Palladium stone and ingot
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Palladium has many uses in our lives. For instance, in fuel cells, aerospace equipment, electronics, dental fillings and jewelry to name a few. But nowhere is the precious metal’s utilization felt more than in the auto industry, and the manufacture of autocatalysts that reduce harmful emissions from internal combustion engines.
The industry typically accounts for around 80% of total global palladium demand. But in 2022-23 that seemingly appeared to be a thing of the past as equipment manufacturers increasingly found palladium prices dearer.
Faced with higher operating costs and input price inflation, many turned to platinum as a substitute. The end result is a profound shift in the precious metals market unseen for over five years.
For last week, the price of palladium slumped below platinum for the first time since April 2018. At 8:03am EST on Thursday (February 8, 2024), palladium traded 2.8% lower at $869.6 per troy ounce while platinum traded at $874.5 per troy ounce.
The development may be headline grabbing but the writing has been on the wall for a while. According to World Platinum Investment Council (WPIC) around 620,000 ounces of palladium were replaced by platinum in 2023, up from 385,000 ounces in 2022. It inevitably caused global palladium prices to slump by nearly 40% in 2023.
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What’s more, WPIC sees the substitution at an even higher 700,000 ounces in 2024. This is remarkable because the substitution process is not all that simple. On paper, platinum and palladium are effectively interchangeable in the case of gasoline autocatalysts. But in practice, the substitution of platinum for palladium (or vice versa) is a slow process requiring manufacturing train alterations.
Loss of discount quandary
In 2022, it was thought that only the larger automakers were doing the switch for newer vehicle models. But the shift appears to much wider based on the elevated substitution levels seen in 2023.
Additionally, the rising market share of electric vehicles, which are battery operated and do not require any sort of emissions treatment system, has further clouded market sentiment on palladium’s price outlook.
But with platinum now being the dearer of the two precious metals, and one that finds wider usage in the jewelry market, leaves the auto industry in a medium-term quandary. Five years of palladium price rises between 2018 and 2022 do appear to be a thing of the past.
If market projections for palladium substitution on auto manufacturing trains – with hedged cheaper platinum prices – do indeed ring true this year, then palladium supply would likely be in surplus in 2025.
Especially as major producers in the four key mining hubs – South Africa (80,000 metric tons), Russia (74,000 metric tons), Canada (17,000 metric tons) and the U.S. (14,000 metric tons) – appear to be in a mood maintain production. Only Russia’s leading palladium miner, Nornickel, envisages a drop in output.
The picture could be further complicated by above-ground (or already mined), palladium stocks, placed at 11.6 million ounces in 2023 by independent research consultancy Metals Focus.
As discount morphs into a premium in favor of platinum, the auto industry’s substitution between the metals will likely wane. Ultimately, palladium may well bounce back in terms of higher usage volumes in 2025, but that may not necessarily translate into higher prices.
Disclaimer: The above commentary is meant to stimulate discussion based on the author’s opinion and analysis offered in a personal capacity. It is not solicitation, recommendation or investment advice to trade commodity, oil and gas stocks, futures, options or products. Commodity, oil and gas, and equity markets can be highly volatile and opinions in the sector may change instantaneously and without notice.
