Hailed as the best-performing commodity of 2017, palladium has reached lofty heights, trading at a 17-year high last week.
The precious metal is used in catalytic converters in petrol engines to curb vehicle pollution.
Demand for palladium is up following the negative publicity that erupted when Germany’s Volkswagen admitted to rigging diesel emissions tests.
Platinum is used in catalytic converters in diesel vehicles, but more manufacturers and consumers are switching from diesel to petrol cars. Most petrol engines use palladium, as it has traditionally been cheaper than platinum.
But now the stronger demand for palladium, which is also subject to supply constraints, has led to its price soaring. Palladium reached a record $1 138 an ounce this month, breaking its long-standing 2001 record of $1 110.50 an ounce.
Palladium owes its good fortune to high demand from the automotive industry, which consumes nearly 80% of the world’s supply.
For nearly 70 years, the platinum price was three to four times that of palladium. As a result, vehicle manufactures were determined to use palladium in their catalytic converters to save money, said Peter Major, the director of mining at Cadiz Corporate Solutions.
Palladium prices topped platinum prices in September for the first time since 2011.
“Palladium is now higher than platinum, but it’s not more efficient than platinum. So I can’t see palladium staying up like this. I just don’t think the fundamentals warrant it staying up here,” said Major.
Some analysts think it’s only a matter of time before manufacturers swap palladium for platinum, particularly if the former keeps trading at a premium.
The metal is a byproduct of platinum and nickel mining and it is starting to run out, said mining analyst René Hochreiter of Noah Capital Markets.
“The price keeps on going up and there’s no stock on the surface, and demand is just so great, even the car companies are starting to move to platinum. Platinum will start moving soon, maybe even this year,” he said.
South African mines in the platinum belt produce close to half of the world’s palladium, with Russia being the other major producer. The two countries each account for 45% of palladium production. The Chamber of Mines website says South Africa accounts for more than 75% of the world’s platinum output.
With these two metals seeming to play against each other, Major says the industry could experience better performance in 2018. “Even though the platinum price has not moved in a year, the other metals in the platinum group have,” he said.
“For decades, platinum was about 66% of platinum mine revenue, with all the other minerals making up about 34%,” said Major. “But today, that ratio is very different. Today, platinum is barely 45% of mine revenue, with palladium nearly 30%, rhodium 10%, nickel 5% and copper, gold, ruthenium and iridium all about 2% to 3% each. They’re doing better than over a year ago, when all of those metals were down.”
The strengthening rand under new ANC president Cyril Ramaphosa could be a deterrent for investors.
On Wednesday, the rand broke through the R12 barrier for the first time since 2015, trading at R11.97 to the dollar. “The stronger the rand gets, the worse our mining shares do,” said Hochreiter.
“Unless the palladium price goes to $1 500 or $2 000 an ounce, which I don’t see, it’s not going to happen this year — that’s for sure,” he said.
The challenge for palladium, as a byproduct of platinum and nickel mining, is as demand increases the metal faces severe supply shortages. This may encourage the car manufacturing industry to switch to platinum, which is seen to be more efficient and works in both diesel and petrol engines.
Tebogo Tshwane is an Adamela Trust trainee financial reporter at the Mail & Guardian