Explainer: Gold off the throne, why are palladium prices on a tear?

Palladium

Immortalised in global pop culture thanks to its stint in Marvel's Iron Man, Palladium is one of the four major precious metals, mined primarily in South Africa and Russia.

What is palladium?

Palladium helps convert all the toxic gases, which the vehicles emit, into carbon dioxide and water vapour.

With auto companies becoming more green-conscious world over, and consumers too willing to spend more for a car that is 'cleaner,' the usage of palladium has increased exponentially. Palladium is used in catalytic converters, the device that controls exhaust emission.

Apart from the auto sector, palladium is also used in dentistry and jewellery.

The price of the precious metal touched new consecutive highs since November. It ended 2019 with 60 percent gains and climbed over 40 percent in the first few weeks of 2020, breaching $2,224.90 an ounce on January 17.

In fact, the price of the precious metal has trebled over three years, toppling even gold off the top spot in terms of monetary value.

“Palladium is likely to continue to make new highs this year, and probably beyond, even though short-term and short-lived corrections are also in the cards, Nikos Kavalis, founding partner of precious-metals consultancy Metals Focus told MarketWatch.

Steep rise

Experts say newly environmental consciousness across the globe has increased demand for the metal, as per a Bloomberg report, Europeans preferred gasoline car (which use palladium) over diesel vehicles (use platinum).

The auto sector shift is especially significant since at least 85 percent of all of the world’s palladium is used in automobiles.

Particularly on the demand side, emission standards coming into force in number one car market China require 30 percent more palladium per vehicle, more than offsetting recent falls in numbers of vehicles sold, said Standard Chartered analyst Suki Cooper told Reuters.

The low mining of the mineral has caused a hitch in the demand-supply flow, turning the metal dearer. As palladium is a by-product of platinum or nickel further suppliers are slow to react to price fluctuations, which is likely to extend the gap for longer, Bloomberg noted.

Data released by South Africa on January 16 showed the country’s output of platinum group metals including palladium fell 13.5 percent in November compared to the same month in 2018, as per Reuters. For perspective, South Africa produces two-fifths of the world’s mined palladium.

Notably, the slowdown in the global automobile sector did not dent the rising demand either, as the replacement and upgrade requirements, particularly from China, India, the US and Europe kept the ball rolling, as per MarketWatch.

Years of deficits have pushed down visible palladium stockpiles, with holdings in exchange-traded funds (ETFs) at just over 600,000 ounces, down from 2.5 million ounces in mid-2015, removing a potential supply source, as per Reuters.

Is there an alternative?

Platinum, trading at $1,000 an ounce, and which is in use for diesel cars, could be a substitute but is not freely interchangeable with palladium.

One major challenge is the permits required for modifications and such, Johann Wiebe, the lead metals analyst on the GFMS team at Refinitiv told MarketWatch. The other problem is scientific. Gasoline burns at a lower temperature than diesel. Som work would be needed to make platinum perform as well as palladium autocatalysts.

Those looking towards electric vehicles (EVs) as the solution may also be disappointed. It is going to be a while before EVs become mainstream and/or the majority of auto vehicles on the road. Till such time, palladium use in hybrid vehicles is also a growing source of demand, Bloomberg pointed out.