Palladium

Palladium market fundamentals and trends

Palladium is used in catalytic converters, electronics, chemical/petroleum refining, jewelry and dental and medical applications.  Because of low annual production levels and a lack of substitutes in many applications, palladium is a scarce, highly valuable metal.  Market fundamentals are positive for palladium as demand for the metal continues to grow while production declines due to supply concentration from high geopolitical risk countries and systemic cost issues.  The combination of rising demand and falling production caused the palladium market to fall into a deficit position of 1,070,000 ounces in 2012, based on data from Johnson Matthey.

Palladium supply

Only 204 tonnes (6,570,000 ounces) of platinum were produced in 2012, with 80% of that production originating in Russia, South Africa and Zimbabwe.  Palladium supply from Russia, which accounted for 40% of 2012 production according to the CPM Group, is comprised of mine production and sales from government stockpiles.

Information on Russian government stockpiles is considered a state secret, but a number of palladium industry experts believe that stockpiles are close to being depleted.  Russian mine production has also declined in the past decade as palladium grades have decreased at Norilsk.   South African palladium production, which accounted for 36% of total 2012 production, is as a byproduct of platinum mining.  As described earlier, South African platinum mines have faced rapidly rising costs and continue to face labour demands for higher wages.  Therefore, palladium production from South Africa is unlikely to experience considerable growth in the near future.

Secondary palladium supply from recycling accounted for 2,032,000 ounces of palladium supply in 2012, down 8.9% from 2011 according to the CPM Group.  The decline in recycling supply was attributed to lower palladium prices, indicating that recycling feedstock availability is price sensitive.  The compounded annual growth rate in secondary supply since 2000 is 3.1% and growth is expected to continue due to the increasing use of palladium in autocatalysts in the previous decade.  However, technological improvements and thrifting of palladium in autocatalysts over the past decade are expected to slow the growth of palladium from recycling in coming years.

Palladium demand

Palladium demand has risen at a compounded annual rate of 3.9% since 1982, based on data from the CPM Group and Johnson Matthey indicates palladium demand exceeded supply by 1.07Moz (17% of primary supply) in 2012.  Use in catalytic converters continues to be the largest demand source, accounting for 64% of total demand in 2012.  Palladium use in autocatalysts has been a major growth area as manufacturers have tried to substitute lower-priced palladium for platinum wherever possible.  The majority of catalytic converters for gasoline engines now use palladium as the primary PGM and it now comprises about one-third the PGM content in a diesel catalytic converter.  According to the CPM Group, Palladium demand from autocatalysts increased 8.5% in 2012.  Demand growth was driven primarily by the US auto market, where auto sales have recovered back to pre-2008 levels.

Going forward, Autocatalyst demand is expected to rise due to increasing global environmental standards & strong auto demand from Brazil, Russia, India and China.  In China, passenger car sales were up 14% in the first half of 2013 and there is ample room to grow based on the low number of cars per household in China relative to GDP per capital.  Emission standards are also being increased, which means that new vehicles will have higher PGM content.  China implemented China 4 emission standards (similar to Euro 4 standards) on a nationwide basis in July 2013, while Beijing implemented China 5 emission standards in February 2013.

Palladium trends

• Palladium demand has been growing at an average rate of 5% per year since 1982; up 16% in 2012
• Primary palladium supply peaked in 2006 and has been declining at an avg. rate of 3.3% per year since
• Primary palladium supply declined in 2012 by 11% to the lowest level in 10 years
• 68% decline in Russia stockpile sales, along with its primary supply drop, drove global palladium market into a deficit equal to 17% of mining supply over the course of 2012

Strong demand for palladium in autocatalysts is expected to continue as global vehicles sales rise and emission standards become more strict, while supply growth will be negatively impacted by the systemic issues faced by South African platinum mines and declining Russian supply.

These fundamental trends have caused palladium prices to rise at a faster pace than platinum prices.  Currently, the price of palladium is 51% the price of platinum, which is substantially above the long-term (1968 to 2012) average of 30%.

Like platinum, it appears likely that palladium markets are likely to be in deficit until new sources of supply are developed.  Given the inelastic nature of autocatalyst demand, new sources of supply should ideally be situated in geopolitically safe, mining-friendly jurisdictions in order to guarantee supply stability.

Sources:

Johnson Matthey Platinum 2013 (http://bit.ly/15H8G41)
CPM Group Platinum Group Metals Yearbook 2012
SIAM, China Automotive Information Network, AEB, ANAFAVEA
Johnson Matthey Market Data Table (http://bit.ly/V7pnOo)