By Darren V. Long Guildhallwealth.com

April 29, 2014

Admittedly I had some reservations in 2006, when we originally began explaining the merits of palladium ownership. Not because I didn’t believe in the fundamentals of the palladium market, which are in many ways very similar to gold and silver. However, my concerns were about the size of the market and the potential volatility in the long term. Back then the price of palladium was a mere pittance in comparison to today’s price selling at approximately $186 per ounce.

Now in April 2014 palladium is trading on the open market at a multiyear highs of around $800 per ounce; a tidy gain of approximately 330 percent. Let me reintroduce you to this precious metal.

Palladium is part of the platinum group of metals produced primarily as a by-product of platinum and nickel mining. The palladium market is relatively small with and its primary uses are electronics, jewellery, investment and the key one, platinum-based auto catalysts, more commonly known as catalytic converters.

South Africa and Russia are the biggest suppliers of palladium. They account for almost 80 percent of the yearly supply with Russia leading the way.

 supply-demand-map

Source: North American Palladium Ltd.

One reason why Palladium prices have jumped is because of the increase in the world demand for better and more stringent pollution controls. In particular India and China have lead the way in the growth of demand due to their increase in the amount of population driving cars and other vehicles on the road that require pollution controls in the form of catalytic converters.

China is home to the fastest-growing automobile market in the world. In China last year, the number of cars on the road jumped by nearly 40 percent. Sales of domestically produced automobiles soared by 55 percent. The number of cars is expected to increase at least 10-15% per year through the rest of the decade. The number could even be larger because the Chinese are discovering new car financing. Imagine what will happen when 1.6 billion people discover no money down, five-year car loans!!!

At the same time, China is continuing to slowly recognize the need for stricter pollution standards. More stringent emissions standards mean more and better catalytic converters and that means more palladium demand. It should then come as no surprise that China remains the largest demand center for palladium in the world. Although this in and of itself is a great reason to invest and own some physical palladium there is a lot more.

In 2014, there continues to be a convergence of factors that are propelling palladium to multi-year peaks. These recent highs above $800 per ounce represent the highest price level for palladium since March 2011 and for some a move towards 2001′s all-time high of $1,090 per ounce is considered a very real possibility in the near term.

I am amongst those who estimate that palladium is poised to appreciate further. As mentioned earlier there are other factors working in favour of higher prices as well. Factors very similar to gold and silver which should continue to drive the metal skywards.

Supply/Demand and Geopolitics

The intensifying political calamity in Ukraine has been a substantial driver of palladium’s ascension in recent weeks, with Russia’s suspected involvement in the conflict prompting the West to discuss and start imposing substantial economic sanctions on the country.

Norilsk Nickel is the world’s largest producer of the palladium (see what I mean by by-product), and last year this mining operation accounted for 40 percent of total global supply. If you consider the broad implications of the possible trade restrictions on Russia it is easy to conclude that there could well be a catastrophic change in the supply chain for palladium. In addition to this there are already concerns that planned production ramp-ups in the country will not be able to keep pace with demand.

Russian stockpiles have been an important source of supply for a decade or more. Unfortunately due to increased demand their stockpiles have been depleted to a fraction of what they once were. With these reserves diminished, palladium exports and sales have dropped in recent years. A sign of the times to come with even the biggest of precious metals refiners such as Johnson Matthey publicly stating that they expect sales, which were down markedly year over year, to continue to slide over the next decade to a worrisome level. As a result of this Russia’s reputation as a major palladium provider is very much under threat.

The New Elephant in the Room-South Africa

In more recent weeks we have discussed fresh mining and labour strikes in South Africa and its impact on the palladium supply which is being crippled at the moment as a result.

Almost forty percent of all mined palladium is pulled out of Africa and if this striking continues to impact the mining operations there it may become very difficult to recover the lost supply creating an even further and deeper crisis adding to the speculation of higher prices.

It is estimated that between 5,000 to 10,000 ounces worth of production is being lost each day as a result of the ongoing action.

The other side of this equation that is impacting the African supply of palladium are the rising electricity, fuel and construction costs already hampering margins at the country’s largest mining companies. With reported rolling black outs and growing concerns about the capacity — and indeed appetite — of these firms to match workers’ demands the future of the world’s second largest [producer of palladium is currently up in the air making for a great reason to invest in palladium now.

The Evolution of Stringent Emissions and Vehicle Demand

A framework of rising disposable income in countries like China and India which is spawning the first ever middle class explosion in these population rich countries, is also driving global car demand through the roof.

In addition to this trend has been aided in some cases by large drops in petroleum prices. Obviously this is a terrific portent for palladium, which is used extensively in catalytic converters to clean up exhaust emissions.

A return to boom conditions in the Chinese and Indian car market is lifting global auto catalyst demand for palladium by as much as four to six percent to over 7 million ounces alone in 2013.

And according to IHS Automotive, global car production has risen more than 13 percent from 2010 levels and topped out at a record 82.8 million vehicles last year. The expectation is that more than 85 million vehicles will roll off the production line this year, with output anticipated to exceed 100 million by 2018.

Helped by statutory changes around the world, which require higher loadings of PGMs to reduce vehicle pollution, the car industry should continue to use vast quantities of palladium.

All of the issues I have discussed point to a vigorous increase in the price of palladium not just this year but well into the future.

Fortunately, unlike silver and gold, this view is shared by the number crunchers at many of the largest banks in the world who also expect the white metal to average higher and higher in 2014, approaching $900 an ounce by next year.

With the palladium market expected to remain in deficit for some time to come — a situation exacerbated by increasingly larger demands, it is no doubt time to think about adding the less expensive brother of platinum to your portfolio.

Yours to the penny,

 

Darren V. Long

Darren V. Long is Senior Analyst with Guildhall Wealth Management Inc. Darren is a speaker, writer and financial commentator on gold, silver and the economy. He can be heard weekly on “The Real Money Show” on 640 am radio in Toronto discussing all facets of the precious metals markets. Listen to replays of all shows on www.therealmoneyshow.com 1.866.274.9570 www.guildhallwealth.com and www.guildhalldepository.com or email at: investing@guildhallwealth.com