The crazy price of palladium cost global carmakers $18 billion last year — and it keeps going up
The bull market in palladium caused by a chronic shortage of supplies has cost the global automotive industry US$18 billion over the past year, according to a new report by U.S. bank Citi.
The price of the silvery white metal has surged more than 80 per cent over the past year as industrial consumers have scrambled to meet demand for the critical ingredient in catalytic converters for petrol and hybrid cars.
Analysts at Citi believe that barnstorming run — palladium hit a record high above US$2,500 an ounce last week — squeezed cash flows, costing the car industry US$18 billion in 2019.
“Platinum group metals [which include palladium] now represent a whopping 15 per cent of global automakers’ cash flow, up from 7 per cent a year ago and 4 per cent three years ago,” said Citi analyst Max Layton in a report, noting that his calculations assumed that buyers had not hedged the cost of their purchases. Layton added that the figures would be even higher for automakers with heavy exposure to gasoline vehicle sales, which have greater weightings of palladium and rhodium in their converters.
One of the big factors behind the surge in price has been demand from China, where carmakers have to meet more stringent standards on air pollution. This has led to an increase in the amount of palladium that goes into catalytic converters. The converters built using palladium convert toxic emissions such as carbon monoxide and nitrogen oxide to carbon dioxide, water and nitrogen.
At the same time, supply has failed to keep up with demand and inventories have been whittled down. This is because palladium is produced alongside platinum or nickel — commodities where new projects have been few and far between.
However, analysts note that the rally may fade if carmakers start to substitute cheaper platinum for palladium. “By some accounts 25 per cent [of the palladium] . . . can be substituted for platinum in gasoline vehicles in 18 to 24 months and this may already be in the pipeline,” said Layton, who is not convinced the rewards of staying bullish on palladium at current prices outweigh the risks. “In this case, this could gradually affect the market from 2021 and would likely substantially affect the market from 2022.”
Still, carmakers, which are ploughing billions of dollars into electric vehicles, may be disinclined to switch.
Citi believes that the bigger threat to the market is renewed sales from Russian stockpiles, as the country’s leading palladium producer Norilsk floods the market in an effort to prevent that substitution.
Norilsk’s Global Palladium Fund, established in 2016, supplied 1 million ounces of palladium in 2017 and 2018 respectively, according to Scotiabank, helping to keep a lid on prices. However, palladium’s recent surge — it is up more than 25 per cent this year — suggests the metal is very scarce or demand has ramped up abnormally, said Nicky Shiels, a commodity strategist at Scotiabank in New York.
The rising price of palladium has also led to some unexpected consequences. Police in London have warned car owners of the risk of thefts of catalytic converters while Toyota, maker of the Prius hybrid car, has advised UK drivers to buy a “Catloc” device, which is fitted around the converter to stop it being cut out.
Other more obvious effects include the rising share prices of producers such as Norilsk, Anglo American and Sibanye Gold. The stock price of the latter, listed in Johannesburg, has more than doubled since September. Analysts believe Anglo American’s platinum business, which has its own listing in South Africa, could pay a special dividend this year.