Will Palladium Prices Ever Match Platinum Prices?

- October 21st, 2015

The Investing News Network got in touch with William Tankard, director of precious metals and mining at Thomson Reuters, to get more insight into the relationship between the two metals.

In the wake of the Volkswagen (ETR:VOW3) emissions scandal, investors have been wondering whether palladium prices could rise higher than platinum prices.
To be sure, platinum prices fell substantially in the second half of 2014 despite a protracted strike earlier in the year, and have continued to fall in 2015. The news that Volkswagen used “defeat devices” to cheat on emissions tests for diesel vehicles hasn’t helped matters, as the white metal is used in catalytic converters for diesel engines.
“If Volkswagen were doing the same thing in Europe and if there is more to come, it would be really bearish for the platinum market,” Michael Sheehan of Orion Commodities Management told Reuters on September 25. “At some point platinum and palladium prices will go to parity … my guess would be between $700 and $850.”
Platinum prices initially dropped following the Volkswagen emissions scandal, although they have more recently taken back some of those losses, gaining just under 11 percent since October 1. Spot platinum is currently trading at about $1,003 per ounce.
However, palladium has also fallen in 2015, and a sizable gap has remained between prices for the two metals. Is it a realistic possibility that palladium could ever match — or trade above — platinum? The Investing News Network got in touch with William Tankard, director of precious metals and mining at Thomson Reuters (TSX:TRI,NYSE:TRI), to more insight on the relationship between the two metals.

 

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Palladium price victory unlikely

“I’m reluctant to suggest that they could trade on par, and certainly reluctant to suggest that palladium could routinely become — on any sustained measure — the metal of the two which trades at a premium to the other,” said Tankard, when asked whether palladium prices could ever rise above platinum prices the same way gold prices have. Platinum has been cheaper than gold since mid-January.
While Tankard suggested that the price ratio between the two metals will drop lower, he explained that higher prices for palladium relative to platinum would mitigate increasing palladium demand. “As that ratio closes, you are going to see certain areas of demand where palladium has enjoyed improved offtake fading back,” he said. “And this very much speaks to the automotive side.”
While platinum is used for catalytic converters in diesel vehicles, palladium is used for converters in gasoline vehicles. However, palladium is also sometimes used as a partial substitute in catalytic converters for diesel engines, since it is the cheaper of the two metals. “That’s something that has been very much a medium- to long-term trend,” Tankard said, “and that is something that we would consider likely to persist.”
However, with palladium becoming more expensive, the incentive to use more palladium in catalytic converters diminishes. “If palladium was to continue to rally against platinum, then the substitution pressures would ease considerably. That would in turn speak to improved platinum demand relative to where we find ourselves today,” he said.

 

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Mined production

Secondly, Tankard noted that with only a very small handful of exceptions, the majority of the world’s platinum-group metals mines are primary platinum mines. That makes things complicated when looking at incentive pricing for new palladium projects.
“If the palladium price goes up, there’s admittedly very few new mines going to be incentivized to come online because of that,” Tankard said. “[B]ut likewise, if the platinum price goes down, you are going to see increasing likelihood of platinum output being taken out of the system, whereas the associated palladium taken out at the same time would be substantially less.”
Overall, Tankard stated that while palladium has traded above platinum on very brief occasions in the past, he doesn’t see that happening again in the near future.
Palladium prices have dropped 16 percent so far this year, but have risen 26 percent since August 26. Platinum prices are now sitting at $673.
 
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.

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