Platinum rises from ashes of 'dieselgate' to outperform palladium. What's next.

By Myra P. Saefong

Platinum prices topped palladium's this month for the first time since 2018

Platinum traded higher than palladium this month for the first time in nearly six years, with expectations for a back-to-back annual supply shortage and rising demand for platinum boosting prospects for higher prices.

The move for platinum has come at the expense of sister metal palladium, a metal that has seen significant price declines, and faces a supply surplus next year.

On Feb. 8, April platinum futures (PLJ24) (PL00) settled at $894 an ounce on Comex, topping the $892.10 an ounce settlement for the March palladium contract (PAH24) (PA00). That was the first time most-active platinum futures finished above palladium since April 9, 2018, according to Dow Jones Market Data.

The return of platinum's traditional premium to palladium is the "conclusion of a structural move that has been in process over the past five years," said David Holmes, senior vice president, trading and sales, at Heraeus Metals NY. Strong demand had fueled high prices for palladium, prompting car manufacturers to seek out a cheaper substitute in catalytic converters - platinum.

The metals are used in the car part, which helps reduce harmful emissions, with palladium mainly used in gasoline-powered vehicles and platinum mostly used in diesel-powered vehicles.

For now, platinum's premium has proven to be short-lived, with prices falling back below palladium's this week. On Thursday, April platinum settled at $905.20 and March palladium ended at $952.80.

In 2023, however, palladium prices fell by 38% - much larger than the 6.8% fall in platinum and year to date as of Thursday, palladium's down 14% versus platinum's 10% decline.

Physically backed exchange-traded funds have seen similar performance, with the abrdn Physical Platinum Shares ETF PPLT losing more than 8% last year, while the abrdn Physical Palladium Shares ETF PALL lost nearly 39%.

'Dieselgate'

Platinum's outperformance versus palladium was a long time coming.

Volkswagen AG's (XE:VOW) 2015 emissions scandal, known as "dieselgate," had led to a drop in demand for diesel-powered vehicles in Europe and, in turn, less consumption of platinum for emission-controlling catalytic converters.

It took some time, but that loss in platinum demand has been offset by the substitution of platinum for higher-priced palladium in gasoline-powered vehicles.

Price parity between platinum and palladium had been "long expected," and the closing of the price disconnect between the two metals is not a great surprise, said Edward Sterck, director of research at the World Platinum Investment Council (WPIC).

Platinum is now "in a fundamental market deficit driven by strong demand and strained supply," he said, and that deficit "hasn't been priced in yet."

Palladium's rise and fall

Ironically, it is the rise and fall of palladium that has helped to strengthen platinum prices.

Despite lower car sales after the 2017 global peak of 100 million light vehicles, which are designed to carry small loads, palladium demand continued to increase, Heraeus' Holmes said. Countries raised their emissions standards for light vehicles, forcing autocatalytic manufacturers to lift the amount of the metal used in emissions control systems, and offsetting any declines in aggregate vehicle sales, he said.

In 2022, Russia's invasion of Ukraine "compounded a price panic" as Russia is responsible for 60% of the world's primary palladium production, said Holmes.

Most-active palladium futures reached a record intraday high in March 2022 at $3,425, according to Dow Jones Market Data.

The sustained high prices and persistent premium over platinum prices then "encouraged" car manufacturers to substitute out of some palladium in their catalysts in exchange for platinum, Holmes said.

A transition to battery electric vehicles, or BEVs - which don't require any palladium - from the internal combustion engines also reinforced palladium's downward price trend, said Holmes. So palladium moved from a metal in a "structural deficit to a metal in structural surplus that is expected to grow over the next decade."

WPIC expects the global palladium market to move into a surplus starting in 2025, and it is forecast to post surpluses each year through at least 2027.

Global platinum supply, however, is forecast to see deficits of more than 1 million ounces in 2023, and 353,000 ounces for 2024, according to a quarterly report from WPIC released in November. The next quarterly report will be released in early March.

Demand

Platinum demand is "proving remarkably robust, supported by the substitution of platinum for palladium in catalytic converters of gasoline vehicles, and the increasing use of platinum in industrial applications," Sterck said.

Platinum is also used in the "fast-growing" hydrogen economy, Sterck said, in which hydrogen is seen as a low-carbon energy source.

Read archived story: Green hydrogen is opening doors for higher platinum demand

For palladium, however, the supply-demand outlook isn't quite as price supportive.

Palladium demand is expected to remain "broadly at current levels for a number of years to come, supported by tighter emissions legislation and a growing market share of hybrid vehicles," said Sterck.

Meanwhile, more than one million ounces of additional palladium supply is expected to come from the recycling of end-of-life vehicles by 2027, he said, likely lifting the palladium market into a surplus from 2025.

Challenges

The biggest challenge for industrial demand for both platinum and palladium is the "health of the Chinese economy, global decarbonization efforts, and supply risks," said Sterck.

China is the biggest consumer of industrial metals globally, and the economic risks it is facing have the potential to "dampen demand for industrial metals, or at least demand expectations," he said.

Global decarbonization efforts, on the other hand, can be positive for industrial metals, said Sterck.

"We are effectively trying to pivot from a carbon-based economy to a metals-based economy" and there are signs the future supply plans for a number of these metals...will "not be sufficient to meet future demand," he said.

Current metals prices are "generally not sufficient" to motivate the funding of new production now - production that would only come to the market in eight or more years' time, given the minimum lead time for a new mine to be built, Sterck said.

Aboveground stocks, particularly those stockpiled by automakers, had helped to balance the platinum market, and the majority of those stocks are now in China, which had been importing significant amounts of platinum since at least 2019, he said.

With platinum's market shortfall having been satisfied by aboveground stocks, the question is what happens when those are depleted - "how available is China's stockpile to the world?" Sterck said.

"I think there's an inherent investment opportunity in that," he said.

-Myra P. Saefong

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02-16-24 1313ET

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