Why Palladium Could Shine Brightly

Hubert Moolman’s look at the ratio between platinum and gold was interesting, but platinum is merely one of several elements in the periodic table known as the platinum group metals.

The best known metal in this group (other than platinum) is probably palladium. And while platinum has tended to underperform relative to gold, palladium prices have reached 9-year highs recently.

Here’s a chart showing gold, platinum, and palladium since January 2009:

And here’s a chart that shows both the gold/palladium and platinum/palladium ratios:

As you can see, back in January 2009 you needed about 4.5 ounces of palladium to buy one ounce of gold. Now you need only about 2 ounces of palladium to get that same ounce of gold. Palladium prices and this rato, however, can be extremely volatile. It’s not unusual to see palladium fall as much as $50 per ounce in just a few days.

A few weeks ago, UBS discussed its outlook, “We forecast that palladium will likely see one of the strongest increases in intensity of use of any commodity to 2015.” And Derek Engelbrecht, marketing director at Impala Platinum told Bloomberg, “The fundamentals for palladium are looking brighter than they are for platinum.”

So why do some analysts say that palladium is shining so brightly? A look at the supply and demand for palladium provides some explanations.

More cars on the road, more demand for palladium

Like platinum, palladium can be used in catalytic converters, but the use of palladium-based converters has been growing more rapidly.

In its “The Case for Palladium” overview (PDF), Stillwater Mining Company (SWC), a palladium mining company, explains that back in the 1980s, companies like Ford realized that there wouldn’t be enough platinum in the world to meet government emission standards planned for the 1990s.

Consequently, Ford scientists redirected their research efforts and in 1989 they first introduced a palladium-based catalytic converter technology … Palladium, at the time being less costly, rapidly replaced platinum and became the metal of choice as the efficiency of the gasoline engine catalytic converters improved …

That’s for gasoline engines, but diesel engines work differently. Up until a few years ago, diesel engine emissions were mostly treated using platinum. However, according to Stillwater:

By late 2009 technology had emerged reportedly allowing palladium to displace up to 50% of the platinum loadings in diesel catalytic converters, and with the technology in hand, movement toward 50% palladium loadings is now underway.

This is a significant development considering over 50% of new European-built cars are diesel and considering diesel catalytic converters require two times more PGMs than equivalent gasoline engines.

To dig a little deeper into the demand for palladium, I downloaded market data that’s available from Johnson Matthey, a producer of autocatalysts.

Here’s a look at demand for palladium and platinum by application over the past 30 years:

You can see that the demand for palladium as an autocatalyst over the past several years has been rising rapidly compared to the same application for platinum.

And breaking out demand by region shows that China is using much more palladium than a decade ago as the nation’s automotive industry grows:

It’s always possible, of course, that the Chinese (and other emerging economies) will grow less rapidly, reducing palladium demand. Also, there’s always the possibility that another, less expensive technology could be developed to replace the role of palladium in catalytic converters.

Potential tight supplies: Russian stockpiles dwindling?

Russia has traditionally been a large producer of palladium, accounting for more than half the world’s supply according to data from Johnson Matthey’s Platinum 2010 Interim Review.

In fact, for several decades Russia (and the Soviet Union before it) amassed a significant stockpile of palladium, but some experts say that supply is dwindling.

According to the Wall Street Journal on November 19:

Earlier this week Dow Jones Newswires cited a Russian Finance Ministry official as saying the Russian state palladium stock is “practically nil,” and that the State Precious Metals and Gemstones Repository, known as Gokhran, is now unlikely to sell any palladium on the world market.

Standard Bank metals analyst Leon Westgate described the comments as “significant,” as the official level of Russian palladium stockpiles is a state secret.

“The great unknown in the palladium market has always been the potential size of Russian stockpiles sitting in the background. While demand from likes of China and the U.S. for petrol-driven autos has been solid background support, China in particular, anything which suggests that palladium stocks may be lower than previously anticipated is bullish for prices,” he told Dow Jones Newswires.

Why would that stockpile be gone? Seeking Alpha contributor Mark Anthony offers a deep perspective on the reasons in some comments on a post about Stillwater Mining.

As it turns out, mining certain ores for nickel yields significant palladium as a byproduct. And Russian company Norilisk Nickel, the world’s largest nickel producer, supplies millions of ounces of palladium per year.

But according to Mark Anthony, the company is changing its nickel extraction process to reduce pollution:

This chemical process greatly cuts the production cost, cuts off almost all sulphur dioxide pollution, and consumes much less energy. Nickel and copper can be extracted at much higher efficiency, almost 100%.

But the one catch is platinum and palladium, being chemically inert metals, will NOT be extracted by the chemical process, and will be left in the mining waste, after valuable nickel and copper is already produced.

That means Norilsk, supplier of 45%+ of the world’s palladium, will become just a nickel and copper producer and produce almost NO palladium and platinum, and it can actually make MORE profit because the new chemical process costs way much less.

Mark Anthony left another comment suggesting that prices could keep rising, noting, “Palladium is still far too low below platinum price for demand to be suppressed, nor is it high enough to encourage increased production of palladium.”

Investing in palladium

As with other precious metals, investors interested in palladium itself can buy the metal in coins and bullion bars, or consider shares of the Physical Palladium Shares ETF (PALL). Of course you should review the prospectus to make sure you understand the risks of investing in a commodity-based ETF, one of which is that the fund can trade at less than its net asset value.

In addition, the market for palladium (and other platinum group metals) tends to be thinly traded and can be extremely volatile. There can also be wide spreads when buying and selling physical commodities.

As for miners, two of the largest that trade on US exchanges include Stillwater (SWC) and North American Palladium (PAL).

While I’ve seen gold, silver, and platinum (as coins and jewelry for example), I can’t remember ever actually seeing anything made of palladium. But I never really thought to look under my car.

Important Note
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