Will Palladium Continue its Golden Performance?

Palladium bars
Refined palladium bars. Palladium is not a well-known precious metal.

Earlier this year, the price for palladium reached its all-time high, in excess of US $2800/Oz. Palladium is one of six Platinum Group Metals (PGMs), which are revered for their superior catalytic properties. Palladium, platinum and rhodium are the most widely known PGMs, and while it is common knowledge that platinum is considered a “precious metal,” many are unaware that both palladium and rhodium are also precious metals. This article is the first in a three-part series focused on fundamentals relating to the supply and demand of palladium, rhodium and platinum. Here, we make the case for buoyant palladium prices in the short- and medium-term. Palladium supply has been in deficit annually since 2011 and, even with COVID negatively impacting automobile sales in the short-term, the majority of research firms expect another small deficit this year or at best a small surplus.

Palladium Price Chart
Palladium price chart, yearly deficit in supply.

The market for palladium demand primarily consists of catalytic converters, widely known as “auto-catalysts.” Auto-catalysts are responsible for approximately 85% of global palladium demand. These devices were first introduced by emissions legislation in North America during the 1970’s with the goal of reducing pollution levels originating from vehicles being operated in and around urban areas, where pollution is often most condensed and affects the health of large populations. In more recent years, the enforcement of emission legislation in developed countries around the world sees automakers comply with increasingly stringent and complex requirements, lest they face the potential for large fines and/or public disfavor.

Why Are PGMs Used in Auto-catalysts?

Auto-catalyst
Pictured above is an auto-catalyst, leading source of demand for PGMs

PGMs are the primary components in auto-catalysts that reduce vehicle exhaust (emissions) of hydro-carbons, carbon monoxide, oxides of nitrogen and particulate matter. Auto-catalysts convert most of these emissions into less harmful components: carbon dioxide, nitrogen and water vapor. When considering vehicles that run on gasoline, it is palladium (along with smaller loadings of platinum and rhodium) that has proven to be the most effective catalyst. When considering vehicles that run on diesel, platinum (with smaller loadings of palladium and rhodium) is the most effective catalyst. There is no alternative technology or metal(s) that have been proven to have the same desired outcome for auto-catalysts as PGMs. There is limited ability to substitute any of these metals with each other due to the complexities of related technologies and each PGM’s individual chemical properties.

Where Does Palladium Supply Come From?

Russia is the leading producer of palladium, most notably PJSC MMC Norilsk Nickel (Nornickel), a Russian mining company and the world’s leader in refined nickel production. Over 40% of global palladium production annually originates from this one company. The country’s domestic miners are not known for their operational efficiency or environmental stewardship, sometimes resulting in operational issues and environmental disasters.

South Africa is the second largest producer of palladium globally, and consistently holds the crown in platinum and rhodium production. However, mining in South Africa has been rattled by a matrix of issues during recent decades:

  1. Social unrest and government instability
  2. Insufficient power generation from domestic utilities
  3. Regulatory obstacles to investment in renewable energy sources
  4. Wage disputes between unions and mining companies

In modern times, South Africa’s roots in colonialism often manifests as distrust of the minority white population by its natives: Corruption, gaffe and bribery have become embedded in many critical government institutions, resulting in issues that affect the country’s economy and the residents’ standard of living. For instance, Eskom, the country’s primary power generating utility, struggles to fulfill the country’s electricity needs and pay down massive debt. With over US$30 billion owing, it is increasingly likely that the government-owned entity could default on future payments and has led to downgrades of South African sovereign debt to below junk levels. The extensive debt is partially attributed to mismanagement and corruption scandals.

Mogalakwena PGM Mine in South Africa
The Mogalakwena PGM Mine in South Africa, established in 1993, is the largest open pit platinum mine in the world, and is 100% owned by Anglo American.

Eskom meets most of its electricity demands through wholly owned, coal-fired plants and coal purchased from South African mines. These plants have struggled to provide sufficient power to businesses and residents, however, resulting in rolling blackouts countrywide and limiting power available to industries such as mining and manufacturing. Mining companies are eager to secure their ability to consistently operate by transitioning to their own renewable power generation and reducing carbon credits. South Africa is a prime candidate for both wind and solar power generation; however, the union representing coal miners is powerful with politically connected leaders. The current ruling party, the ANC, is concerned that significant job losses could occur from a rapid transition to renewable energy, allowing regulatory red tape to hamper industries in their efforts to create their own power generation facilities. Furthermore, frequent clashes between domestic mining companies and unions related to miners’ compensation and wages can result in miners striking for months at a time, seriously impacting the cashflow of companies throughout the mining sector.

North America is also a supply source for palladium, hosting two palladium mining operations that were both bought by South African firms in recent years: Sibanye Stillwater owns a large mining operation in Montana, while Impala Canada owns the Lac Des Iles mine near Thunder Bay, Ontario. The major mining complex in Sudbury, Ontario has also processed PGMs from local mines, where PGMs are a by-product of nickel and copper mining. Of all PGMs, palladium supply is the most diversified geographically despite the majority of supply coming from two countries, Russia and South Africa.

Lac des Iles Mine near Thunder Bay, ON
The Lac des Iles Mine near Thunder Bay, ON. Owned by South Africa-based Impala Platinum following the company’s acquisition of North American Palladium. Lac des Iles Mine features a unique, world-class ore body with modern infrastructure, including both an underground mine and surface operations.

How Has COVID Affected Palladium?

This is where we may begin to determine the value of palladium in the coming months and years. While the demand for automobiles globally has been negatively impacted, which could continue into next year, the increasingly stringent emissions legislation in Asia and Europe has begun to offset declining demand for automobiles. In addition, mining companies in South Africa—where mines for precious metals are typically labor-intensive and see miners crowded deep underground—have been not able to operate at full capacity due to health concerns surrounding transmission of the virus. This has reduced the anticipated supply of palladium from the region and been supportive of palladium prices.

Rhodium
Pictured above is an auto-catalyst, leading source of demand for PGMs

Rhodium, featured in the next post in this series, is extremely rare (the annual supply of rhodium could easily fit on the back of three large trucks), with most of the global production originating from the deep-South African mines. Auto-catalyst producers, the main source of demand for rhodium, appreciate rhodium’s unmatched ability to reduce nitrogen oxide release into the atmosphere from internal combustion engine (ICE) vehicles.

With South African mining production being negatively impacted due to physical distancing requirements (especially the deeper underground shafts atypical of the country’s gold and PGM mines), there is speculation that auto-catalyst producers will have to increasingly use palladium to make up for an expected shortfall of rhodium. While the three metals (Pd, Pt, Rh) work much more efficiently as a blend to scrub hydrocarbons and particulate matter, palladium can be substituted for some rhodium content, the same way platinum can substitute some palladium content. Considering the rarity of rhodium (there is no such thing a rhodium mine, supply always originates as a by-product from mining platinum or palladium), substitution may be required for manufacturers to keep up with ever-tightening emissions regulations, and could be very supportive of palladium prices.

Nornickel’s Talnakhskoye deposit
Nornickel’s Talnakhskoye deposit. “Taimyr” mine. The deepest mine shaft reaches a depth of 1,532 meters.

Palladium production from Nornickel in Russia has not been as affected by COVID due to the company’s operations being in the remote Arctic; however, with the company being the world’s largest producer of palladium, one could expect palladium prices to soar if their operations are impacted by a local outbreak. Following a recent diesel spill, a serious environmental concern for Nornickel, the company reported the spill was the result of a fuel storage tank failure caused by thawing permafrost, upon which much of the infrastructure in the arctic is built.

Conclusion

While demand for new vehicles could be subdued near-term, is the price of palladium poised to re-emerge and reach all-time highs? One might argue that electric vehicles do not require palladium (because they don’t burn fuel) and their increasing market share will curtail demand for palladium over the next decade; however, even the most bullish forecast for electric vehicles (EVs) only calls for a potential 30% global market share of EVs by 2030. It is also possible that consumers may hedge, choosing hybrid electric vehicles or plug-in hybrid electric vehicles, before going fully electric.

Due to the stop-and-start nature of hybrid vehicle engines, they operate at a lower temperature and, therefore, use MORE palladium than their traditional fossil fuel-only counterparts. Heat is key in the catalytic properties of palladium and required for it to do its job efficiently. Less heat generated means higher palladium loadings.

Taking into consideration the socioeconomic, infrastructure and environmental issues of the major palladium producers in South Africa and Russia, one could assume that mining companies are looking for palladium deposits elsewhere. There is evidence of major mining companies’ interest in North American projects through recent acquisitions of the only two primary palladium mines on the continent. If you consider the situation with lithium, which is expected to be in high demand over the coming years, automakers are seeking to ensure that future supply is being sourced responsibly to reflect electric vehicles’ purpose: the better option for a growing number of consumers that are mindful to their impact on the environment.

Looking for investable palladium projects in safe and respectable mining jurisdictions? Check out New Age Metals palladium project located in Canada near the Sudbury mining complex, ON.

Disclaimer: The opinions expressed in this blog are for informative purposes only. To the best of our knowledge, the information presented in the blog are accurate, however, we do not guarantee the accuracy of information. The views conveyed do not constitute investment advice and readers should seek professional advice when making financial decisions. Readers should not rely on the information, and those who do, do so at their own risk. New Age Metals is not licensed as an investment advisor.