In a recent note (The precious one) I highlighted the extreme bullish sentiment in the palladium market as evidenced by the narrative from financial media headlines. The point being that when sentiment is stretched then it can often mean that a strong move in the opposite direction in imminent.
Recall that around three-quarters of palladium demand comes from the auto-catalyst sector. The high price of palladium versus platinum has meant that car companies have been eyeing the cheaper of the two metals. A signal that manufacturers are moving out of palladium into platinum could be the spark that narrows the price gap between the two precious metals.
Back in March the feedback was that it would take 18 months to two years to make a switch once that decision had been made. What has been missing is any evidence that car companies have been substituting palladium for platinum. But where to find the first sings of this happening?
According to Matthew Turner, ex-precious metals analyst at Macquarie look no further than the central European country of North Macedonia!
This country had little to do with the global PGM markets for much of its history. It is not a producer, and in 2009 reported imports of unwrought PGMs of only $1. That might sound a little implausible, but probably not far from correct – in 2008 PGM imports were less than $20,000.
And yet in 2010 it imported over $100m of PGMs. And by 2018 this was over $1bn, with more than 1 Moz of PGMs imported. This year is approaching $1.5bn.
What gives? In 2010 refiner Johnson Matthey (JM) opened a diesel autocatalyst plant, which was expanded in 2013. This is why North Macedonia’s exports of catalysts also exploded, rising from nothing in 2008/2009 to nearly $2bn in 2018 (Macedonia has not gone its own car industry).
This is great for an analyst. Other large catalyst manufacturing countries are also PGM traders, such as the UK, and/or jewellery consumers, such as the China and the USA. This means it is hard to draw firm conclusions from trade data. But in North Macedonia it is just catalysts – therefore it is safe to assume the imported PGMs are being used in that sector.
As such because we can break the trade data out by metal we can use it to estimate what proportions of platinum and palladium JM are putting in their catalysts. If we look at its imports by volume, we see that more platinum is imported than palladium – in 2018 nearly 800 koz of the former to around 350 koz of the latter – making palladium 28% of the combined volume to platinum’s 72%. This is to be expected given the plant is producing diesel catalysts. But importantly this proportion of palladium in the mix doesn’t seem to have fallen in the last few years – indeed it modestly rose from 24% in 2015*.
The latest import data (September) shows little evidence of any substitution. Palladium as a share has averaged 36% over the past 6 months, well above levels seen in 2018.
As Matthew suggests the import data cannot prove that no substitution is taking place:
There could be other effects masking it, for example if JM have been importing additional palladium than they are using in catalysts (indeed it looks likely), perhaps ahead of the rising price or Brexit. It also might be that the mix of heavy and light vehicle autocatalyst could have changed, affecting the ratio (that’s what seems to have driven palladium’s share down in 2013 after the plant’s first expansion). And if the plant had begun manufacturing gasoline catalysts all bets would be off, though then we would also see rhodium imports, and we have not.
We also can’t assume that JM’s Macedonia plant is representative of all their catalyst plants or those of other catalyst manufacturers. And it is possible substitution is happening in gasoline catalysts, not diesel ones.
Meanwhile, trade data is notoriously volatile, SIC codes are open to interpretation and publication has a lag of several weeks. It’s far from being a perfect indicator.
Although the key bullish turning points in the price of palladium (2010 and 2016) match up with palladium’s increased market share, what is also clear from the monthly price chart below is that the price of palladium is well above levels seen in 2013 – the last time palladium had a 35% share.
All of which means that despite this analysts best efforts to understand the demand drivers for palladium we come back to where I started this note. Market sentiment is the primary driver of price.
Related article: The precious one
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Related article: Platinum boom on the horizon? Not so fast!