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January 2nd, 2019 at 11:26 am

Why Palladium’s suddenly an especially precious metal

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For the first time in more than a decade, palladium is rivaling gold in value. A key component in pollution-control devices for cars and trucks, the metal’s price has surged as much as 50 percent in about four months, making it at times more expensive than gold. The rally shows few signs of fizzling.

1. 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 80 percent 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 focused on other metals, such as platinum or nickel.

2. 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 carmakers to increase the amount of precious metal they use. In Europe, consumers bought fewer diesel vehicles, which mostly use platinum, and instead chose gasoline-powered vehicles, which use palladium, following revelations that makers of diesel cars cheated on emissions tests.

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Precious Metal

A shortage of palladium has sent prices soaring

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Data: Bloomberg; graphic by Bloomberg QuickTake

Prices through Dec. 19

3. Why is supply so tight?

Palladium’s status as a byproduct to platinum or nickel mining means that output tends to lag behind price increases. In fact, the amount of palladium produced is projected to fall short of demand for the seventh straight year in 2018. That’s helped drive prices to successive records. While some obscure metals are still more valuable, palladium topped gold this month to become the highest-priced among the four most widely traded precious metals.

4. Are speculators driving up the price?

Partly. Hedge funds have increased their bets that prices will rise, according to futures positioning data. Yet palladium for immediate delivery is trading at a growing premium to material for delivery later, suggesting that manufacturers are scrambling to get hold of metal. And palladium-backed exchange-traded funds have seen outflows as investors withdraw metal and then lease it to users at lucrative rates. There’s also anecdotal evidence of stockpiling in China, the biggest buyer in the automotive sector. And palladium-backed exchange-traded funds have seen outflows as investors withdraw metal. They’re leasing it at lucrative rates to manufacturers who plan to buy palladium when it becomes less hard to obtain.

5. 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, carmakers are having to pay more for the metal and may eventually pass this on to consumers.

6. Is palladium usually this volatile?

Yes, and not just palladium. 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 percent as a shortage caught the attention of speculative buyers. Rhodium rallied more than 4,000 percent over a similar period before carmakers found ways to use less. Palladium itself jumped ninefold from its lows in 1996 to a peak in 2001 as users worried Russian sales would slow.

7. Is it too late to buy into the rally?

Possibly not. While palladium has climbed a long way already — it’s up more than 600 percent from the lows hit in the wake of the global financial crisis — supply shortages are projected to continue. It’s true that palladium’s rise relative to platinum might prompt some carmakers to work on substituting the metals. However, the switch is unlikely to happen at a large scale anytime soon. And the likes of Daimler AG are more focused on electrification and batteries than a metal which represents a relatively small part of production costs.

8. 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 also a growing source of demand.

Via  Bloomberg

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