Palladium - Investment Case And Risks
London (Oct 19) •Emission standards are getting tougher in some of the key auto markets around the world and palladium's role as an autocatalytic is key.
•2021 is expected to be a much better year for the auto market with China leading the way.
•Risks include potentially increased supply from SA and Australia, weakness in the eurozone, the rise of alternative catalytic agents, and the growing penetration of electric, battery, and hybrid vehicles.
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Earlier this month, in The Lead-Lag Report, I had flagged silver's relative underperformance in September. At the other end of the return spectrum, you had palladium, the only other precious metal to deliver positive returns. In light of these developments, I thought it would be a good time to explore and reassess conditions across the palladium landscape.
Long-term investment case
Over the last 5 years, palladium has caught the imagination of the investment world delivering triple-digit returns, well above the returns delivered by the other precious metal cohort.
For the uninitiated, much of this surge has been on account of developments in the automobile sector which accounts for 75-85% of total palladium demand (the electronics and the jewelry segments are the other key consumers). Palladium is in effect used as a key component of pollution-control devices in vehicles (through its catalytic qualities it helps convert dangerous environmental pollutants such as carbon monoxide, and hydrocarbons into less harmful substances). Until the 2015 Volkswagen (OTCPK:VWAGY) diesel emission scandal, in Europe, gasoline-powered vehicles were not as popular as diesel-powered vehicles. But since then, there has been a shift, and palladium's virtue as a catalytic converter for gasoline vehicles has come to the fore. Other contributing factors driving this demand are increased emission standards in a key auto market such as China (which thereby necessitated higher palladium loadings per car) and the growing share of large American SUVs and trucks that need more palladium coating.
Conversely, on the supply side of things, the situation has been quite challenging. There are very limited palladium-dominated deposits in the world (mostly in Russia and South Africa who produce around 160+ metric tonnes in aggregate) and the metal usually crops up as a byproduct to nickel or platinum mining operations around the world.
On account of limited supply and strong demand, the metal has seen a deficit situation for the last 7 years. This has translated to a strong price performance over the last few years.
Situation in 2020
2020's health pandemic has made some alterations to the dynamic here, and for the first time, in 8 years, we could see these deficits ebb as the market comes into balance. While palladium mining supply was impacted by lockdowns and the slow pickup in South Africa (global supply of palladium is expected to fall by -14% annually in 2020), global demand, predominantly on account of weakness in the auto sector, is expected to fall by a greater margin of 16% YoY (Source: Norilsk Nickel).
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