Much price volatility is predicted for palladium – primarily an industrial metal for use in autocatalysts – over the next year, driven primarily by unpredictable trade sentiment as the US-China dispute unfolds, says multidisciplinary research team Afriforesight’s chief precious metals analyst, Jason Welz.
He says the effect of this should be twofold – influencing investment demand for the metal as a safe-haven asset and trade sentiment, which is expected to impact on automotive demand.
Welz’s forecast comes on the back of the palladium price almost doubling from $826.40/oz in September 2018 to a high of $1 600.50/oz in March 2019, from where it quickly tumbled to $1 354/oz just over a week later.
In terms of investment demand, exchange-traded fund (ETF) holdings have decreased 8% so far this year to about 658 000 troy ounces, which is a continuation of the 2016 trend that resulted in ETF holdings plummeting 27% in 2016 and 2017 and 43% in 2018, mostly to meet industrial demand.
Welz highlights this as the biggest reason for the commodity’s dramatic price spike in recent months, which, in turn, has created a bubble, according to industry stakeholders.
To some extent, he believes that the commodity’s bubble has burst, although Afriforesight expects further corrections on the announcement by any major automaker, indicating concrete plans towards substituting away from palladium.
This would be “inevitable, as investment holdings begin to run dry as an outlet for the pressure built by a persistent market deficit”, Welz says.
However, global commodities consultancy Core Consultants MD Lara Smith argues that the bubble is not bursting, but that it is rather a correction, as it “hasn’t given back all of its gains”, and is now contracting around 23.6% from its three-year gains, and less than 38.2% from its 2018 gains.
With the commodity mostly used in autocatalysts, and automotive demand growing strongly while primary and secondary supplies increase modestly, mining company Platinum Group Metals (PTM) CEO Michael Jones believes that the commodity is likely to find its feet soon amid the current palladium deficit, which is forecast to approach one-million ounces in 2019.
“The fundamental market for palladium is strong and we don’t agree that it’s a bubble. If it is a bubble, then it’s a very robust one that’s going to be around for a very long time,” he tells Mining Weekly.
Smith agrees, adding that, despite lower prices, the palladium fundamentals are strong and demand is unlikely to change significantly in the next few years, owing to tighter emission standards.
This view corresponds with global science and chemicals company Johnson Matthey’s (JM’s) platinum group metals (PGMs) market report, published this month, which forecasts that the palladium market deficit will widen significantly in 2019, with primary and secondary supplies unable to keep pace with the growth in automotive demand.
Jones expects this deficit to continue up to 2025 and says it will largely depend on the extent to which remaining ETF holders choose to take profits, excluding investment.
According to JM, palladium ETF disinvestment helped to balance the market in 2018, but remaining holdings are no longer sufficient to bridge the gap between supply and demand.
JM market research director Rupen Raithatha says that ETF investors redeemed more than 2.2-million ounces of palladium holdings during the past four years. This, he explains in the report, helped to support market liquidity during a period of exceptional growth in automotive demand.
However, he warns that persistent market deficits have had a real impact on the price. Despite these high prices, ETF selling dried up in the first quarter of 2019, but JM thinks that there may still be some potential for profit-taking this year.
The company warns in the February edition of its PGMs market report that, even if all the remaining ETF holdings were liquidated, this would not be sufficient to eliminate the shortfall.
Meanwhile, supply of this precious metal is further threatened, owing to the possible shutdown of some of South Africa’s difficult and high-cost, narrow-reef platinum mines where palladium is produced as a by-product.
According to Nedbank’s PGMs update, published in November 2018, South Africa’s platinum production base increased to about 4.9-million ounces in 2017 from about 4.6-million ounces in 2008. However, over this period, the number of operating mine shafts declined to 63 from more than 80. Capital expenditure declined to R13-billion, from a peak of R23-billion in 2008, and the reserve base declined to about 147-million ounces from 280-million ounces.
Nedbank believes that these metrics are all set to deteriorate further over the next five years, making it impossible to sustain South African PGMs production at current levels over the coming years.
The continued shortage of palladium, coupled with the sharp increase in the palladium price over the past two years, will likely lead to the substitution of palladium by its sister metal, platinum.
While this may not happen immediately, Nedbank’s report highlights that there is no stopping the change amid a clear shortage of the metal that would endanger the auto producers’ ability to sell cars.
However, demand has primarily been driven by the automotive industry through the “demonisation” of diesel engines in Europe. The resultant growth in small petrol engines and hybrid engines, which are fitted with emissions-reducing catalytic converters that require it as a catalyst to control pollution, along with the shift away from diesel engines, has benefited palladium.
The JM report states that palladium use in auto catalysts is forecast to rise by 9% in 2019.
However, in terms of import demand, Afriforesight says that available Asian and US data from the first quarter points to a decline, compared with the same time last year. This, Welz says, may be caused by weaker automotive demand on the back of a slowing Chinese economy, the ongoing shift to electric vehicles and producer stockpiling in 2018, or a combination of these and other factors.
“It’s a little early to say, but we expect demand to rise substantially this year.”
Robust Changes Ahead
China’s VI emission standard means that cars will require more robust catalytic converters that are able to meet the one-size-fits-all global legislation. This, in turn, should increase demand for more palladium during manufacture to minimise emissions.
The transition to the China VI emission standard will result in a step change in palladium and rhodium loadings, compared with the current China V emission standards, which more than make up for any car sales decreases, Jones tells Mining Weekly.
China VI emission legislation will be enforced nationally in 2020, but some provinces and cities will introduce the new standards in July this year, under the country’s Blue Sky Protection Plan.
Essentially, this new legislation will require about 30% more PGMs to be used in each vehicle, Smith points out.
JM’s PGMs market report, published this month, also includes a special feature on European emissions legislation. Under Euro 6d legislation, emissions compliance is being extended from the laboratory to the real world through “real driving emissions” (RDE) testing using portable emissions measurement equipment.
When RDE testing is rolled out, it is expected to result in further increases in the PGMs content of catalyst systems, particularly in European petrol cars.
JM principal automotive analyst Margery Ryan states in the report: “Euro 6d legislation is having a significant impact on the palladium market. Vehicles are being tested under a wider range of driving conditions, making emissions control more challenging.”
Exhaust aftertreatment systems are becoming more complex and automakers are adding more palladium to meet the new requirements, she adds.
The report further indicates that the trajectory of palladium demand will also be influenced by trends in vehicle output. A slowdown in sales during the second half of 2018 left the Chinese car market with some excess inventory at the start of 2019, which will result in cuts to short-term production forecasts.
Nevertheless, PTM expects to see double-digit growth in palladium consumption from 2019 to 2020.
According to German chemicals company BASF, palladium demand is estimated to increase to 3.1-million ounces by 2020, owing to its use in the manufacture of Chinese cars.
This increasing demand, combined with constrained long-term supply, has caused a deficit in palladium supply, which has been the key driver in palladium’s high prices – a price trend which experts say will continue.
Despite weakening automotive sales in key markets, stringent emissions controls are expected to sustain demand as governments seek to improve their emissions targets.
Jones expects this demand to continue because of tight supply, thereby creating a strong market for palladium, which ultimately benefits PTM through its palladium-dominant Waterberg project, in South Africa.
South African Producers
The record palladium and rhodium prices have lifted the despondent mood in the South African platinum industry.
Coupled with the weaker rand, which helps to lower costs, South African producers – such as Sibanye-Stillwater, Impala Platinum (Implats) and Anglo American Platinum (Amplats) – have all been recording profits for their PGMs divisions since 2018.
Adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) from Sibanye-Stillwater’s South African PGMs operations increased to $25.2-million in the first quarter of 2019.
The higher PGMs rand basket price, boosted by increases in palladium, rhodium and nickel, resulted in a laudable operational and financial turnaround by Implats in the six months to December 2018, when Ebitda increased 112% to R5.9-billion.
For its 2018 full year, Amplats reported the doubling of headline earnings and moved from net debt to postdividend net cash of R2.9-billion on higher rhodium prices chipping in R2.6-billion. High palladium prices contributed R2.1-billion and high ruthenium prices yielded R1.3-billion.
South African Backdrop
With South Africa having successfully completed its elections last month, Jones remains confident that improving confidence could be indicative of future growth for local industries.
This would, ultimately, have a positive impact on not only the country’s embattled economy but also the Waterberg project and similar projects.
However, since the fate of palladium and the fate of platinum are intertwined, and South African mines are capable of producing significant quantities of both metals, Welz expects the effects on miners’ revenue for both metals to largely offset each other going forward, with platinum-focused operations better off than palladium-rich mines in their forecast.
He notes, however, that palladium-rich mines tend to be newer, lower-cost operations, which should keep South African PGMs mining, in general, profitable going forward.
“What is clear at this stage is that, if the prices of palladium and platinum converge at the current average, the South African mining industry will benefit, as platinum will be dominant for years to come,” he concludes.