Palladium – Commodity

Instrument description

One of the metal that is widely used as a commodity is ‘Palladium’ which is a silvery-white, lustrous metal. Palladium along with platinum, rhodium, ruthenium, osmium, and indium form ‘PGM,’ which is known as the Platinum Group Metals. According to United States Geological Survey (USGA), ‘PGM’ are quite rare and make up just 0.0005 parts per million of Earth’s crust. Palladium, along with other PGMs, is considered superior catalysts that are used to speed up chemical processes.

Since its discovery in the 1800s, palladium was mostly used in making jewelry, but due to its catalytic property, palladium became premium metal to be used to prevent the emission of harmful gases from exhaust emissions of automobiles. Today nearly 210,000 kilograms of palladium has mined annually, and more than 75% is used in the auto industry. The main uses of palladium are

• Used in catalytic converters due to its ability to trap carbon emissions from the automobiles that can pollute the environment.
• Palladium and palladium silver alloys are used in making multilayer ceramic capacitors (MLCC) that control of current in circuits.
• Palladium and its alloys with gold, copper, silver, and zinc are used to make dental crowns, bridges, and inlays.
• Due to its chemical properties palladium is used in different applications such as fuel cells, photography, polyester production, coins, and ethanol fuel production.

Palladium is extracted when PGM ores are mined, and mostly the palladium and other PGMs are a by-product of other metals that are extracted from the Earth’s surface. The recycling of scrap metal also results in palladium, and according to USGS, almost 125,000 kilograms of palladium, platinum, and rhodium are recovered from recycling. The top five countries producing palladium (in kilograms) are

• Russia - 82000
• South Africa - 73000
• Canada - 23000
• S.A - 13200
• Zimbabwe - 10000

Palladium and other PGMs are present in the Earth’s surface, and PGM reserves denote the amount of metals that can be mined. South Africa has proven more than 90% of the Earth’s PGM; however, mining, extraction, and processing require a significant amount of financial resources and logistics. The price of metal is determined by its total cost of production. The top five countries having the largest PGM reserves (in kilograms) are

• South Africa - 63,000,000
• Zimbabwe - 1,200,000
• Russia - 1,100,000
• S.A - 900,000
• Canada - 310,000

History of Palladium

Palladium was discovered in 1803 by an English chemist named William Hyde Wollaston who combined platinum with hydrochloric acid and nitric acid. The element that resulted was shiny but soft and more popularly used in making jewelry. However, the advent of emission standards of automobiles changed the importance of palladium from a metal worthy of making jewelry to a noticeable commodity to be used in preventing pollution.

Palladium was discovered early in the 1800s, but its commercial use was not common until the 20th century. In the industrial sector, palladium was first used in developing photographs, but the cost and rarity of palladium made it unsuitable for this purpose. From 1920 to 1930, palladium deposits were found in South Africa, and Canada and the dental industry began to use both palladium and platinum in making alloys for tooth bridges and dental crowns.

The numerous metals were regularly tested to explore their properties, and research on catalytic properties of palladium in the 1960s resulted in the use of palladium in fuel cracking and production of polyester. The big popularity for palladium came in the 1970s when strict rules were imposed on the standard of automobile emission. New catalytic converters were designed using palladium due to its ability to absorb carbon monoxide.

Since the boom of the auto industry from 1989, the main use of palladium is in the use of a catalytic converter, which is tub-shaped and traps the harmful emissions when the engine burns fuel. Most of the metals in PGM have a high density and high melting point, but only palladium has the lowest melting point and density. Palladium is considered a noble metal, which means that oxygen does not affect or corrode the metal like other metals such as iron, copper, and aluminum. Also, acids cannot damage the surface and appearance of the palladium.

Having a lustrous appearance and other advantages makes palladium ideal for jewelry; however, it has a low density, which makes it less efficient than platinum when it comes to premium quality jewelry. One of the most beneficial qualities of palladium is its ability to absorb hydrogen. According to research and tests, palladium can absorb hydrogen more than 900 times its volume, which makes palladium the best component in fuel cells.

How is Palladium produced

Palladium is extracted from the mines that contain ores that consist of other PGMs as well. The PGMs are extracted from natural concentrations of heavy minerals called ‘Placer Deposits’ that result due to the impact of Earth’s gravity on the moving particle. The placer deposits are found in rocks such as chromite, dunite, and norite.

Palladium and other PGMs are usually by-products in the extraction of other metals such as copper and nickel. But PGMs are mined alone in Bushveld Complex in South Africa, which is also known to have more than 90% of the world’s proven PGMs. The PGM ores are processed through the froth flotation method where heavy machines crush the rocks and put them in chemicals; this step allows us to separate the usable PGM from other insignificant pieces of rocks.

Supply and Demand of Palladium

The supply and demand aspect drives many commodities and also influences the price of metals that are traded in the commodity market. Palladium is a rare metal and found in a handful of countries, which results in a limited quantity of the metal. At the same time, there is an overwhelming demand due to the production of millions of vehicles that require palladium to be used in the catalytic converters.

How to read the price change of Palladium

The Chicago Mercantile Exchange (CME) Globex is the global electronic platform that allows trading for palladium 24 hours and 6 days a week. You can trade palladium crude oil with Contract for Difference (CFD) in the U.K. from Monday to Thursday from 00:00 – 21:00 and 22.05 – 00.00, on Friday from 00:00 – 21:00 and on Sunday, 22.05 – 00.00. The symbol of on CME Globex is ‘PA.,’ the price quotation in USD per troy ounce, and the minimum contract is 100 troy ounces.

If we look at historical values, the lowest recorded value of palladium was $78 in August 1991. The highest value last year was $1,838 per oz. on December 2, 2019. The palladium price is denoted by USD/t oz. where USD is U.S Dollar and t oz. refers to troy per ounces.

When we analyze the palladium price chart, we see the palladium prices trading from $2000 to $3000 troy per ounces from January 2020 to the last week of April 2020. The highest value of palladium was $2855.64/t oz. on February 27, 2020. There was a sudden drop in the price of palladium from the last week of February, and the palladium dropped significantly to the lowest value of $1587.97/t oz. on March 18, 2020. The palladium prices rose steeply again at the end of March, but there have been large swings, and currently, the price of palladium is $1975.43/t oz. The Bid price is $1980.72/t oz. while the Ask price is $1975.33/t oz.

How to Trade Palladium

Trading in palladium may potentiallybe quite profitable mainly because the demand for automobiles will increase with a growing population, and so will the use of palladium in catalytic converters. More than 75% of palladium supply comes from Russia and South Africa that can result in supply shocks. The USA is also a big exporter in palladium, and if political sanctions make Russia curtail its supply, then the palladium price can rise considerably.

Palladium is both a rare and precious metal that increases its value like gold and silver. Trading in palladium can diversify a portfolio and lower the volatility if you have invested in a basket of commodities. The different ways to invest in palladium are through Bullion, Futures Contracts, Options, Exchange Traded Funds (ETFs), Contract for Difference (CFD), and Shares.

Palladium bullion consists of bars and coins and is a direct way to invest in palladium, but you have to consider the cost of storing the coins. A palladium Futures contract is offered on CME Globex with a contract of 100 troy ounces. Futures is a derivative contract where you placed leveraged bets on palladium prices. Upon expiration, the contract is settled by the physical delivery of palladium, but you have to pay interest rates and storing costs.

One of the cost-effective ways to trade palladium is through CFDs, which is also a derivative contract between you and a broker. You have the advantage to deposit and speculate on price difference from opening to closing of the trade. You also can go Long or Short and gain from both a rising and falling market if your prediction is correct.

With CFDs, you are speculating on the underlying asset, so there is no need to buy or own palladium. For example, with a leverage of 1:10 if you want to trade $1000 worth of palladium, then you will deposit just $100 and trade a larger position. CFD gives opportunity to magnify gains, but also losses, but a risk management tool can be used.

Another method to trade palladium is by buying shares of publicly traded companies who have access to palladium prices. Buying shares give you exposure to palladium prices and may get profit in the form of dividends. Some companies include Norilsk Nickel, Anglo American Platinum Ltd, North American Palladium Ltd, and Platinum Group Metals Ltd.

What causes the price change of Palladium?

Like most commodities, the price of palladium is also affected by certain factors that are

• South African and Russian Supply

Russia and South Africa are the two leading countries in the extraction of palladium and account for nearly 75% of the entire global demand for palladium. The supply difficulties in Russia and South Africa plays a huge impact on the prices of palladium. The Russian company, Nornickel, is the largest supplier of palladium, and political sanctions, export restrictions, and new mining guidelines can directly influence the supply and price of palladium coming from Russia. South Africa also supplies a vast amount of palladium, and the supplies are affected by fuel and electrical costs.

• Vehicle Demand

More than half of the palladium production goes to the auto industry in developing the catalytic converters. As the auto industry is one of the biggest industries with millions of vehicles manufactured annually, the demand for palladium plays a major role in determining its price. The cars that function on gasoline require palladium, while diesel-run cars use platinum in the catalytic converters. The demand for gasoline-driven cars is more in the world as compared to diesel-powered cars. China, one of the biggest countries, and a huge population, require one-third of the total palladium produced in the world.

• Investment

Most of the precious and rare metals have significant investment value, such as gold and silver that were also used as a mode of currencies in ancient times. Apart from gold and silver, platinum and palladium have a certain value and can be used as an investment. An investor can purchase billion or ETFs to gain access to the palladium market. However, the market of palladium is not fully developed and has thin liquidity and large price fluctuations.

• Inflation

Like most commodities and metals such as gold, palladium is also valued in U.S Dollar and has an inverse relation with the U.S Dollar. For instance, the price of palladium rises with a weakening USD value, and the price of palladium falls when the USD strengthens. The U.S Federal Reserve, also called the Fed, usually keeps the interest rate low to prevent inflation.

• Recycling

The recycling of palladium also impacts the price of palladium. The majority of the recycling comes from the catalytic converters in the vehicles. However, the value of recycled palladium is quite less as compared to the value of recycled steel. The higher steel prices can result in a higher number of palladium recycling, and increased supplies of recycled palladium would mean low prices.

• Price of substitutes

The other metals in the PGM apart from palladium are considered to be substitutes as they have similar properties. The industrial use of metals in the auto industry usually determines the rise and fall of metal prices. Apart from palladium, platinum and rhodium are used in catalytic converters, and their prices are less compared to pallidum, then they can be used as substitutes. The demand for palladium will increase if its prices drop, and the demand can come from the diesel-powered catalytic converters.

Palladium is a precious metal and one of the best investment in times of inflation and currency devaluation. The low-interest rates in the U.S and Europe help the automobile industry to grow as most people purchase cars through financing and leasing. The demand for palladium in catalytic converters goes hand in hand with a rise in demand for vehicles.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.