What Factors Are Driving the Price of Palladium?

by Trefis Team
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Palladium has been one of the best performing metals in 2017, with its price soaring roughly by 47% since the past one year. With such a phenomenal performance, let us look at the factors driving the price of the precious metal and the factors which could impede its growth in the upcoming years.

Shift in Consumer Preference from Diesel to Gasoline Vehicles

The Volkswagen fiasco in 2015 led to a heavy shift in the consumer preference from diesel fueled to gasoline fueled vehicles. Volkswagen admitted installing a software in their manufactured vehicles which could get around pollution checks. The misleading outcome of the pollution checks on Volkswagen cars led to 40 times greater nitrogen oxide pollutants emission than the U.S. permissible unit. This consequently lead to a disruption of the reputation of diesel cars and hence shifted consumer demand towards gasoline cars. This shift is significantly evident in the western European countries, which is a key market for diesel vehicles. Market share of diesel cars in western Europe fell by 5.6% in 2017 to subside at 43%. Bank of America estimates the current market share of 43% to drop to 20% by 2023 due to the aforementioned reasons. Expected governmental bans on the use of diesel vehicles may even exaggerate the impact.

Drawing back to how palladium fits into this whole context is that palladium is used in the production of catalytic convertors which are installed in gasoline-powered cars to convert the harmful gases in car exhaust to less toxic substances. Thus, the consumer substitution from diesel cars to gasoline cars has resulted in an increase in demand for the precious metal and hence supported its prices.

Widening Supply Deficit

Palladium had been characterized by an environment of supply deficit since 2012. The growing demand for Palladium has added to the ongoing concern regarding its availability and thus put an upward pressure on its price. The palladium supply deficit in 2017 was approximately  6,80,000 ounces and as per the estimates of HSBC, palladium is expected to see a supply deficit of more than 1 million ounces in 2018. Widening of the supply deficit would continue to support palladium at higher prices.

Factors Which Could Lead to a Decline in Palladium Prices

The two possible factors which could create a downward pressure on prices of the precious metal are: the substitution of palladium with its sister metal platinum and the rapid consumer shift towards Electric Vehicles (EVs).

Palladium’s sister metal, platinum, is also used as a catalytic converter in automobiles with the same purpose as that for palladium. Platinum is specifically used for diesel fueled vehicles and can be used in gasoline vehicles as well. The preference for palladium over platinum in gasoline vehicles is merely due to the fact that palladium has always been relatively cheaper in comparison to platinum which made it a cost competitive choice for auto-manufacturers. However, palladium prices in 2017 breached this status-quo and has been trading higher than platinum for the first time since 2001. This makes platinum more attractive to auto-manufacturers in the current scenario and hence might lead to the consequent shift of their demand to platinum over palladium. This would reduce the demand for palladium and dampen its prices.

Furthermore, another factor which could remain detrimental for palladium in the upcoming years is the consumer shift towards EVs. EVs provide much greater environmental benefits in comparison to both gasoline and diesel fueled vehicles. Demand for EVs are expected to account for 54% of new car sales by 2040. This would remain a huge downside for palladium. However, EVs are not cost competitive and feasible for longer commutes yet, and thus do not enjoy a vast advantage over gasoline or diesel vehicles. Although innovations and investments are in progress to make them as competitive as traditional vehicles, a quick change in the composition of the auto-fleet is not likely in the short term.

Although palladium is expected to continue to trade at higher levels in 2018, the substitution of platinum over palladium would lead to a decline in its price to a certain extent. However, as prices are expected to subside at higher levels throughout 2018, this would remain beneficial to palladium producers such as Vale, which extracts palladium as a by-product of its nickel refining process.

We have $10 price estimate for Vale, which is currently below the market.

Have more questions about Vale? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Vale
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