Investing In Palladium


Investing In Palladium

Palladium prices have skyrocketed over the past year. Here we examine the reasons behind the rise and explain how to invest in the precious metal.

Published on 5 February 2018

An investor who wants to diversify into precious metals usually considers buying gold, silver, or platinum. But lesser-known palladium is also a good option.

In fact, palladium – which is primarily used as a catalyst in petrol cars – saw its price shoot up over 40% to a level of US$1,047 per ounce by early February this year. Twelve months ago, it was trading at about US$772.

Why have prices risen so swiftly and sharply and can they go up even further?

What’s driving palladium’s price gains?

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Palladium valuations have reached a 17-year high because of a combination of several factors:

1) Demand for petrol cars: Strict emission norms have led to a shift away from diesel cars. Consequently, palladium – which is used as a catalytic converter in petrol cars – has seen an increase in demand. In western Europe, diesel cars suffered a 5.6% drop in market share in 2017 as customers shifted to petrol vehicles.

That’s a trend that is likely to continue. According to analysts at Bank of America Merrill Lynch, diesel cars, which currently account for a 43% share of the market, will see their share fall to 20% by 2023.

At the London Bullion Market Association conference held in Barcelona in October last year, Al Bedwell, a director at LMC Automotive, a provider of market intelligence for the auto industry, said, “We do see further declines in the diesel market…. There are more headwinds for diesel.”

About 75% of worldwide demand for palladium is from petrol-fuelled cars.

2) Production cannot keep pace with demand: Russia and South Africa produce most of the world’s palladium.

With the world’s palladium mines are unable to meet demand, existing stocks are being used to fill the gap. The inventories held by palladium-backed exchange-traded funds (ETFs) are being sold in the market. According to an estimate by UBS, a Swiss global financial services company, there was a deficit of approximately 830,000 ounces of palladium in 2017.

Another reason for the strong demand in palladium is that it cannot be recycled from discarded automobiles.

3) The world’s palladium stocks are drying up: A recent report from Reuters points out that since the end of 2014, global palladium ETF holdings that are tracked by the international news agency have halved. By mid-January, the stocks of palladium had been depleted to about six weeks’ demand.

Commenting upon this development, Tim Kendall, an analyst with ICBC Standard Bank, said, “If that source of metal starts to dry up, whether because ETF stocks are getting low or because investors are holding onto the metal tighter, you need to find other routes for it to come into the market, and that typically occurs through higher prices.”

Technological developments could reduce demand

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Denso Corporation, a Japanese automotive component manufacturer that has close ties with Toyota, has announced that it has developed a new catalyst that utilises 20% less precious metal than its predecessor. This could have major implications on the demand for palladium.

The new catalyst, which is currently being mass-produced, will initially be used in Toyota’s hybrid Lexus LC 500h. But it is likely that it could be used in other models too. Denso may also consider selling the catalyst to other car manufacturers.

Another factor that could have an impact on the demand for palladium is that it could be substituted by platinum. Traditionally, palladium has been cheaper than platinum. But with its recent price rise, it now costs a little more.

It is estimated that carmakers could take about 18 months to make the changes required to use platinum.

How to invest

The ETFS Physical Palladium Shares is an exchange-traded fund that you can buy on the New York Stock Exchange. The fund’s net asset value rose sharply over the last year:

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The fund holds 233,411 ounces of palladium at vaults in Zurich and London.

Investing in palladium through an ETF is convenient. You don’t have to bother about storing the precious metal or insuring it. As the ETFS Physical Palladium Shares are traded on the NYSE, it is easy to liquidate your investment at short notice. For most investors, this could be the best way to gain an exposure to the precious metal.

Another way to get an exposure to palladium is by buying the shares of a company that produces it. North American Palladium Ltd is a Canadian company that operates its Lac des Iles mine near Thunder Bay, Ontario.

The firm’s shares are traded on the Toronto Stock Exchange. The stock has seen a sharp escalation in price in the last one year:

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In 2016, the company produced 149,563 ounces of palladium. Production has been stepped up subsequently. In the third quarter of 2017, North American Palladium produced 53,118 ounces. In the comparable quarter of the previous year, production was only 33,165 ounces.

At its current price, the share is trading at a price-earnings (P/E) ratio of 256. It’s not very clear whether such a high valuation is justified.

A third way to invest is to purchase palladium coins. Popular coins include the one-ounce Canadian Palladium Maple Leaf and the one-ounce and half-ounce Russian Ballerina Palladium coins.

However, if your intention is to diversify your investment portfolio, an investment in coins may not be the best option. You will have to be very careful about storing them. Additionally, selling your coins is not as easy as liquidating an investment in shares or an ETF.

The bottom line

Commodity prices are cyclical. Boom follows bust and then the cycle repeats itself. Palladium valuations increased from less than a hundred US dollars in 1992 to over ten times as much in 2001. Then they fell to a little over US$300 over the next seven years. The current rally started in 2009 and prices are again at a level of over US$1,000.

When will the market peak and how far will it fall after that? While it isn’t possible to make these predictions with any degree of certainty, it’s likely that at some point in the future prices will start trending downwards. When this happens, investors should be prepared to sell or be willing to wait for the next upswing.