Palladium’s new-found allure is catalyst for crime

A crime wave is sweeping the UK. Looking to profit from soaring palladium prices, thieves are stealing catalytic converters — often in broad daylight — and selling the devices to illegal scrap dealers for cash.

These criminal capers are the result of a gravity-defying price surge that has seen palladium hit a record high in nominal terms, overtaking gold for the first time in 16-years and trading at a significant premium to sister metal platinum.

With stocks running low, producers, consumers and investors reckon that palladium could push even higher unless there is a sharp slowdown in global growth that hits demand for new cars. Palladium is used in the catalytic converters fitted to petrol-powered vehicles to reduce harmful emissions.

The silvery white metal, which is mined alongside nickel or platinum, has jumped more than 50 per cent from its August lows and earlier this month hit a record of $1,434 a troy ounce before slipping back to $1,358, as traders took profits.

Meanwhile, in the futures market the current palladium contract is trading above those that expire in the coming months — a situation called backwardation that is a signal of a tight physical market.

“The price spike combined with leasing rates and backwardation tells you there is huge physical stress in the market,” says Willem Middelkoop, founder of the Netherlands-based Commodity Discovery Fund.

While several factors have contributed to the price surge, according to investors the root cause is simple: huge production deficits.

Nornickel, the world’s biggest palladium producer, reckons demand outstripped supply by 900,000 ounces last year. It sees the shortfall rising to 1.3m ounces in 2019, as any slowdown in the vast Chinese market will be offset by the introduction of new vehicle emissions standards.

“Palladium is roughly a 7m ounce market from a producer prospective. So a deficit of 1m ounce is quite significant,” says Mr Middelkoop.

The supply gap has been filled in recent years by above-ground stocks, which many analysts believe are now close to being exhausted.

“Inventories at warehouses in Switzerland, typically the residual palladium market, are well below the highs seen a few years ago,” says Michael Widmer, metals strategist at Bank of America Merrill Lynch. “Similarly, stocks at CME [Group] warehouses have drawn for years and are now depleted.”

There has also been a sharp decline in stocks held by palladium-backed exchange traded funds — they are down 40 per cent in the past year to just above 720,000 ounces — as investors have redeemed units to take delivery of physical metal, often so they can lease it at sky-high rates.

“To some degree the supply shortage of recent years was met by ETFs,” says Hans-Guenter Ritter, global head of trading at Heraeus Holding, one of the world’s largest refiners of palladium. “But they cannot contribute forever.”

Another source of supply has been Russia’s strategic stockpile, which analysts reckon is close to being depleted.

“There is always a lot of speculation around Russian stocks,” says David Jollie, an analyst at miner Anglo American. “A lot of that has been sold into the market but no one knows the exact figure.”

While palladium is used in jewellery, chemicals and electronics, around four-fifths of annual demand comes from the automotive industry. Demand has been strong in recent years, boosted by a healthy global car market and a tougher emissions regime in China. The Volkswagen diesel emissions scandal has also boosted demand for petrol-powered vehicles.

Supply has failed to keep up, however. Palladium is mostly mined in Russia and South Africa, but supply in both countries has been constrained by a lack of investment. Russia’s Nornickel, the world’s largest producer of palladium, has said its supply of palladium will remain roughly flat until 2020 and new projects will not come on stream until after 2025.

“Spending on new palladium supplies and capital expenditure on existing supplies have fallen over the past five to six years,” says Rick Rule, president and chief executive of Sprott US Holdings, an asset management group.

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“We may be stuck with increasing prices until Nornickel is able to increase production. That looks like the only near-term release,” he adds.

The biggest threats looming over the metal include a strengthening US dollar, fallout from the China-US trade war and carmakers choosing to substitute palladium with platinum, which is almost $550 an ounce cheaper.

But a switch to platinum could take up to two years and involve the complete reconfiguration of an engine system, battery input and tailpipe, according to Nornickel.

“Of course if [palladium] prices really spike, humans are infinitely inventive. The industry will find a way to substitute or become more efficient,” says Mr Rule.

Longer term, the increasing popularity of electric vehicles could mean that palladium’s turbocharged run is on its last legs. For now though, it looks set to remain the most precious of precious metals.

“I doubt the price will pull back too much,” says Mr Ritter. “The tightness in the physical market will continue.”