Looking at the current platinum and palladium prices, it’s hard to believe that approximately 5 years ago platinum prices were 2 times higher than palladium prices. Indeed, on September 24, 2013 spot platinum price was 1427.8 $/Oz, which was higher by 72% than the price on September 24, 2018 (829.1 $/Oz). As a comparison, spot palladium prices on September 24, 2018 was 1054.3 $/Oz. On the graph below you can see the dynamics of metal prices over the past 5 years. In this article I will try to consider the main factors affecting the prices of metals, as well as to answer the question: «What is better to invest in platinum or palladium?».
The main consumers of palladium (~80% of demand) are automakers, which use metal in autocatalysts for the gasoline vehicles, as well as for the gasoline hybrid vehicles to clean up exhaust fumes. Rising markets of the gasoline and gasoline hybrid cars, against the backdrop of the countries regulation to reduce emissions, have been causing of the palladium market deficit for the last 5 years. It is not hard to understand, that this factor is the key reason of the strong performance of the palladium prices and will be the determining driver of the trend trajectory in the future.
The main global producers of palladium are South Africa & Zimbabwe (47% of total production) and Russia (37% of total production). The remaining portion of the global supply accrues to North America (14%) and other countries (2%).
At the year-end 2017 the African mine production slightly increased by 3% and still stays strong. However, the situation in Africa remains unstable and associated with risks of national turbulence, violent upheavals and clan rivalries, that could lead to stoppage in production and decrease the global palladium supply.
In 2017 the supply of Russian palladium declined by 13% mainly due to Norilsk Nickel’s reconfiguration program. It is expected that the company’s palladium production will stabilize, however it will not be enough to cover current demand.
Will this deficit continue? I think yes. Some support for the palladium deficit will provide the increasing recycling, which showed strong growth in 2016 and in my view should continue its trend in the mid-term. Also Norilsk Nickel’s Global Palladium Fund will play a crucial role in the management of global palladium stocks over the forseeable horizon. The fund will increase the transparency of the global stocks and will try to maintain the deficit on the market, given by Norilsk Nickel’s status of the world’s largest producer of palladium and the importance of palladium in the company’s revenue generation. According to Norilsk Nickel’s interim IFRS financial results for six months ended June 30, 2018, the share of palladium sales in total revenue was 33%, which in monetary terms was $1950 mln.
In summary, against the backdrop of the increase in car sales, as part of the growth of the world economy and tightening emissions standards, palladium demand will remain strong. As a result, rising automakers palladium demand, stable deficit and increasing investor sentiment will support bullish trend of palladium prices.
On the other hand, it could help platinum and open new upside potential. How? Let’s start analyzing the platinum market.
Platinum demand is slightly diversified than palladium and mostly based on autocatalysts for the diesel vehicles (~35% of demand) and jewelry (~30% of demand). Analyzing in depth the structure of the demand, we see that ~15% of autocatalysts demand is accounted for by diesel cars in Europe and ~20% of jewelry demand falls on China. Looking at current platinum market prices, it’s obvious that major growth drivers are losing momentum.
What are the main reasons? First of all it is the loosing of market share by diesel vehicles in Europe. Honestly speaking, I think we are witnesses of the beginning of the end of diesel engines. After German decision to ban diesel vehicles, a lot of European cities (Rome, Paris, London, Madrid, etc) announced that they would ban diesel cars in 2020-2024. Historical note: Germany is the pioneer of the diesel engines… And we see how founding father destroys his invention.
Another negative factor for platinum prices is the declining in the demand from the jewelry producers, especially from the Chinese producers. Consumers’ preference is still based on precious jewels, branded jewelry sold by piece, the opposite of most platinum product on the market. However, it could be slightly offset by growth of Indian platinum jewelry consumption, as well as recovery of the platinum jewelry industry in US and Japan.
More than 80% of global platinum production is accounted for by South Africa and Zimbabwe. The remaining portion of the global production accrues to Russia (12%), North America (2%) and other countries (2%).
At the year-end 2017 the African mine production slightly decreased by 1%, but still stays strong. But, as I mentioned, earlier the business and operating environment in region is fluctuating, so we could expect sharp decline in platinum production.
Platinum: down but not out
And now it is time to return to my assumption that high palladium prices under the conditions of sustained deficit on the market, could provide upward trend for the platinum prices. Simply because it enhances the likelihood of car producers to substitute platinum for palladium in gasoline engines. Taking into account the current global ratio of palladium to platinum use in autocatalysts (2.75 to 1), in case of rising risk for auto producers of scarcity palladium, there is a chance that we will see this substitution.
Current market situation has pushed some companies to investigate the possibility to use platinum in gasoline engines. However, research results showed that it is need to improve technologies, because platinum has worse thermal stability in comparison with palladium. Therefore, I don’t expect that in the medium term platinum will substitute palladium in the automotive industry. Also currently it is difficult to estimate the cost of this technologies and how its use will affect on the margin of the automakers.
Anyway if substitution is postponed indefinitely without any positive information flow for the market, I think that platinum prices could move lower in the short term. In sum, without any technology breakthrough I expect we will see slight increase of the palladium prices over the short term and unimposing dynamics of the platinum prices.
Despite the fact that analysts have more positive view on the platinum prices than me, they forecast continued excess of palladium prices over platinum over the next 5 years:
One drop of poison infects the whole tun of wine
We considered in depth the major factors affecting the prices of palladium and platinum. It was determined that robust demand growth from automotive sector will remain the main driver of the metals’ bullish trend. And despite the internal rivalry of palladium and platinum, everything looks positively. However, the analyses of PGMs (platinum group metal) wouldn’t be full without risk measurement of the electric vehicles’ market penetration.
Why it could become a noteworthy risk for platinum and palladium? Because PGMs are not used in the production of EV (electric vehicles), due to there is no exhaust to catalyze. The producers use such metals as lithium, cobalt, nickel, copper, etc., but not platinum and palladium.
The penetration of electric cars in China is outstripping other countries under the sway of strong government support of the production of zero- and low-emission vehicles. In 2Q 2018 the sales of EVs reached 4% of the total sales of passenger vehicle in China, as a comparison in 2Q 2015 the EVs share was less than 1%. Also electric vehicles reached almost 2% of sales in Europe and 1.5% in North America.
In my opinion this quick growth is likely to continue. Generally, in 4Q the sales of electric cars in the Chinese market are higher. Also beginning in 2019 carmakers will have to sell a specified percentage of ‘New Energy Vehicles’ amid government regulations, which are similar to imposed requirements in California. Carmakers that do not meet the established performance targets, will be obligated to buy credits from competitors. At year-end 2017 the share of China in the global EV market was 47% and I expect that this share will increase to 55% in 2018.
In my view electric vehicles will push out of the market the diesel and gasoline cars, which absolutely will be fatal for palladium and platinum. However, it’s a matter in long-term future, because current EV share and tendencies of development are low on the global scale. But we shouldn’t forget about this factor and keep up with the times.
What is better to invest in platinum or palladium? Taking into account the strong palladium demand from gasoline automakers, many countries refusal of diesel engines, sustained palladium deficit in the mid-term, in my view palladium will be more attractive in comparison with platinum.
Also I don’t expect that in the medium term platinum will substitute palladium in the automotive industry. In addition, current EV share and tendencies of development are low on the global scale, therefore I don’t worry about EV market-share gain in the foreseeable future.