Palladium Trading


The Essential Guide

 

Why is Palladium Valuable?

Palladium is a lustrous, silvery-white metallic element. Along with platinum, rhodium, ruthenium, osmium and iridium, it forms a group of six elements known as the platinum group metals (PGMs).

PGMS are extremely rare. According to the United State Geological Survey (USGS), the group makes up only .0005 parts per million of Earth’s crust. The PGMs are known as superior catalysts – substances that help chemical reaction occur more quickly.

English chemist William Hyde Wollaston discovered palladium in 1803 when he mixed platinum with nitric acid and hydrochloric acid and noticed that another element was left behind. The shiny, malleable element soon became a popular metal for jewelry production.

Wollaston William Hyde Jackson via Wikimedia {PD-US} – published in the U.S. before 1923 and public domain in the U.S.
William Hyde Wollaston via Wikimedia {PD-US} – published in the U.S. before 1923 and public domain in the U.S.

However, the advent of modern emission standards for automobiles transformed palladium from a luxury metal into an essential commodity for preventing pollution.

Since 1989, the primary use of palladium has been in catalytic converters for automobiles.

These tube-like structures trap harmful emissions that occur when an engine burns fuel.

Today more than 75% of the 208,000 kilograms of palladium mined annually is used by the auto industry.

What Are the Characteristics of Palladium?

Although all PGM metals are known for their high melting point and high density, palladium has the lowest melting point and density in the PGM group.

Like the other metals in this group, palladium is a noble metal, which means oxygen does not rust or corrode it. In addition, acids can’t penetrate or damage the metal.

All of these properties, along with its shiny, lustrous appearance make palladium ideal for jewelry. However, its lower density has made it less desirable than platinum in high-end jewelry production.

Palladium Ring by Joanna Angelett via Wikimedia
Palladium Ring by Joanna Angelett via Wikimedia

One of the most extraordinary characteristics of palladium is its abnormal ability to absorb hydrogen. In fact, palladium can absorb a volume of hydrogen equal to 900 times its own volume.

This property makes the element valuable in the fuel cell and nuclear industries.

How Did the Palladium Industry Evolve?

Although palladium was discovered in the early 19th century, there were no viable commercial uses for the metal until the 20th century.

The first industrial use for palladium was in developing photographs. However, the rarity and high cost of the metal made this application impractical.

In the 1920s and 1930s, new deposits of the metal were discovered first in South Africa and later in Canada. Soon after, the dental industry began utilizing both platinum and palladium to make alloys for crowns and bridges.

In the 1960s, new research into the catalytic properties of palladium led to the metal’s use in polyester production and fuel cracking.

However, the implementation of stricter automobile emission standards in the 1970s caused demand for the metal to soar. The chemical properties than enabled palladium to absorb carbon monoxide made it essential to the design of catalytic converters.

How is Palladium Produced?

Mining

Palladium is extracted from ore bodies in mines that contain other PGMs.

Miners generally extract PGMs from placer deposits, which are naturally occurring concentrations of heavy minerals. These deposits accumulate as a result of the effects of gravity on moving particles. These placer deposits are found in rocks such as dunite, chromite, and norite.

Chromite via Wikimedia
Chromite via Wikimedia

Palladium production often takes place as a by-product of producing other metals. For example, in the Russian Norilsk and Canadian Sudbury deposits, miners extract palladium and other PGMs as a by-product of nickel and copper.

However, the Bushveld Complex in South Africa has such large quantities of PGMs that mining them on their own is economically viable. In fact, this region contains more than 90% of the world’s proven reserves of PGMs.

Processing

After PGM ore bodies are extracted, they are processed using froth flotation techniques. Machines crush the rocks and immerse them in tanks with chemicals. This allows separation of the valuable PGMs from clay and other worthless rocks.

Flotation Cell via Dhatfield on Wikipedia
Flotation Cell via Dhatfield on Wikipedia

Recycling

Recycling scrap metal also provides a portion of the annual supply of palladium. According to the USGS, recyclers recover about 125,000 kilograms of platinum, palladium and rhodium annually, including 56,000 kilograms from automobile catalytic converters.

How Rare Is Palladium?

The mass fraction of a metal found in the earth’s crust is an accurate barometer of how rare a metal is.By this measure, PMGs excluding platinum and osmium are exceedingly rare:

MetalParts per billion in earth’s crust
Gold4
Silver75
Platinum5
Osmium1.5
Other PGMsLess than 1

In fact, one analyst estimates that all the palladium that has ever been mined would fit in a typical SUBWAY restaurant.

 

map to show the Biggest Palladium Producing Countries (1)

Top 5 Palladium Producing Countries

RankFlagCountryAnnual Production (kilograms)
#1Flag of RussiaRussia82,000
#2Flag of South AfricaSouth Africa73,000
#3Flag of CanadaCanada23,000
#4Flag of USAUnited States13,200
#5Flag of ZimbabweZimbabwe10,000

Which Countries Have the Largest PGM Reserves?

PGM reserves are a measure of the quantity of economically minable metals in the ground. South Africa has more than 90% of Earth’s PGM reserves.

However, mining is an expensive endeavor, and ultimately the price of the metals determines whether it is feasible to mine them.

Top 5 PGM Reserves

RankFlagCountryReserves (Kilograms)
#1Flag of South AfricaSouth Africa63,000,000
#2Flag of ZimbabweZimbabwe1,200,000
#3Flag of RussiaRussia1,100,000
#4Flag of USAUnited States900,000
#5Flag of CanadaCanada310,000

Most of the industrial demand for palladium occurred after the 1970s when air quality laws required catalytic converters on automobiles. However, other industries also depend on supply of the rare metal.

Top 5 Uses of Palladium

UseDescription
Catalytic Converters

catalytic converter
Palladium’s remarkable chemical properties make it integral to the production of catalytic converters. The metal can trap carbon and oxidize it before it is emitted into the air as pollution.
Electronics

MLCC
Multi-layer ceramic capacitors (MLCC) help control the flow of current in circuits. Palladium or palladium and silver alloys are used in constructing MLCCs. Hybrid integrated circuits and plating materials also use palladium.
Dental Industry

tooth
Alloys of palladium with gold, silver, copper or zinc can be used to make dental inlays, crowns and bridges.
Miscellaneous Industrial

coins
A variety of products and industries rely on the unusual physical and chemical properties of palladium:

Coins
Ethanol fuel production
Fuel cells
Medicine
Oil refining
Photography
Polyester production
Water treatment
Private Investors

palladium shell
Individuals and investment funds purchase palladium to protect their portfolios against losses from inflation and market crises. Investors purchase bullion, coins and funds that invest in the metal.

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What Drives the Price of Palladium?

The supply of palladium is concentrated in a handful of countries, while the overwhelming amount of demand comes from one industry (automotive). These factors make palladium a very volatile commodity.

These are the six most important drivers of palladium prices:

  1. Vehicle Demand
  2. Russian and South African Supply
  3. Investment Demand
  4. Price of Substitutes
  5. Inflation and the US Dollar
  6. Recycling

Vehicle Demand

Between a half and three-quarters of all palladium production goes to make catalytic converters for automobiles. As a result, demand for vehicles plays the biggest role in determining palladium prices.

Catalytic Converter via Frank Derks on Flickr
Catalytic Converter via Frank Derks on Flickr

Diesel-fueled cars use platinum in catalytic converters while gasoline-fueled cars use palladium. Therefore, vehicle demand in the United States and China, where most cars use gasoline, plays a bigger role than in Europe, where there are more diesel-powered vehicles.

China, in particular, accounts for one-third of net palladium demand.

Russian and South African Supply

These two countries account for a combined 75% of the global supply of palladium.  Therefore, supply bottlenecks in either of these nations can have a huge impact on prices.

The Russian company Nornickel is the world’s largest supplier of palladium.Political sanctions, new mining regulations and export restrictions are just some of the many factors that could impact supply of palladium coming from Russia.

South Africa supplies nearly as much palladium as Russia. In the past, interruptions to electricity supply and high fuel and construction costs have led to supply disruptions and higher prices.

Investment Demand

As with gold, silver and other precious metals, palladium has garnered interest from the investment community.

Investors can purchase ETFs, bullion and other financial products to gain exposure to the metal.However, the palladium market has been characterized by thin liquidity and large price swings. As large traders enter or exit this market, traders should expect wild price swings.

Palladium Bullion via Money Metals on Flickr
Palladium Bullion via Money Metals on Flickr

Price of Substitutes

As prices for the various PGMs rise and fall, industrial users in the automotive sector could alter their demand for these metals.

Both platinum and rhodium can be used in catalytic converters. If the price of these metals becomes less expensive relative to palladium, then manufacturers could substitute them in production.

On the other hand, if palladium prices drop, then its demand should increase. Diesel catalytic converters can use between 25 and 50% palladium. If prices for palladium become depressed, then new demand could come from the diesel sector.

Inflation and the US Dollar

Investing in palladium is one way to protect against the loss of purchasing power from inflation and a weak US dollar.

Palladium is priced in US dollar and usually exhibits a strong inverse correlation with the dollar. In other words, as the dollar weakens, palladium prices tend to rise. Buyers purchasing palladium in other currencies have more purchasing power when the dollar is weak and less when the dollar is strong.

Palladium is also a precious metal and, therefore, viewed as an investment. In times of currency devaluation and inflation, traders often turn to precious metals as reliable stores of value.

Recycling

The amount of palladium recycled can have an effect on prices.

Most recycling comes from catalytic converters in automobiles. However, the value of palladium in a vehicle pales in comparison to the value of steel. Therefore, higher steel prices could encourage vehicle recycling and lead to greater palladium recycling. Of course, greater supplies of recycled palladium mean lower prices for the metal.

4 Reasons You Might Invest in Palladium

Investors should consider purchasing palladium for the following reasons:

  1. Bet on Automobile Demand
  2. Bet on Supply Constraints
  3. Bet on Investment Demand
  4. Portfolio Diversification

Bet on Automobile Demand

The automobile market is the most critical industry for palladium.

Investing in the commodity is a way to bet on surging demand for automobiles in emerging market countries such as China and India.

BYD Qin Hybrid Vehicle in China via Wikimedia
BYD Qin Hybrid Vehicle in China via Wikimedia

Similarly, the low-interest rate environment in the United States and Europe should bode well for the automobile industry. Low rates mean affordable access to credit markets. Since most buyers finance automobile purchases, rates play an important role in determining demand. As long as rates remain near historically low levels, demand for cars and the catalytic converters that go in them should remain strong.

Bet on Supply Constraints

With three-quarters of the global supply of palladium coming from two countries, there is the real possibility for supply shocks in palladium production.

The United States is a large importer of palladium and has a recent history of tensions with Russia. Should Russia curtail its exports of palladium, the price of the metal could soar.

Similarly, labor disputes in South Africa or new mining regulations could lead to supply disruptions and higher prices.

Bet on Investment Demand

Investment products focused on palladium are relatively new compared to other precious metals such as gold and silver.

As more traders discover the favorable supply/demand fundamentals for this commodity, palladium prices could rise. The thin liquidity in the market could exaggerate price gains.

Portfolio Diversification

Most traders have the vast majority of their assets in stocks and bonds. Commodities such as palladium provide a way to diversify and reduce the overall risk of portfolios.

Should I Invest in Palladium?

Traders who want to invest in palladium should consider purchasing it along with a basket of commodities that includes other precious metals (i.e., gold and silver), base metals (i.e., copper, nickel, lead and zinc), agricultural commodities (i.e., dairy, meats and grains) and energy.

Purchasing a basket of commodities helps protect traders from the volatility of any individual commodity. It also adds overall diversification to a stock and bond portfolio.

There are three specific trends that could raise palladium prices in the years ahead:

  1. Chinese Demand
  2. Investment Demand
  3. Energy Costs

Chinese Demand

China is the top consumer of palladium and could increase its consumption in the years ahead. The Chinese economy has experienced a recent slowdown, although there are signs this may be coming to an end. Investing in palladium is one way to bet on a resurging Chinese economy.
Investment Demand

The proliferation of ETFs has exposed more traders to precious metals. As the gold and silver trade becomes crowded, traders could seek new ways to gain exposure to precious metals. Palladium could benefit from this trend.

Energy Costs

Higher energy costs make mining an increasingly challenging business. As fuel and electricity costs rise, more mining operations could close or consolidate. This should produce higher palladium prices.

However, traders should also consider the risks of investing in palladium:

  1. A Global Recession
  2. Cheaper Substitutes
  3. Global Economic or Political Control

A global recession could weaken Chinese and US automobile demand.

Cheaper substitutes could replace demand for palladium in catalytic converters.

Global economic or political turmoil could strengthen the US dollar and weaken demand for precious metals and other commodities.

Expert Opinions on Palladium

Most analysts who follow the palladium market pay attention to its price relationship with platinum. One expert sees reasons for optimism about the palladium market compared to platinum:

Palladium expert George Gero

 

“Palladium is powering on with the demand for more vehicles. There’s more need for palladium, which cannot be reclaimed as easily or as often from junked automobiles as platinum.”

George Gero, managing director, RBC Wealth Management, New York

 

However, another leading analyst sees reasons for caution. He believes that while the rising market share of gasoline-powered vehicles is a positive, the future presents challenges for palladium prices:

Palladium expert Carsten Menke Julius Bar

 

“Diesel’s share of the European auto market is falling and the flip side of that is gasoline’s share is rising. Chinese car sales supported palladium, but there will a reality check as tax incentives are removed. In Europe and the United States, car sales look to be peaking.”

Julius Baer analyst Carsten Menke

How Can I Invest in Palladium?

Investors have several options for gaining exposure to palladium prices:

Palladium Trading and Investing Methods Compared

Method of InvestingComplexity Rating (1 = easy, 5=hard)Storage Costs?Security Costs?Expiration Dates?Management Costs?Leverage?Regulated Exchange?
Palladium Bullion1YYNNNN
Palladium Futures5NNYNYY
Palladium Options5NNYNYY
Palladium ETFs2YNNYNY
Palladium Shares2NNNNYY
Palladium CFDs3NNNNYY

*Storage costs are passed on to traders in the form of management fees.

Palladium bullion

Physical bullion such as bars or coins is the most direct way to invest in palladium. However, investing in bullion requires a secure storage facility. Ultimately, the cost of this storage and the low value-to-weight ratio could make holding physical palladium an impractical proposition.

Palladium Coin
Palladium Coin via Wikimedia

Palladium Futures

The Chicago Mercantile Exchange (CME) offers a contract on palladium that settles into 100 troy ounces of the commodity.

The contracts trades globally on the CME Globex electronic trading platform and have a variety of expiration months.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are physically settled by delivery of palladium.

Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Palladium Options on Futures

The CME offers an American style options contract on Palladium Futures.

Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of palladium futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in palladium futures to profit from their trades.

Palladium ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do. The ETFS Physical Palladium Shares (NYSEARCA: PALL) invests in physical palladium that it stores in secure vaults.

ETFS Physical Palladium Shares

Shares of Palladium Companies

There are many publicly traded companies that have some exposure to palladium prices.

While investing in companies can be a leveraged way to gain exposure to palladium prices, many of these companies have significant exposure to other precious metals. In addition, factors such as company management and the overall stock market can also affect these investments:

CompanyCurrent PriceOverviewListingsFoundedNumber of EmployeesInteresting Fact
Norilsk Nickel

nornickel-logo



The American depositary receipts of the world’s largest palladium producerOTC, London, Frankfurt, Berlin199396,193+The nickel deposits of Norilsk-Talnakh are the largest nickel-copper-palladium deposits in the world
Anglo American Platinum Ltd

AngloAmerican-logo
South African company engaged in the production and sale of platinum group metals.OTC199524,945In August 2007, British charity War on Want published a report accusing Anglo American Platinum's parent company Anglo American of profiting from the abuse of people in the developing countries in which the company operates
North American Palladium Ltd

NAP-logo
Canadian company that explores for palladium, platinum, gold, nickel, copper, and other metals.Toronto1993201-5001 of only 2 North American based palladium or platinum producers
Platinum Group Metals Ltd

PGM-logo
Canadian company that explores for and develops precious and base metal properties in South Africa and CanadaNYSE2002111The Company is focused on exploration and development of platinum. It has operations in South Africa and Canada

CFDs

One way to invest in palladium is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of palladium. The value of a CFD is the difference between the price of palladium at the time of purchase and its current price.

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Some regulated brokers worldwide offer CFDs on palladium. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to palladium prices without having to purchase shares, ETFs, futures or options.

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