The Case for Investing in Palladium

I’m not really a commodities investor, but I have heard about palladium and its potential due to the widening supply demand deficit and decided to take a look at it.

The price of palladium has risen by more than 50% since last year. It also surpassed the price of gold for the first time since 2001. This week the price of 1 ounce topped $1500, while platinum is hovering around $800 and gold at $1400.

Mainly known as an alternative to gold and platinum, its catalytic properties also made it highly valuable to the automotive industry. The auto industry accounts for about 80% of the demand for palladium. This metal is used in catalytic converters, which were taught to us since we were in primary school, that it is a central component of the vehicle emission control systems of most passengers with ICE, or internal combustion engine or hybrid engines. The devices, installed between the engine and the tailpipe, convert as much as 90% of the hydrocarbons, carbon monoxide and nitrogen dioxide in vehicle emissions into less harmful gases.

Strict Emission Standards a Boon for this Precious Metal

Why is this metal in such a high demand? Well, we have China and other developing countries stepping up to enforce stricter auto emission limits as diesel cars are phased out. Governments around the world are also uniting to fight climate change by bringing in stricter emission standards, Volkswagen helped pushed them to expedite following their embarrassing emissions scandal. With a limited supply of palladium, the growing demand for palladium could be impactful and prices could go higher.

MagnaFlow 94006 Universal Catalytic Converter

In March 2019, Fiat Chrysler Automobiles recalled close to 900,000 vehicles due to defective catalytic converters. This recall is expected to increase the need for palladium by a further 77,000 ounces, placing an additional strain on an already limited supply.

(see https://www.theverge.com/2019/3/13/18264238/fiat-chrysler-recall-cars-emissions-investigation )

It is Hard to Find This Metal

Another reason for its growing price is that palladium deposits are rare. The majority of the world’s palladium production comes from South Africa, Canada and Russia mines. It is usually mined as a by-product. Overall, it is estimated that 110,000 tons of platinum group metals are held in reserve around the world, with nearly 70,000 tons held in South Africa alone. An important source for the metal is recycling. In 2017, 121 tons of platinum, palladium and rhodium are recovered globally from scrap.

Alternatives to Palladium?

Due to the price of palladium skyrocketing, it has sparked speculation that vehicle makers may consider switching to its sister metal platinum in the production of catalytic converters. However, from the basic chemistry knowledge I have, I don’t think that it is possible to directly switch materials pound for pound. It may also take a very long time for auto makers to make sure that it is compliant.

Jim Gallagher, CEO of North American Palladium, has explained in an interview that platinum cannot be substituted directly in the same quantities and speaking in terms of platinum, you would need alot more of this metal and the layout needed to be reconfigured as both palladium and platinum react differently to heat and chemistry. Furthermore, the palladium market is bigger than the platinum market and it does not make sense to shift to another market that has a smaller supply base.

Electrification of Cars

With the electrification of cars, there would be little or no carbon emission. Hence, the demand for this metal could eliminate itself as there will be no need for catalytic converters in electric vehicles. However, we are talking about worldwide adoption of EVs here. To be realistic, I think we have a long way to go due to lack of range capabilities and charging infrastructure.

Even if this is eventually going to happen, people would be adopting hybrid vehicles to allow them to be comfortable with the new technology. I believe hybrids vehicles will be a bridge connecting combustion and pure electric vehicles, hence the catalytic converters will go for a long way and it will bring palladium along with it. According to JP Morgan Chase & Co., hybrid vehicles accounts for merely 3% of the global vehicle market in 2016 but is expected to account for 23 percent of vehicle sales by 2025. We shall see.

Conclusion

Palladium demand is up while supply is down, which has resulted in impressive price gains and I expect it to continue for the next few years. Its importance to the automobile manufacturing industry is expected to continue supporting demand even as the world transitions to EVs. The tight supply situation alongside this steady demand could further widen the deficit and have end users looking to new sources of raw material.

If you are interested, you can visit this website where I first got my information.

https://www.theinvestorspodcast.com/tag/palladium/

Cheers

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