Palladium: A story of ups and downs

The global palladium market is at a turning point: it’s becoming cheaper, but there are also conditions that point to a possible increase in its price. The structure of palladium consumption is changing, preparing the market for a significant transformation.

Unnecessary negativity

The price of palladium is dropping, which is making investors nervous. In January this year, the price of this precious metal on the New York Mercantile Exchange was USD 1,800 per troy ounce, but now the metal is showing no sign of breaking the USD 1,500 mark. This trend is causing negative sentiment among financial analysts and traders, who believe that the metal's price will continue to decline.

They argue that palladium prices are closely linked to the global economy, which is either on the verge of recession or has already entered one. Additionally, the European Union and the United States, the two biggest economic blocs in the world, are facing challenges that do not support a strengthening of demand for palladium, leading to lower prices.

Traditionally, the consumption of palladium has been driven by the automotive industry. In the European Union and the United States, the sector stagnated in 2022. For example, American Ford saw a reduction in car sales by 5.7% to 3.7 million units, and German BMW had a 4.5% drop in sales to 2.1 million units. As a result, production and sales of cars may also decrease in 2023 due to rising inflation and increased rates on car loans. Additionally, the production of electric cars, which do not require palladium catalysts, is expected to increase significantly.

Moreover, analysts are looking at the prospects of replacing palladium with the cheaper platinum. In 2022, platinum replaced 340,000 troy ounces of palladium, and in 2023 this figure may increase to 500,000. Palladium inventories in traders' warehouses are expanding, which is creating a surplus supply of the metal and putting pressure on prices.

Refuting negative sentiment

It is hard to agree with this negative sentiment. At the end of 2022, the global market shortage of palladium was estimated at 550–600,000 troy ounces after a decline in its production by Sibanye-Stillwater, which ran into difficulties with its raw materials supplies. Anglo American Platinum and Impala Platinum were in a similar situation, facing power outages at their facilities that led to a drop in metal output.

However, other players were not able to take advantage of the emerging conjuncture due to limited opportunities for production growth. Norilsk Nickel preferred to adjust its extraction and production of palladium based on demand trends, with a view to keeping global palladium prices at a reasonable level.

Growth drivers

Palladium output may pick up this year if producers around the world resolve their technical bottlenecks. However, the deficit will not disappear because of increased production of cars around the world, with oil prices currently standing at around USD 85 per barrel. In particular, the US automaker Ford recorded a decrease in the shortage of microchips (which have negatively affected the entire global automotive industry since the pandemic year of 2020) amidst the recovery of the weakened US market, and now expects to increase sales of cars.

Replacing palladium with platinum is not a panacea. The price difference between them is about USD 500 – not enough to radically change the final cost of a car. Additionally, the catalytic ability of palladium is much higher than that of platinum. A stringent policy in the European Union and the United States on tightening environmental requirements for exhaust gas emissions from cars will help maintain orders for palladium catalysts from the world's largest automakers.

The trend seen over the last few years to decarbonize vehicles by expanding production of electric cars will not be able to shake palladium's position in the global automotive industry either in 2023 or in the medium term: electric cars will still lose out to cars with internal combustion engines and will also be in stiff competition with hybrid cars, which are growing in popularity as a result of the uneven distribution of charging stations and price hikes for electricity.

The use of biofuel in transportation will also fail to eliminate palladium catalysts, which are needed for its mass production. Replacements based on zirconium and other metals lose out to palladium in efficiency and depth of catalysis.

The predicted hydrogen transition will only increase the demand for palladium, because it is capable of absorbing 90 times its own weight in the gas. Diffusion of hydrogen in palladium puts it in a quasi-liquid state that provides easy gas return at a relatively low temperature (while nonferrous metal replacements lose out greatly as substitutes). Palladium is best placed to provide reliable and safe storage of hydrogen.

Palladium in oil refining cannot be ignored, but it can also be used in natural gas to produce ethylene, propylene and other gas and chemical products that are also deployed in purification processes.

A curious fact: in China, the demand for palladium is driving the production of monoethylene glycol, which is used as a component of antifreeze and brake fluids and as a coolant in residential heating systems. China uses coal as a raw material for monoethylene glycol production, and without palladium catalysts the production process is simply impossible.

Also in China, palladium catalysts are purchased in huge quantities by chemical plants which produce propylene oxide from hydrogen peroxide. In turn, propylene oxide is needed to produce polyurethane, which is used in various adhesives, sealants, paints, shock absorbers and fillers.

The use of palladium opens up new horizons for fine organic synthesis in the production of medicines. Studies have revealed that palladium compounds have useful properties providing the basis for the creation of drugs that can combat inflammation and cancer.

Finally, palladium can be used to produce biological stimulants and pesticides for agriculture, thereby helping to reduce the use of chemical plant protection products. Notably, palladium can increase the efficiency of synthesizing peptides (the existing production technologies are characterized by high costs), which are considered by experts to be a promising class of compounds for the production of inexpensive pesticides.

As a result, we can predict a global market deficit of 400,000 troy ounces of palladium in 2023 due to growth in car production and other fundamental factors. Prospective niches will stimulate orders for palladium, preventing the buildup of a large palladium surplus and any drop in prices below USD 1,300 per troy ounce for a long time to come.