What factors are contributing to the price rally and what does the future hold for palladium? Johann Wiebe of Thomson Reuters shares his thoughts.
The palladium price hit an intraday high of $1,001 per ounce on September 4 for the first time since 2000. As of Wednesday (September 20), the precious metal was trading at $916.50.
Despite that decline, Johann Wiebe, lead analyst at Thomson Reuters’ GFMS Supply Chain & Commodities Research division, has high hopes for palladium. In a recent note, he said the metal has had a strong bull run since the start of 2016, when it bottomed at $470, and continues to have good prospects.
“The market remains tight for short-term delivery, pushing the forward curve into backwardation. With gasoline car sales across the globe expected to remain strong, palladium will remain in high demand,” Wiebe explained. Palladium is a key component of the autocatalysts used in gas-powered vehicles, and demand from that sector is expected to account for 77 percent of total palladium demand this year.
China is the largest vehicle market, and Wiebe said that sales there were up 2.5 percent until July. Sales have also been strong in Japan, where they “witnessed a particularly strong recovery of 8.4 percent over the same period following years of declines.” US sales declined by 3 percent, but it’s estimated that 500,000 vehicles were lost in the wake of Hurricane Harvey, which hit Texas in August. Wiebe said replacement demand for vehicles lost in the storm could offset the decline in US sales this year.
The increasing prominence of gasoline-powered vehicles is the result of a fall from favor for diesel-powered vehicles, which require platinum autocatalysts. “Granted, diesel vehicles will still be around for a while, but their share in Europe, the largest market, is estimated to decline from around 45 percent at present to as little as 35 percent in 2025,” Wiebe said.
Currently there are over 100 million diesel cars in Europe, which is more than twice as many as the rest of the world. Their prominence is largely due to previous tax incentives, which encouraged many Europeans to shift from gasoline- to diesel-powered vehicles. These cars emit less carbon dioxide than gasoline-powered vehicles, which was considered beneficial at the time; however, diesel cars emit more nitrogen oxide than gas vehicles, and that substance has been linked to heart and lung disease.
A new study explores just how damaging diesel cars may have been on the continent, and notes that gasoline cars now emit less carbon dioxide than they once did. Jens Borken-Kleefeld, a co-author of the study, said in an interview that gasoline-powered vehicles now produce roughly the same CO2 emissions as diesel cars — that means “the original push for diesel cars in Europe is no longer valid.”
Even as gas-powered vehicles become more dominant, there is some concern that sales could be impacted by the widespread adoption of battery-powered vehicles. Countries such as India, France, Britain and Norway are moving towards a ban on both gasoline and diesel vehicles, and about 10 other countries have set sales targets for electric cars. Those developments could impact palladium and platinum demand in the longer term, but future impacts remain to be seen.
Wiebe also noted that the price gap between platinum and palladium has narrowed, with platinum being priced at $957.40 per ounce as of Wednesday. He said that while companies that produce car parts are concerned about reducing costs, he does not expect them to significantly substitute palladium-based aftertreatment back into platinum. Instead, parts manufacturers are expected to move towards hybrid vehicles, which are generally gasoline powered.
In closing, Wiebe said that on the supply side, Norilsk Nickel (MCX:GMKN) reported a 2-percent decline in palladium output in H1 2017, with production coming in at 1.3 million ounces. Challenges revolved around a slow ramp up at the Talnakh concentrator and downstream reconfiguration, as well as higher costs caused by a nearly 20-percent rise in the US dollar and Russian rouble exchange rate. Wiebe said growth prospects at various projects are “very positive” for H2 2017, and he expects palladium production to be slightly higher in 2017 compared to 2016.
That “could ease some of the price pressure in H2,” he said, adding, “we would not, therefore, be surprised if the palladium price corrects a bit short term, but further out we forecast a continued strengthening trajectory and averaging over $1,000 for the first time in its history on an annual basis.”
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.