Palladium Prices Top Platinum For First Time Since 2001; May Not Last
(Kitco News) – Palladium prices have moved above those for platinum for the first time in 16 years, helped by demand for gasoline-powered vehicles at the same time platinum has fallen alongside gold, analysts said.
Nevertheless, analysts also say they look for platinum to regain the upper hand, at least in the short to medium term. Further, they do not envision any meaningful shift in use of palladium to platinum for automotive catalysts unless palladium was to maintain a premium for at least two years.
As of 10:14 a.m. EDT, spot palladium was trading up 30 cents to $927.30 an ounce. Platinum was down $1.75 to $918.70 an ounce, leaving palladium with a premium of $8.60. By contrast, palladium was around $222 per ounce cheaper than platinum at the end of 2016.
The main industrial use of these sister metals is to scrub emissions from catalytic converters in motor vehicles. Palladium can be used in gasoline-powered cars popular in the world’s two largest auto markets – the U.S. and China. Diesel-powered vehicles, such as those popular in Europe, require platinum.
“Diverging demand expectations for platinum group metals [are] creating a price parity for palladium and platinum not seen since 2001,” said a research note from commodities broker SP Angel. “Palladium is benefitting from its inclusion in catalytic converters in gasoline-powered vehicles, which is expecting robust growth from the shift from diesel engines following the 2015 Volkswagen emissions-rigging scandal, and hybrid electric vehicle demand.”
Robin Bhar, metals analyst at Societe Generale, said the diesel-car scandal has hurt platinum due to ideas that consumers will look to new gasoline-powered vehicles instead. Further, he said, the supply/demand fundamentals favor palladium already.
“We are in a fairly deep deficit for palladium,” he said.
Societe Generale projects a supply deficit of 1.8 million ounces in the palladium market this year, then 1.9 million next year. By contrast, the bank looks for a 44,000-ounce supply deficit in platinum this year and 50,000-ounce surplus next year, meaning platinum is “essentially a balanced market,” Bhar said.
Bhar pointed out that platinum also tends to be more closely correlated with gold, which has fallen back in recent weeks on a stronger U.S. dollar after Federal Reserve commentary was construed as hawkish for future monetary policy.
“Palladium, it can be argued, is the most industrial of the precious-metals complex with more than half of demand coming from the auto-catalyst sector,” Bhar said. “Therefore, it is behaving almost like a base metal. So the factors driving copper and the other base metals higher are also pushing palladium up.”
Commerzbank analysts reported that investors also have favored palladium.
“Besides different fundamental backdrops – a high palladium supply deficit is envisaged this year, while the platinum market is likely to be largely balanced – there are also differences in terms of investment demand,” Commerzbank said. “Speculative financial investors have been betting heavily on rising palladium prices for months now….”
Furthermore, market expectations for lower jewelry demand impact platinum more than palladium, pointed out Georgette Boele, precious-metals strategist for ABN AMRO Bank.
Platinum Expected To Regain Upper Hand
Analysts doubt palladium will remain stronger than platinum for long.
“In the short term, we think platinum is undervalued for a whole host of reasons. Therefore, we think there is scope for platinum to move back to a slight premium in the short to medium term,” Bhar said. “We don’t see a sustainable premium of palladium over platinum…until about 2020 or 2021.”
Societe Generale’s annual forecasts call for platinum to be around $25 to $50 more expensive than palladium for this year through 2019, he said.
Boele pointed out that the large bullish position of speculators in palladium futures means this metal is vulnerable to a pullback on long liquidation.
“If they were to become less positive on the palladium price outlook and start to liquidate their long positions (taking profit), palladium prices could drop to $800 per ounce,” she said. “In short, we think that platinum is cheap and palladium is expensive. We expect the platinum/palladium ratio to rise again.”
Shifts in prices of various commodities can result in industries trying to substitute toward those that are less expensive. However, Bhar said he doubts the auto sector will make any kind of meaningful move toward replacing palladium with platinum unless the ratio continues to widen in favor of palladium, plus palladium maintains a premium for two years.
“This [substitution] doesn’t happen in the short term because investments are needed to retool the plants. It probably needs to stay at a premium for a couple of years before we’d see that necessary investment in re-engineering of auto catalysts,” Bhar said.
There is a risk of demand for both metals drying up if fully electric cars were to overtake the market, since they would not require platinum group metals for catalysts, Bhar said. However, he said, the industry consensus as of now is for manufacturers to rely on some kind of hybrid vehicle that uses both electricity and most likely gasoline, meaning some continued demand for palladium.