LAWRIE WILLIAMS: Platinum closing in on palladium as fundamentals gap closes
With all precious metals falling below their initial January 1st prices, that for platinum appears to have fallen least of all, being down by only around 1.5%. By contrast previously high-flying palladium is down over 15% from its start-of-the-year price and the price gap between the two pgms seems to be closing inexorably.
I had predicted this earlier in the year, but the changed circumstances between the two metals in terms of supply/demand fundamentals has altered by even more than I had anticipated. Platinum seems to be moving into a temporary supply deficit situation, while palladium is moving from a huge supply deficit towards a fundamental supply/demand balance.
So what has changed to bring this change in situation about? Primarily the problem seems to revolve around new car sales with some of the biggest manufacturers imposing production cutbacks, supposedly on a temporary basis. This is because of a global shortage of the semiconductor chips necessary to keep the modern automobiles increasingly sophisticated electronic systems functioning. The motor manufacturing sector is by far the single biggest market for palladium used as an exhaust emission control catalyst in petrol (gasoline)-powered engines.
In part this due to the car manufacturers’ just-in-time approach for supplying its production lines with all the parts necessary to put a new vehicle on the road. During the enforced lockdowns, road trips were cut back drastically, as was the demand for new vehicles and ongoing semiconductor demand was sharply reduced. The chipmakers responded by seeking out new markets for their products – mostly in the in-demand home electronics sector which was booming under lockdown. Now the motor manufacturers are having problems in sourcing and reinstating new supplies as the chip manufacturers may have found themselves locked into new supply contracts in other industries.
The above is probably only a temporary problem for the motor manufacturers and will likely sort itself out eventually, but this may take a few months yet and while this persists the demand for palladium will continue to falter. The problem has been exacerbated by some other unrelated problems experienced by chip suppliers, which have also been adversely affecting availability, and the fact that it probably takes in excess of two years to bring a new computer chip manufacturing facility online to meet enhanced demand.
The growth in demand for electric vehicles (EVs), which don’t require palladium catalysts to function is also beginning to accelerate, particularly in China – the world’s biggest current market for vehicle sales. A recent estimate gives EVs a growing position in the Chinese new automobile market, although some doubts are being expressed over the corporate fragmentation in the sector and in some Chinese EV technology.
Europe is becoming a significant market for EVs with some countries putting bans in place on internal combustion-powered light vehicle manufacture and sale in the medium term. Norway seems to be leading the way and is heading towards a 100% take-up of light vehicle EV sales. Battery EVs already account for over half of new car sales there, The shape of things to come.
The U.S. is lagging behind here, but with the two biggest manufacturers, GMC and Ford, both beginning to move into EV manufacture in a major way, not to mention pioneer and current EV market leader Tesla, the non-polluting light vehicle market share could start to expand rapidly. Even so it will be difficult to convince much of the American currently internal combustion engine powered car-owning community that EVs are a satisfactory substitute. Change will happen, but probably more slowly in the U.S. than in many other parts of the world.
While the above paints a bleak long term future for palladium, unless a new all-encompassing use is found for the metal, the same is not true necessarily for its sister metal, platinum. The latter has a slightly better precious metals pedigree than palladium, although its principal demand role is also industrial. It still has a small, but important, place in jewellery fabrication, but is also important in the development of some of the newer non-polluting hydrogen fuel cell technology. This is being developed as a competitor with battery power as a potential power source for light vehicles.
Goldman Sachs sees both metals moving into a production surplus in 2022, which would potentially further remove some of palladium’s current price advantage, although probably not lose it altogether. But as time progresses we would expect platinum to retake its historic price advantage over palladium, if only because we can see growing markets for it ahead and potentially declining ones for palladium. It may yet take some time for this to happen. At current price levels palladium has a 90% price premium, but that is down from around 140% only just over 5 months ago. Things are moving fast in the comparative metal price stakes.