt is on for more palladium. With difficulties in South Africa’s production and companies wanting to deal less with Russia’s pollution where possible, the spotlight is on mining prospects in Canada, the US, and Zimbabwe, the three next-largest suppliers and sources of palladium.
Junior PGM or pure-palladium projects are able to hunt for the precious metal relatively worry free. Demand isn’t going anywhere and is only set to continue increasing, especially in China and India. The massive supply gap means new projects are at a premium but won’t make significant dents in the gap, preserving the high prices. And if they can’t get off the ground, analysts expect palladium prices to
only climb higher, with Bank of America analysts
expecting the rally to continue all the way to US $3,500/oz.
(Surface of a 100g palladium ingot)
Investors that entered the palladium market when prices were at US $1,000/oz have enjoyed the ride, but it’s not expected to stop anytime soon. When metal prices go up, there’s a noticeable time-lag before producers start to benefit, and the palladium market is rapidly reaching that point. Whether it’s through finding a palladium stock that fits your portfolio or buying the metal itself, the amount of upside left in this sector is staggering.
The new normal for palladium didn’t arrive without warning. It’s been a decade of low supply on one side and constantly increasing demand on the other, but by now we’re far past the tipping point. And increasingly tighter restrictions on vehicle emissions aren’t going to stop, requiring more efficient catalytic converters and more palladium to make them. The question remains, where will the palladium come from?
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