Palladium: why does this metal cost so much?
The recent spike in palladium prices is creating new challenges, particularly for the auto sector. In 2019, palladium prices ranged between 1267 and 1977 dollars per ounce. A 54% increase made palladium literally worth more than its weight in gold for most of the year. On 20 January, palladium moved above 2500 dollars per ounce.
What is palladium?
Palladium is one of the six metals of the platinum-group metals (PGM) group. The others are ruthenium, rhodium, osmium, iridium, and platinum. It has the following main properties:
- Malleable, ductile (i.e., able to change shapes without breaking) and transformable into thin layers.
- It does not tarnish in air.
- It is highly resistant to corrosion from air and to acids (except nitric acid).
Applications of palladium
More than 85% of palladium is used in car exhaust systems to transform toxic emissions, such as carbon monoxide and nitrogen oxide into carbon, water and nitrogen.
Palladium is also used in jewellery. It is far less dense than platinum, is similar to gold and can be processed into 100 nm sheets. In the electronics industry, it is used in electrodes, chips and computer circuits.
Why this spike in palladium prices?
Demand for palladium is rising as governments, led by China and European countries, impose tougher vehicle-emission standards, which are requiring automakers to raise the quantity of palladium they use.
Demand for palladium rose in China in particular in 2019. Reuters reports that new Chinese emission standards will require at least 30% more palladium per vehicle. In Europe, the Dieselgate scandal has also promoted greater use of palladium.
Only very few countries produce palladium. The three main exporters are Russia, South Africa and Canada. South Africa was forced to reduce its output after the December 2019 flooding caused production problems at Eskom, the South African power company.
Unlike the oil industry, new infrastructure development and R&D projects are rare in the palladium industry. Even when it is turning at full capacity, palladium producers have a hard time meeting current demand. This shrinks inventories and raises prices.
Impacts of the spike in prices
As the main consumer of palladium, the auto sector has been hit hardest by higher prices. In a research note, Max Layton, head of EMEA commodity at Citi, estimates that, over the past three years, the percentage of PGMs in cash flows has more than tripled, to 15% in 2019. His report also found that higher prices cost the auto industry 18 billion dollars last year.
Higher palladium prices have also had some unexpected consequences. London police has warned car owners of the risk of theft of catalytic converters, while Toyota suggests buying a “Catloc”, to keep them from being stolen.
What About 2020 And Beyond?
Palladium outlook will be unable to meet growing demand in the short term. In the longer term, if palladium prices rise too much over a long period, automakers will find an alternative, such as platinum. This would be bad news indeed for palladium producers. Companies such as Norilsk, the main Russian producer, would therefore find it in their interest to bring palladium prices back down to earth, by selling off some inventories, for example.
A few things to be kept in mind regarding the possible replacement of palladium by platinum:
- Palladium-rhodium catalytic converters are more efficient than platinum-rhodium ones. More platinum than palladium would have to be used to offset this loss in efficiency. Moreover, the transition from palladium to platinum could take up to 18 months.
- Palladium offers great thermal stability and a long service life, whereas platinum tends to become brittle at high temperature and thus becomes less efficient over time.
- R&D costs are high to develop new catalytic convertibles based on platinum rather than palladium. R&D budgets are currently being steered towards vehicle electrification, and palladium accounts for only a small portion of automakers’ costs.
In the longer term, automakers are tending to shift from internal-combustion cars towards electric cars, which have no need of palladium. The issue therefore arises of palladium uses after the transition to electric vehicles has been completed. Mercedes announced that by 2025, 50% of the cars it makes will be electric.
- Because of regulations incumbent on it, the auto industry is the main cause of higher palladium price.
- In the short term, palladium is likely to remain at levels similar to, or higher than, in 2019.
- In the longer term, if palladium prices do not fall, automakers will have to find either a substitute or a way to accelerate the transition towards electric cars. So lowering palladium prices is in the interests of both automakers and palladium producers.
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