Palladium: Sometimes Really New is Well Forgotten Old

Palladium is gaining momentum again. The best reward/risk commodity of 2019, this limited availability precious metal is unveiling similar patterns now. Over the past 3 months it added 2.5% and retested its $2,900/oz resistance level. All signs point to a high possibility for the commodity to actually beat that crucial level this time around.

Prices of palladium, used in catalytic converters to clean car exhaust fumes, have risen 21% year-to-date. Under similar circumstances, in 2019 the price of palladium soared 127% before it lost 30% due to the coronavirus crisis. Over 2020, the price of palladium increased by another 28.5%, and it is difficult to say what should stop this trend in 2021. Since 2016, palladium has been steadily rising in price, with the only noticeable drop having occurred in the above mentioned 2020. What makes palladium so unstoppable?

Once again, palladium is essential and largely irreplaceable for the production of car catalyst converters metal that reduces toxic exhaust emissions. In fact, palladium and platinum act like a sponge, absorbing hydrocarbons. Palladium is capable of absorbing exhaust emissions up to 900 times its own weight. A shift to electric vehicles may eventually erode demand, but in recent years tightening environmental rules have forced carmakers to use more and more palladium in their traditional gasoline engines – particularly, in Europe and China. So as long as combustion engines experience high demand for various reasons (EV trucks have very poor reviews, for instance) use of palladium will be steadily rising.

In 2021, 85% of palladium is still used in autocatalysts. Back in the 1970s, countries began to tighten their vehicle emission standards, primarily on nitric oxide, one of the main components of smog in big cities. Palladium, unlike platinum, neutralizes N₂O much more efficiently, so it is palladium – not platinum, unlike what many amateur analysts say is optional whereas it is not – face accelerating demand, with a pattern pretty much similar to one demonstrated by lithium due to the growing demand for high capacity rechargeable batteries.

The excess of demand over supply of palladium in the market has been observed since 2012. In 2019, the metal deficit increased again, which led to the price doubling. The shortage occurred mainly due to the strict requirements in China and European countries aimed at fighting the growing level of air pollution. Such measures resulted in the situation where each automobile requires 30% more palladium than before. Since China became the major car manufacturer in the world, to cover the resulting shortage in the market, the metal funds began to sell their reserves (read below). This stringent situation is partially offset by the metal recycling, whose dynamics for 8 years is positive showing an increase of 35%. In general, there has been a shortage of palladium on the market for many years.

Logistics bottlenecks caused by world economic reopening forced China, as the world's largest consumer of metals, to sell more metals from its government stockpiles to avoid pricing turmoil. The National Food and Strategic Reserves Administration has recently officially announced that more auctions will be organized in the near future to ensure market stability. The first such auction in more than 10 years included an offer of 20 thousand tons of copper, 30 thousand tons of zinc, 50 thousand tons of aluminum. However, palladium is not among them. Given that, it’s worth mentioning that palladium is one of very few metals that China intends to keep buying, not selling – and it must be viewed as a strong catalyst for the strengthening of the ongoing upward trend.

In addition to that, at the end of June, the subcommittee on customs and tariff regulations of the Russian government supported the proposal of the Ministry of Economic Development to introduce combined duties on the export of ferrous and non-ferrous metals outside the EAEU. It is assumed that the income from duties will compensate for the rise in prices for metal products on the domestic market. Increased export duties on key products of ferrous and non-ferrous metals will be temporary; they are planned to be introduced from August 1 to December 31, 2021. We expect significant strengthening of several metal price trends during this period, of which the one formed by palladium, which Russia’s share in the global market accounts for 44%, will be the most apparent.

The only public exchange fund that keeps pure physical palladium ingots as its collateral is the Aberdeen Standard Physical Palladium Shares ETF (PALL). It is an exchange-traded fund established and managed by Aberdeen Standard Investments LLC. The main goal of the Fund is to track physical palladium prices. On top of that, PALL is the only public palladium fund in the United States. The Fund’s recent actions also illustrate the dramatic shortage of palladium supply on the market that has forced it to partially sell its reserves. We think this situation is temporary by its nature, however. Similar moves can be traced during the years of the acute deficit: there were physical palladium outflows from the Fund’s NAV. Since 2011, the Fund has reduced its reserves from almost 12 million troy ounces to 1.6 million troy ounces.