1) Vehicle demand
Roughly 75% of palladium demand is from the autocatalyst sector. Unlike diesel cars that use platinum, petrol fueled cars use palladium as a catalyst to reduce noxious vehicle emissions. Tighter vehicle emission standards is likely to increase demand for palladium.
Palladium is more exposed to the Chinese and US markets where diesel hardly features in the passenger vehicle segment. Chinese demand is particularly important in that almost one-third of net palladium demand (accounting for recycling) comes from the Asian economy.
Apart from catalytic converters, palladium sees usage in a wide range of industrial applications, including fuel cells, dentistry, and medicine.
Norilsk Nickel is the largest producer of the precious metal, accounting for about 40% of global supply. Any disruption to exports from Russia perhaps in the form of sanctions could be expected to reduce the supply of the metal onto the global market.
3) South Africa
Around 40% of all mined palladium comes from South Africa. Supply constraints in the form of intermittent electricity supply, rising fuel and construction costs and industrial action have all curtailed output from South Africa in the past.
The launch of a number of Exchange Traded Funds have helped support investor demand, opening up the possibility of investing in palladium to a wider group of investors. Investors should be cautious though. Unlike gold and to a lesser extent silver, the palladium market is a lot more opaque while swings in investment fund flows can have a disproportionate affect on prices.
High prices incentivise vehicle manufacturers to look for alternatives or reduce the amount of metal used in their catalytic converters. This could involve substituting palladium with other metals such as platinum or rhodium.
Higher prices typically incentivise the recycling of palladium catalytic converters, a source that typically accounts for up to 30% of total supply. But since palladium forms a very small proportion of the value of a vehicle high palladium prices only have a marginal impact on the incentive to recycle. High steel prices encourage dismantlers to recycle vehicles and take palladium and other materials as byproducts.
7) US monetary policy
Although not just a fiat commodity in the same way as gold, palladium shares some of the properties of gold. Higher interest rates, reflected in higher bond yields reduce the attractiveness of holding non-interest bearing assets like palladium. However, it is not the nominal interest rate that affects the price of palladium but the real interest rate, i.e. after inflation.
When real yields are low the opportunity cost of owning palladium drops. Investors are then likely to be willing to pay a higher price relative to palladium’s long-run estimated real value.
8) US dollar
A weaker dollar can also act as a disincentive to producers to increase output. For example, a depreciation of the US dollar against the Russian ruble will (all other things being equal) reduce profit margins for Norilsk Nickel, the largest producer of palladium. All of its revenue will be received in US dollars, which will now buy less rubles, but some proportion of the costs will be denominated in rubles and will remain constant (at least in the short term). The prospect of a lower profit margin acts as an incentive to decrease the supply of palladium on to the global market.
Stockpiles of palladium in Russia have been an important source of supply in recent years. However, the amount of metal held in the form of stockpiles is a secret so there is uncertainty over the exact amount of metal held.
Of all the precious metals palladium exhibits the strongest degree of price seasonality. Palladium prices tend to show the strongest gains during the first quarter of the year.
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