Sizing up PGM markets

The palladium market has taken hits in all its major sectors, including autocatalysts, electronics and dental alloys. As a result the price of the metal fell from US$450 per oz. a year ago to below US$250, its lowest level since March 1998. The price of palladium peaked at US$1,090 in January 2001.

The use of platinum in autocatalysts was down 2% in 2001 but recovered marginally in 2002. However, three factors — high auto industry PGM stocks, a decrease in the amount of palladium used per unit, and the fact that car makers have been using more platinum, rather than palladium, in “lean-burn,” high-efficiency engines — have taken their toll on demand, as has the increased use of diesel-powered engines.

In electronics, high inventories and the substitution of nickel for palladium in capacitors chopped demand by almost 75%. Also, use of palladium in dental alloys was largely replaced by gold, cutting in half the 1.3 million oz. palladium used for the same purpose in 1998.

In spring 2001, the Ottawa-based consulting firm Equapolar predicted these trends but was not bearish enough in its palladium forecasts.

Meanwhile, platinum, which has better fundamentals, held its price well over the previous two years and reasserted its price superiority over palladium. The disparate performance of these two metals, especially over the past two years — and throughout their history — should lay to rest the universal mantra among commodity analysts that platinum and palladium would come together in price because of their interchangability in autocatalysts.

In terms of palladium supply, large inventories and new production from Norilsk, Stillwater, North American Palladium and numerous South African companies will keep prices low. South Africa is second only to Russia as the world’s largest palladium producer, and production there is buoyed by firm platinum prices and a 2-to-1 ratio of platinum/palladium in ore. Thus the country will continue to expand output of palladium as a byproduct regardless of market forces. If this were not bad enough, a supply source for palladium that rivals even Norilsk looms large — namely, recycled metal.

To date, about 36 million oz. palladium have been used in autocatalysts. About 30 million oz. have been used since 1992, with only 1.9 million oz. recovered. With an average vehicle life of 15 years, recovered palladium will rise to 600,000 oz. by 2008 from 290,000 oz. this year. Within a decade, recycled palladium will reach 4 million oz. per year, representing 40% of demand at that time. Almost 12 million oz. platinum have already been recovered from autocatalysts in the past decade. Equapolar predicts 1.3 million oz. will be recovered each year for the next decade.

Norilsk Nickel’s deal for 56% of Stillwater Mining was designed to stabilize palladium markets and secure Stillwater’s U.S.-based contracts. The rationale is that uncertainty of supply, combined with price volatility, caused customers to find alternatives. Norilsk hopes that by ensuring supply, demand will rise. There is no doubt that some improvement will result; however, given supply pressures over the next several years, it would be naive to think that any kind of deal will shore up palladium prices significantly in even the medium-to-longer term. That could only be achieved as a result of new uses of palladium.

This sudden maturing of the palladium market means a closer relationship between price and marginal cost of production. Stillwater Mining and North American Palladium, as primary producers from palladium-rich ores with low byproduct credits, will become the marginal suppliers to palladium markets. Watch for North American Palladium to raise cutoff grades significantly in the near future as forward-sold metal becomes a smaller portion of sales.

— The author is one of the principals of Equapolar, a consulting firm in Ottawa.