Yesterday, Stuart penned a blog entry discussing some of the metal industry beneficiaries of President Obama’s newly announced fuel economy agreement. The two key means of attaining the stated goals, according to my learned colleague, include the reduction of a car’s weight and better engine efficiency. Both will rely on lighter, stronger metals such as aluminum, high strength steels and magnesium (which we will comment on in a future article). The second aspect of the new automotive standards calls for a reduction in tailpipe emissions, which brings us to the second set of metals poised for some re-charging, the PGM’s (platinum, palladium and rhodium).
Palladium, which closed on Monday at $232/ounce, down by 50% from last year though increasing this year, may stand to gain more from the new agreement than its brother platinum (rhodium may continue to do well since no product substitutes can catalyze NOx). Much of this has to do with which precious metal can best serve as an emissions reducing auto-catalyst for cars running on diesel or gas. Because of recent price spikes for platinum, the automotive research community has galvanized (no pun intended) around the idea of product substitution. Palladium stands to gain since it dominates the gas market, according to this article. In the US market, where gas dominates diesel, palladium may do very well indeed.
According to the National Academy of Sciences in a book entitled: Minerals, Critical Minerals and the US Economy, copyright 2008, the PGM group of metals remain the rarest and because of that, the industry has developed the most advanced recycling technology. Palladium comes primarily from South Africa and Russia though some North American production exists. And though the National Academy of Sciences does not view America’s reliance on imports for these metals as a cause for concern, these metals do rank among the highest in terms of supply risk and somewhat limited substitution options, though palladium appears to have more substitutes than platinum and rhodium. Palladium, often a by-product of platinum production also comes from nickel-copper-cobalt production. Prices therefore tend to show greater volatility because product availability ebbs and flows with the primary metal or rather the economics of the underlying primary metal. Any spike in demand then, may result in higher prices. According to Norilsk Nickel, the biggest global producer of palladium, demand from the global automotive sector will soon return to pre-crisis levels…Russia has sufficient metal to supply the market, but other factors may also add to palladium price volatility.
The first factor involves the creation of an ETF in the US market for both platinum and palladium. Unlike other ETF’s, ETF Securities, who filed the papers to start this fund in the US, will make this fund backed by physical bullion, according to this article. Though the fund still has some regulatory hurdles to overcome, industrial buyers would have another hedging option though the price could increase on the back of speculator investment as it has in Europe. The last factor that could create significant pricing volatility involves the supply and demand balance, according to this MoneyWeek article. The author suggests that longer term, an increasing deficit exists for palladium excluding institutional demand and inventory movements.
Buyers of palladium would serve themselves well by identifying alternative sourcing strategies now, while palladium trades at or a little above its historical average.