- Palladium has been in a deficit for the past 6 years and it’s expected to remain in a deficit for the foreseeable future.
- Palladium is both a precious metal and an industrial metal which has its pros and cons.
- I’ll describe a few potential ways to invest in palladium.
When someone mentions precious metals, the first metal that comes to my mind is gold. However, there are other precious metals and one of them is palladium.
Palladium, platinum, rhodium, ruthenium, iridium, and osmium form a group of elements referred to as the platinum group metals (PGMs).
Palladium is the key component of fuel cells, in which hydrogen reacts with oxygen to produce electricity, heat, and water. It’s also used in electronics, dentistry, medicine, hydrogen purification, chemical applications, groundwater treatment, and jewelry. However, the main use of palladium—45% of total output—along with rhodium and platinum, is in the three-way catalytic converters in car exhaust systems.
Palladium is a rare metal and many consider it a safe haven investment. In today’s article, I’ll describe the outlook for palladium and discuss a few ways to invest in the metal.
First, let’s take a look at the palladium price movement over the last 10 years.
Figure 1: Palladium prices per ounce. Source: APMEX.
Palladium prices are at all-time highs and are significantly higher than the lows reached along with other commodities in January 2016.
Palladium Outlook – Supply & Demand
The reason behind such a huge price increase for palladium is that there isn’t enough palladium currently being mined to cover for demand. The palladium market has entered its sixth year of deficit, and the deficit is expanding.
Figure 2: Palladium market supply demand surplus/(deficit) in thousands of ounces. Source: Norilsk.
With the deficit expected to expand, there is still potential for palladium prices to increase.
The bulk of the demand is coming from increased production of gasoline vehicles. On top of that, global vehicle production is continuing to grow at a fast pace.
Figure 3: The palladium share in catalytic converters and vehicle production has been continually increasing. Source: Norilsk.
You might wonder how I could discuss palladium and its usage in catalytic converters when I‘ve been promoting the growth in electric vehicles and the consequential increase in copper demand for a while now. Well, electric vehicle production is definitely going to surge, but traditional car production is also going to grow thanks to increased demand from emerging markets. On top of that, hybrid cars contain more palladium than standard gasoline cars.
Figure 4: Electric vehicles aren’t an immediate threat to palladium demand. Source: Norilsk.
On the supply side, palladium production is decreasing and there aren’t any large scale projects coming online soon.
Figure 5: Palladium supply is in a structural decline. Source: PMTrend.
Decreasing production will widen the palladium deficit.
Figure 6: Expected future palladium deficit. Source: Sibanye.
On top of the deficits, the cost curve with an average cost price of around $750 per palladium ounce doesn’t allow for lower longer term palladium prices.
Figure 7: Palladium cost mining curve. Source: Sibanye.
So, to conclude the story on palladium, the relatively high mining costs give a downside margin of safety which can be broken but can only last for a short period of time because lower palladium prices would force a significant number of miners to diminish production, as was the case in 2016. Lower production always quickly pushes prices up.
How To Invest In Palladium
There is always the option to invest in palladium miners. However, only a few stocks focus only on palladium as most miners are diversified and palladium is mined alongside platinum. Nevertheless, companies that derive substantial revenues from palladium sales include:
- Norilsk Nickel (OTCPK: NILSY)
- Sibanye (NYSE: SBGL)
- For a pure palladium play, North American Palladium (OTCPK: PALDF)
For those readers who prefer to invest directly in palladium, there are palladium coins and bars to be bought, but be sure to check on how to divest those if ever necessary.
The most liquid option to invest in palladium is, of course, ETFs that are backed by insured physical palladium bars stored in secure storage vaults that track the price of the precious metal. However, there is a yearly fee that such ETFs charge that’s around 0.4% to 0.6%. The largest ETF is PALL (ETFS Physical Palladium Shares ETF).
Palladium Is A Good Investment, But…
The issue with palladium is that it’s neither a precious metal nor an industrial metal. Given that, it probably won’t appreciate as much as gold will in the case of a financial meltdown and it will also fall significantly in the face of weaker industrial demand, especially if the electric vehicle disruption intensifies.
Nevertheless, palladium is in a positive trend and the fundamentals show the trend is here to stay. Traders especially could take advantage of the trend while investors should be more convinced on investing in miners that have palladium exposure.