LAWRIE WILLIAMS: Platinum closing price gap with palladium – fast
Several weeks ago we made the perhaps somewhat rash prediction that there was a strong chance that platinum and palladium prices could achieve parity sometime in 2022. In our view platinum’s more diverse markets were definitely more promising than those for palladium, and the price gap will continue to diminish as time progresses, unless some strong new demand element for palladium might be found.
These two leading platinum group metals (pgms) in demand volume terms have certainly come closer together in price in recent weeks and may be on their way to meeting our above prediction, although this may take a little longer than we initially expected. The cl0osing of the gap may be not so much due to a rise in the platinum price, but to a big fall in that of palladium. A big recent palladium price dip has been, at least partly, due to a squeeze on new car manufacturing, palladium’s biggest demand element, due to a component supply shortage.
In the first half of the current year, for example, at one time the spot price of palladium had exceeded that of platinum by as much as $1,750 an ounce. During the past week, the spot price differential between the two metals had fallen back to as low as nearly $1,000, and at times fell to under $800. A continuation of this trend would indeed see the two metals achieve price parity by around the middle of next year, although we are no longer quite so confident that parity will be achieved within this timescale.
Much depends on whether the new car market picks up, which it may well do if the coronavirus impact is seen as lessening. However the potential rise in infections caused by the Omicron virus variant seems to be complicating this.
The palladium price has been hugely dependent on its demand as the principal exhaust emission control catalytic metal for petrol (gasoline)-driven internal combustion engines. New light vehicle sales have been badly hit, though, by the aforementioned supply-chain disruptions for semiconductor chips – nowadays a vital component in new cars.
This fall in demand has seen the huge appetite for palladium, which had led to a big supply/demand deficit which had been driving prices ever-higher, diminish drastically and the price plunge. Thus the previous huge palladium supply deficit has now become far less of a factor, while platinum supply has conversely seen a move from a strong surplus to perhaps a small shortfall.
We have also seen the beginnings of a palladium supply increase due to its earlier high price making the search for palladium rich deposits, and/or an expansion of existing production, temporarily more attractive. However, the recent price falls for the metal may lead to some of these increased production developments staying at the conceptual stage rather than being brought to fruition as the economics now look rather less positive.
Of course in the longer term palladium demand will be strongly hit by a move to the purchase of non-polluting car drive systems. Even hybrid vehicles which combine internal combustion and electric drive will eventually be phased out in favour of all-electric, or perhaps fuel cell, power which does not require palladium. Progress in this area is building with many countries now legislating against the manufacture and sale of internal combustion powered light vehicles at a relatively near-at-hand future date, and some major manufacturers are now saying they will phase out internal combustion engine light vehicle production altogether.
We had also suggested that the price gap between platinum and palladium could be influenced by a possibly increasing move towards substitution by the currently much less costly platinum for palladium as the predominant catalyst in exhaust cleaning systems. Readers will probably recall that platinum used to be the principal catalytic metal for exhaust emission control systems, but was then almost wholly superseded in the petrol-powered light vehicle market by the then hugely less costly palladium. Now the boot may be on the other foot, although the diminishing price differential between the two sister metals perhaps makes the incentive for investing in the production change rather less economically advantageous.
Furthermore, continuing research and development has meant that palladium may well currently have much better properties than platinum as an exhaust emission control catalyst. This could prolong its dominant position in this key market until non-polluting drive systems predominate in the market, which may yet be a few years hence.
The potential fall in demand for palladium in its primary market, though, may thus prove to be a little slower than initially envisaged, although we see it as inevitable over time. Development of non-polluting drive systems for light vehicles may progress faster than foreseen though. Here in the UK, at least, TV advertisements for electric-powered cars now seem to predominate as mainstream manufacturers begin to switch over production.
The presumable corresponding growth in electric vehicle (EV) availability in particular, coupled with technology improvements in factors like EV vehicle range, charging speeds and ever-increasing pressure to replace the internal combustion engine with a non-polluting alternative, may well further increase the speed of EV uptake.
Norway is a great case in point here. Government imposed restrictions on internal combustion-engine powered cars, coupled with high fuel costs and ever-increasing environmental-related publicity, have meant that EV sales are already currently dominating the new car market in that country.
The net result of all this is that the closing of the price differential between palladium and platinum, although it may well be inevitable, may also slow down a little from our initial expectations. This could particularly be the case if a reduction in coronavirus-related restrictions, and a fall in supply chain caused shortages, means a rapid resurgence in the new car market before non-polluting drives start to dominate it, which they inevitably will over time. But the change may yet not be fully in place for a few years yet.
Some of the world’s population will remain resistant to this change, particularly as the price of EVs at the moment is higher than that of internal combustion engine driven vehicles, and servicing capabilities are not as well catered for. This leads us to suggest that price parity between palladium and platinum may not be seen until a little later than our initial expectations despite the huge narrowing of the price gap during the current year.
Price parity, and then a switch to platinum being at a higher price than palladium again, may thus take a little longer to happen, but is virtually certain to occur in time in our opinion. We think therefore that overall palladium demand will remain reasonable in the short to medium term, but its price will become increasingly vulnerable as time progresses and non-polluting drive systems come down in price and start to dominate the global car market.
Platinum, on the other hand, will still see longer term price growth due to its much wider range of potential markets. There is still a good chance that at the recent rate price parity between the two pgms may still occur within the next 12 months, but any recovery from the coronavirus pandemic, and a pick-up in new car sales as a result, may delay the inevitable.
In our view therefore, platinum remains a better investment bet than palladium in the medium to long term, although palladium’s price fall to below that of platinum may take a little longer than previously suggested dependent on the global recovery from the coronavirus pandemic.