The world’s most valuable metal is likely to get costlier amid a scramble by European and Chinese automakers for its supply.
Palladium, which goes into making the catalytic converters required for refining gasoline engine emissions, hit a record high of $1,440.35 per ounce on its spot price on Jan. 17 amid a global shortage.
The metal is expected to come under further pressure as carmakers face a potent mix of stricter emissions legislation, more rigorous testing, and more serious consequences for any failure to meet standards, materials specialist company Johnson Matthey PLC (LON:JMAT) says.
Supply Deficit To Widen Dramatically
In a platinum group metals (PGMs) outlook published this week, JM said:
“The deficit in the palladium market looks set to widen dramatically in 2019, with stricter emissions legislation forecast to stimulate double-digit rises in palladium demand from European and Chinese automakers.”
“Although recoveries from autocatalyst scrap should rise again, the rate of growth in secondary supplies is likely to be lower than in 2018, while primary shipments are expected to be flat.”
JM’s outlook landed the same week as North American Palladium’s (TO:PDL) quarterly earnings, which cited a record net income of $119.2 million for 2018 versus $36.1 million in 2017.
Jim Gallagher, President and CEO of North American Palladium, said:
"Highest-ever underground mine production, combined with rising palladium prices, have resulted in the best-ever financial results in the company's history.”
Palladium ETFs Bleeding Supply
JM’s outlook said with ETF holdings for palladium having fallen to 730,000 ounces at the end of last year, these funds no longer held enough physical metal to bridge the gap between industrial demand and supplies.
At their height in 2014, ETFs held nearly 3 million ounces of palladium.
In the four years since, the redemption of these holdings has added more than 2.2 million ounces of liquidity. Yet, this hasn’t been sufficient to prevent a series of market deficits and gradual tightening of physical availability.
JM added:
“Assuming the palladium price remains high, we expect some further ETF profit-taking in 2019. But this is unlikely to be sufficient to prevent the deficit widening significantly.”
EU, China Emission Standards Boosting Demand
On the demand front, tightening emissions legislation and stricter vehicle testing regimes are now driving palladium autocatalyst loadings higher in most major vehicle markets. This year, the impact on demand will be especially significant in Europe and China, JM says.
Real Driving Emission (RDE) standards in the European Union and China require outdoor driving tests taken under various conditions in addition to the existing lab-based tests. Higher palladium loadings are now required in catalytic converters to meet these elevated standards.
Said JM:
“The technical difficulty of meeting the new regulations, and the commercial risk of not doing so, mean that the average pgm content of European gasoline catalyst systems is rising quite significantly, although there is considerable variation in loadings strategies between companies.”
“It is likely to be a number of years before European car companies are able to focus attention on thrifting again, because the EU is now implementing regulations which will increase the severity, frequency and duration of emissions testing.”
Platinum Substitution Not As Likely
The record high prices of palladium have prompted questions on whether platinum, which leads the platinum-group metal (PGM) group, will be able to match the dizzying heights attained by its sister metal.
The spot price of platinum, which is used in purifying diesel emissions, hit 2-month lows of $779.30 an ounce this week. Futures of platinum fell further, sinking to 5-month lows of $785.55.
Morgan Stanley analyst Christopher Nicholson said notwithstanding different catalytic converter requirements, high palladium prices may ultimately encourage vehicle makers to switch to platinum.
JM, however, said its tests showed that platinum did not perform as well as palladium, and that would limit the likelihood of significant substitution. But the reverse was possible as palladium could more easily replace platinum for gasoline engine needs, it indicated.