Commodity investors will remember how around this time last year palladium was one of the hottest precious metals on the market. Although prices ended up tumbling a bit, they ended coming back strong towards the end of the year.
Now going into 2020, demand for palladium is reaching new records as suppliers struggle to keep up. One report from Citigroup has said that the palladium bull market and increased commodity costs have collectively cost the automotive industry $18 billion in 2019.
Over the past 12 months, palladium prices have increased by over 80 percent as producers are struggling to keep up with industrial demand, mainly attributed to automakers who need palladium for catalytic converters. Some analysts from Citigroup who authored the report have gone on to say that prices will continue to surge as limited supplies combined with increasing demand create a shortage.
“Platinum group metals [which include palladium] now represent a whopping 15 per cent of global automakers’ cash flow, up from 7 per cent a year ago and 4 per cent three years ago,” said Citigroup analyst Max Layton in a report. Although some palladium can be substituted by platinum if companies make modifications to their manufacturing process, it won’t be enough to completely mitigate palladium demand. “By some accounts 25 per cent [of the palladium] . . . can be substituted for platinum in gasoline vehicles in 18 to 24 months and this may already be in the pipeline. In this case, this could gradually affect the market from 2021 and would likely substantially affect the market from 2022,” he added.
Palladium prices have recently broken past the $2,500 per ounce mark, far surpassing the price of gold as the most expensive precious metal on the market. Breaking down demand into regional areas, one of the biggest drivers of palladium demand has been from China, where carmakers have been forced to meet more stringent air pollution standards from the Chinese government. Other areas, such as Europe, have also helped drive demand for catalytic converters, albeit to a less extent than China.
On the supply side, few new projects are popping up that have substantial palladium deposits. Most of the precious metal is produced as a by-product of mining other metals, mainly platinum and nickel, with some of the largest national producers in the world being Russia and South Africa.
Demand for palladium has gotten so bad that police in many countries are now warning car owners that catalytic converter thefts are becoming increasingly common. In the U.K., specific car owners have been recommended to buy a “catloc” device, which prevents the converter from being cut out and stolen from the car.
Overall, shares of palladium producers have been surging, with some of the top companies in the industry – Anglo American (OTC:NGLOY) and Norilsk (OTC:NILSY) – having seen significant gains over the past year. Some of the smaller producers, such as Sibanye Gold, have more than doubled over the past three months alone.
At the moment, there are many reasons to be bullish about not just about palladium, but even precious metals in general. Geopolitical tensions with Iran as well as trade issues with China have helped push prices up even further.
