Palladium

Palladium

Palladium, a rare silvery-white metal, has been eclipsed by precious metals performance in the last few months as investors question, is the everything bubble ripe to burst.

Palladium has slipped under the radar as investors reconfigure their portfolios to deal with the financial and economic reality. Currency debasement, negative interest rate policy, the inversion of 2s10s yield curve and a raft of other indicators are stoking up fears of a looming recession. Moreover, this is spurring on demand for safe-haven assets, which are increasingly becoming scarce.

Could palladium be a potentially good long term bet?

Palladium is also  a scare metal but unlike precious metals its price is not driven by sentiment, which can be fickle.  Palladium prices have been driven by fundamental demand, a macro trend for pollution reduction.

Environmentalism, public awareness of the benefits of clean energy and pro-environmental policies is likely to act as a tailwind on palladium’s demand going forward.

So what is palladium?

Palladium is a scarce silvery-white metal with atomic number 46 on the periodic table. Palladium is alloyed with platinum and gold but it is more easily fusible. Palladium is one of six platinum group metals which share similar chemical, physical, and structural features.

What is driving palladium’s global demand? 

The silvery-white metal has many uses but its major use is in the autocatalyst industry which has been driving its global consumption.

Last year, total gross demand for palladium was 10,121 million ounces (Moz). More than half the world’s consumption of palladium 8,655 Moz went towards the production of catalytic converters in automobiles. 

A catalytic converter is an exhaust emission control device that reduces toxic gases and pollutants in exhaust gas from an internal combustion engine into less-toxic pollutants by catalyzing a redox reaction. The combustion of gasoline creates three primary pollutants: hydrocarbons, nitrogen oxides, and carbon monoxide. Catalytic converters work to alter these poisonous and often dangerous chemicals into safer compounds.

These “two-way” converters combine oxygen with carbon monoxide (CO) and unburned hydrocarbons (HC) to produce carbon dioxide (CO2) and water (H2O).

Most gasoline-powered vehicles in 1975 were required by the US Environmental Protection Agency to be equipped with catalytic converters.

So which geographical region is the largest consumer of palladium?

The world’s largest factory, China had the largest global demand for palladium with 2,117 Moz bought in 2018. Coming in at a close second is the world’s largest economy, North America which bought 2,041 Moz of the silvery-white metal last year. Europe was amongst the top three consumers of palladium at 1,883 Moz. Japan gobbled 859 Moz of palladium last year and the rest of the world bought 1,755 Moz of the metal.

Global environmental policies have been driving the demand for palladium. 

To control emissions and greenhouse gasses countries around the world have come up with strict emissions standards that auto manufacturers must meet.

So stricter emissions testing, Known as Real Driving Emissions (RDE) is coming into effect which could further drive demand for palladium.

How does palladium perform versus platinum in catalytic converters?

RDE tests have shown that palladium performs better than platinum in autocatalyst.

The catalyst component of a catalytic converter is usually platinum (Pt), along with palladium (Pd), and rhodium (Rh). All three of these platinum group metals, or PGMs, are extremely rare but have a broad range of applications in addition to catalytic converters. 

RDE tests have shown that palladium performs better than platinum in autocatalyst in typical driving conditions. 

Palladium is used in gasoline combustion autocatalyst and platinum is found diesel combustion autocatalyst. 

Volkswagen emission scandal (known as Dieselgate) has undermined diesel combustion engines in favor of gasoline, thereby driving demand for palladium.

Volkswagen AG had to deal with at least a half-dozen court actions stemming from its use of software to cheat on diesel emission tests. The iconic German carmaker was forced to put aside some $32 billion to settle lawsuits and pay damages, the automaker faces more than $10 billion in further claims from disgruntled investors and customers. Furthermore, the Dieselgate scandal tarnished the Volkswagen brand and damage its reputation as top executives.

So vehicle emission has since been hanging over the head of VW.

If diesel engines are being phased out in favor of gas-powered vehicles then that is likely to boost demand for palladium even further going forward

Palladium price chart shows the metals spectacular rally, particularly in the past three years.

Palladium increased by 20.96% in 2016 closing at $614.43, then made another jump in 2017 up 55.81% closing the year at $869.21. Last year, 2018 Palladium close up 12.8% at $1,016.46.

Palladium currently is trading more than gold at $1,541.10 per ounce, at the time of writing this piece. Palladium has been the silent performer that few are talking about.

The current price of palladium is driven by fundamental supply and demand issues, not investor speculation. Moreover, in the last six years, there has been a supply shortage of palladium to the tune of five million ounces, which has helped to propel palladium prices to new highs. This has put upward pressure on readily available supplies of above-ground palladium. 

Could a palladium prices crash be imminent in the event of the electrification of autos?

The internal combustion engine, particularly the gasoline engine may not be at the heart of mass transport of the future.

If so electrification is the way forward, then demand for autocatalyst would plunge, thereby sending palladium prices with it

Europe, the third-largest consumer of palladium is on a mission to decarbonize its transport by 2050.

The Paris agreement states that Europe must sell its last internal combustion engine car during the early 2030s, according to the Paris agreement. In other words, Europe’s major autos could cease manufacturing internal combustion cars within the next decade as it switches to electrification. VW is embarking on $50 billion electrification plan. Fiat Chrysler Automobiles NV proposed a merger with Renault to lower the cost of its electrification strategy.

Electrification of vehicles is likely to send the demand for palladium tumbling.