The Fundamentals Of Expected Deficit In Palladium Market

 |  Includes: PAL, PALL
by: Leo Liu

Palladium is a lustrous, silvery-white metal that, as a result of its rarity and value is characterized as precious. Palladium is increasingly used in a wide variety of important environmentally-related technologies, which are expected to grow in demand as the world develops and further embraces efforts geared at increasing sustainability. The manufacture of automobile catalytic converters continues to be the primary use for palladium, with this application accounting for approximately 65% of estimated global demand in 2011, according to Johnson Matthey.

2011 palladium usage breakdown by end-market

Source: Johnson Matthey

Palladium price

Palladium prices have increased significantly over the past few decades as a result of rising industrial demand for use for numerous purposes, including within everyday electronics and in catalytic converters in the car industry. Palladium was as star performer in 2010, with prices nearly doubling. In 2011, Palladium metal price held relatively steady for the first 8 months, during which time it averaged $776 per ounce. The price volatility in the last four months of 2011 was significant, with palladium falling 16% to average $650 for the last four months of 2011.

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Source: Johnson Matthey

Today, two key elements are particularly influential on palladium price performance: loose monetary and fiscal policy and rapid economy development. Prior to the year 2000, industry demand was the most important factor affecting the palladium price. Stimulated by the IT industry bubble, palladium use increased by 9.5 times in the latter half of the 1990's.

In more recent years, however, the palladium price trend was affected more by macro economy impact, leading the price rising faster than industry demand growth. It seems that there are two factors currently boosting the palladium price 1) inflation and the negative real interested rate in US; 2) the loose momentary and fiscal policy implemented by US government for the past decade.

Palladium industry Demand Projected Through 2011

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Source: CPM group

Demand drivers

The consistent growth in palladium in recent years is being driven by several factors:

1. Growth in the Chinese automobile market is forecasted to lead the industry as a whole and become the new driver for palladium demand. Car sales in China rose 4.5 percent in March from the year before as automakers cut prices to counter slack demand in early of 2012, according to China Association of Automobile Manufacturers. In the long term, the growth rate of vehicle sales in China will be in line with Chinese GDP growth, which is expected to be 8.2% in 2012 according to the World Bank.

Sales of Gasoline and Diesel Vehicles in China

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Source: China Association of Automobile Manufacturers

2. Emission standards are tightening globally, advancing to a higher level of environmental standards that will result in heavier loading of palladium for auto catalysts.

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Source: CPM group

3. Increasingly, palladium has gone into diesel auto-catalysts as a substitute for platinum. As a result of the price difference between the two precious metals and the technological improvement for palladium's use in diesel catalytic converters, up to 25% palladium can be substituted for platinum and even more in some applications, according to Johnson Matthey.

Gasoline Passenger Cars % in Select Markets

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Source: CPM Platinum Group

Platinum to Palladium ratio in European Autocatalyst 2009-2011

Source: Johnson Matthey

4. ETF investment demand is expected to increase for palladium. The size of palladium ETFs is much smaller than gold and silver, both of which have millennia of history as currency. There is always an inherent risk in the creation of new ETFs, particularly those based on relatively small commodity markets like PGMs. Nevertheless, if other market factors remain constant, we would expect that this trend will reverse as the market recognizes the longer-term supply and demand fundamentals of the palladium market.

Size of precious metal ETF (US$ Billion)

Source: Bloomberg, CEBM

ETFs' Physical Palladium Holdings

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Source: CPM Platinum Group

Palladium Supply

The largest PGM deposits resource are found primarily in South Africa and Russia, which in total accounts for 75% of global platinum resource , according to Investec Securities Research.

Global palladium resource distribution

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Source: Investec Securities Research

The three main sources of palladium supply are 1) mine production 2) secondary recovery and 3) Russian stockpile sales. According to Johnson Matthey, in 2011, mine production is expected to yield approximately 6.67 million ounces of palladium, with, 2.2 million ounces coming from secondary recovery and a further 0.75 million ounces from Russian stockpile sales.

Constrained mine supply from major producers

Palladium Mine production by Region

Source: Johnson Matthey, Platinum 2011 Interim Review

Palladium mines production breakdown

Source: U.S. Geological Survey, January 2012

Major Palladium supplier by countries


Russia is the largest producer of palladium in the world and the second largest platinum producer. Most PGM production comes from Norilsk and is a by-product of nickel mining. Russian PGM output is constrained by the economics of nickel and by some environmental problems for Norilsk.

The mined supply of Palladium does not actually meet the annual industrial demand for the metal; instead the world has been relying on Russian stockpiles. The belief in the market is that the Russia is expected to decrease its palladium stockpiles sales as stockpiles are almost depleted, according to reliable sources that included Bloomberg. Barclays estimates that sales from Russian palladium stockpiles will drop by as much as 60 percent (to 300,000 ounces) this year. Interfax Report expected that supply from those stockpiles, a state secret, won't exceed 144,678 ounces this year or next and may cease as early as 2014.

South Africa

With the largest deposits, South Africa theoretically has the potential to meet the higher demand. However, South African palladium is constrained by multiple operational and regulatory issues, such as rising electricity costs, shortfall of skilled labour and water, mine safety issues, and the strengthening South African Rand relative to the U.S dollar (or dollar weakness relative to the Rand). An examination of the South African palladium industry may give hints as to the future course of palladium prices. At least three problems are expected to continue to affect miners and, coupled with the rising overhead cost of mining, will likely limit palladium supply from South Africa

1. Low production:

Output in South Africa suffered from poor productivity in the first half of 2011 due to a series of government-mandated safety work stoppages and costly illegal strikes, according to the Johnson Matthey Platinum 2011 interim review.

2. Rising cost of production:

Mining companies are paying more for wages and energy at a time when they are digging ever deeper to maintain production. Mining expense rose 30 percent in 2010 in South Africa according to UBS South Africa. Production costs for one ounce of platinum group metals is now approximately $800 compared to about $300 in 2003, according to CPM Group.

3. Governmental concerns:

According to the Fraser Institute's Survey of Mining Policy Index Ranking (2011-2012), South Africa ranks 53th out of 93 districts in the world regarding the government mining policy index. The sociopolitical situation in the country is getting worse. Regulatory delays, operational interference, nationalization risk are the major concerns about SA government.


With limited opportunity to boost existing production in South African and Russia, and the consisting growing demand of palladium, a long-term structural deficit can only be eliminated by the new source of palladium suppliers. Investors may want to consider investigating mining companies with palladium resource based in stable jurisdictions like Canada.

Canada remains highly prospective for palladium deposits but a significant proportion of current output is a by-product of nickel mining with several mines near depletion. In Canada, only the Lac des Isles mine currently has the potential for producing significant quantities of palladium, which is 146,624 ounces of palladium production in 2011, according to North American palladium year end 2011 result.

With 0.34 million oz indicated and 3.91 million oz inferred resource in palladium based on the July 2011 NI 43‐101 Technical Report by Wardrop Engineering, the Exploration stage Wellgreen Nickel PGM deposit, owned by Prophecy Platinum Corp could become new attractive source of palladium In the future

Investment Vehicles

1. Palladium ETFs

With palladium ETFs, investors can own palladium, thereby gaining exposure to its price, but do not have to grapple with the inconvenience of keeping large quantities of the physical palladium metal. Top two biggest palladium ETFs are ETFS Physical Palladium Shares ETF (PALL) and ETFS Physical Palladium ETF (NYSEARCA:PALL).

2.Company stocks

Investor can also access the palladium exposure by holding the stock of primary palladium mining companies. Stillwater Mining (PGMs) and North American Palladium (PAL) are the major player in North American.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.