Palladium's Momentum Continues as Prices Hit Record High

Palladium prices hit a record high of $1,096.50 per ounce on Tuesday (January 2) before falling on Wednesday (January 3) to $1,084.20.
The metal is on a roll, having gained over 50 percent last year. It was sitting at $1,069.50 on December 27, up from about $685 at the start of 2017.
Palladium is primarily used in autocatalysts for gasoline-powered vehicles. Its price gains have been attributed to growth in car sales in China, the world’s largest auto market. According to the China Passenger Car Association, sales are expected to rise by 4 percent in 2018, double the pace estimated for 2017.

New vehicle sales in the US, another major auto market, are expected to fall 2 percent, to 17.1 million in 2017; however, it is still expected to be the fourth-best sales year in the country’s history. Analysts predict another decline in sales in 2018, as low unemployment and rising consumer confidence compete with rising interest rates, which could make it more difficult for buyers to finance new vehicle purchases.
Palladium has also benefited from tightening emissions controls and a move away from diesel vehicles in Europe. Palladium’s sister metal platinum is favored by automakers for diesel-powered vehicle autocatalysts, and the 2015 Volkswagen (ETR:VOW3) emissions-rigging scandal has driven many consumers away from diesel vehicles. 
For example, diesel car sales in Norway fell from 31 percent of all car sales in 2016 to 23 percent in 2017. Several regions have also begun charging higher road tolls for diesel cars than for gas-driven vehicles, as per Reuters. Hybrid vehicles, which are usually gas and electric, also use more palladium in their autocatalysts and their numbers on the road are increasing. The Norwegian Road Federation says electric cars and hybrid models comprised 52 percent of all new car sales in the country last year compared to 40 percent in 2016.
As a result of robust palladium demand from the auto industry, the market has been characterized by physical deficits since 2012. Aboveground stocks have fallen from 18 million ounces at the end of 2010 to a forecasted 14 million ounces by the end of 2017. In November, HSBC said the palladium deficit is forecast to reach 680,000 ounces in 2017 and will widen to 1,151,000 ounces in 2018.
That said, there are a few factors that could present a risk to palladium’s price strength. Automakers may begin to substitute palladium with currently less expensive platinum in autocatalysts. Paul Wilson, CEO of the World Platinum Investment Council said “there is increasing anecdotal evidence that automakers in the US and Europe are actively considering switching from palladium to platinum loadings on gasoline vehicles, which will likely have a considerable impact on short to medium-term platinum demand should it come to fruition.” As of January 3, platinum prices were up $14.20, at $961 per ounce.
Electric vehicles (EVs) could also reduce demand for catalytic converters, but analysts say it will be years before EVs pose any sort of risk to either platinum or palladium demand. Many countries around the world have pledged to ban vehicles that burn fossil fuels from their roads and automakers are offering more EV models. France and the UK have said diesel- and gas-powered cars will be banned by 2040. China and Germany are considering a ban, but have not yet set a date.
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.