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Palladium is at the peak again but this victory looks like a Pyrrhic one

14 march 2022

Commodity prices skyrocketed in late February this year in response to a military escalation in the Ukraine that could result in wide-ranging sanctions against Russian exporters. Russia’s Norilsk Nickel, the largest palladium producer, like its main beneficiaries, is not included in the sanctions list, but faces serious restrictions in the sale of its products. The ban on flights over Europe has made it difficult to ship metal, which is usually transported by passenger airplanes. Fears of a sharp deterioration in the availability of the metal pushed palladium prices up, which have skyrocketed nearly 60% since the start of 2022, to $3,000 an ounce, nearly reaching their May 2021 peak.

To date, the scale of failures is not fully understood, the market response may turn out to be emotional, so we would like to return to the analysis of the fundamental state of the market for this metal as of the day preceding the start of Russia’s “military special operation”.

The palladium prices experienced turbulence last year as the changes came to the automotive industry. Demand from this industry is a key driver for the precious metal that is a critical component in catalytic converters used to reduce gasoline engine emissions. The rising vehicle sales and tightening the emission regulations have led to a shortage of palladium for several years. After hitting a record high of around $3,018 an ounce in May amid the expectations of a post-COVID recovery in the automotive industry, the palladium prices fell down to around $1,800 after semiconductor shortages forced automakers to cut the production level.

Optimism that the situation for palladium will improve with the restoration of the global supply chain allowed the metal to compensate part of the losses in early 2022. But the strategic outlook for palladium is questionable due to the rise in the share of electric vehicles. At the end of last year, the largest palladium producer, the Russian Norilsk Nickel company, called upon researchers and inventors to identify and develop new areas of application for this metal.


The flight bans were the first, but not the only sign of a dramatic change in the palladium market in late February and early March 2022. With much of Europe’s airspace closed to flights from Russia, miners like Norilsk Nickel are examining for alternative routes to supply the metal to their customers, Bloomberg reported.

According to Nikos Kavalis, managing director of Metals Focus Ltd, quoted by Bloomberg, ways to overcome these difficulties in trading would emerge over time. These may be more complicated routes, shipments to China or other consuming countries.

The main consumer of the Russian palladium is the German BASF company that uses it to produce autocatalysts. The supplies of metals from Russia are still carried out, the German company told Argus. “Should sanctions be imposed that specifically limit or ban the trade of metals of Russian origin, we would rely on alternative sources to cover our own needs. We could bridge short-term supply interruptions with our own stocks,” said a BASF spokesperson.

Meanwhile, a number of other Western companies are seeking to diversify their supplies by refusing to purchase from Norilsk Nickel, writes WSJ.

Flight bans, logistical issues and sanctions will keep palladium very bullish because this is happening during the time when demand is starting to pick up significantly,” said Edward Moya, senior market analyst at OANDA.

For an adequate assessment of the current shock situation in the palladium market, let’s return to the analysis of the situation on it as of February 23.


Initially, 2021 was expected to be a strong year for palladium driven by a booming recovery in the auto market amid the increasing vaccination and the lifting of the coronavirus restrictions. The scale of the problems became clear only by August-September when automakers recognized that the reduction would reach 8 million vehicles instead of the estimated 2-3 million ones, that is, approximately the same number of vehicles will be produced in 2021 as in 2020.

The response to the global limitation in the availability of semiconductors was the deterioration of the fundamental conditions for the palladium market. The Norilsk Nickel’s estimate of the deficit more than halved in November, from 400-500 thousand ounces to 200 thousand ounces. At the same time, the palladium market of about 10 mn ounces in 2021 reached the first annual surplus in a decade, according to the Metals Focus estimates.

At the end of 2021, the palladium price that rose by 29% a year earlier, declined for the first time in six years. This contrasts greatly with the overall strength in most commodities, the reference S&P GSCI index of which consisting of 24 futures across five commodities hit its highest reading since 2009, up 28% in 2021.

The global chip shortage, which has weighed heavily on the demand for platinum-group metals (PGMs), has had a major impact on investor sentiment and positioning, according to Trevor Raymond, Research Director at the World Platinum Investment Council.

The semiconductor shortage is the result of a “perfect storm,” according to the review prepared by Norilsk Nickel and ICBC Standard Bank. Automakers’ purchasing departments were confident in 2019 that they could first cancel their chip contracts and then easily renew them as the market would improve. Unfortunately, that hasn’t happened because the competition with the electronics industry for chips has gotten tougher during the pandemic as consumers working from home and businesses started buying laptops, game consoles and other equipment. Chip inventories have been depleted and, during the pandemic’s worst period, some semiconductor factories had to close, which made manufacturers less prepared for new orders from the automotive industry in 2020 and 2021.

Another reason was the trade war between the US and China that disrupted the semiconductor market due to restrictions. Numerous weather disasters in areas where the main production facilities are located aggravated the situation, for example, a drought in Taiwan in 2021 and the Winter storm in Texas, which resulted in the restricted operation or shutdown of the production lines.

Magnesium availability has become another bottleneck in the automotive sector. This metal is a key component for the aluminum alloys widely used in modern automotive vehicles. China is the main magnesium producer with its share of about 85%. When the Chinese authorities began to reduce energy consumption during the energy crisis in the fall of 2021, more than half of the magnesium production capacities were shut down, and the magnesium price soared from $2,000 to $14,000 per tonne. While the situation has improved since then, magnesium shortages could be yet another “black swan” on the way to auto market recovery, according to the review prepared by Norilsk Nickel and ICBC Standard Bank.

The problems of the automotive industry had a greater impact on palladium than on platinum as autocatalysts are the main application of this metal. Palladium is used mainly in gasoline vehicles, while platinum is used in diesel ones, which have not suffered as much due to their much lower number.


By the beginning of 2022, the prospects for palladium have improved somewhat, VTB Capital writes in its review. A significant improvement in the vehicle production dynamics in 2022 can return a deficit on the palladium market, the bank says.

Some automakers, including Ford and GM, announced in Q4 last year that the situation with the supply of chips was normalizing. Hyundai, GM and Volkswagen also expect the deficit to decline in 2022. Norilsk Nickel estimates that the chip shortage will be resolved in H2 2022, but the automotive production will not return to the pre-pandemic levels before 2023.

According to Raymond, if the automakers’ supply chain problems are resolved, the rise in palladium prices “could be dramatic”. He expects the palladium prices to remain high as the Chinese automakers buy the metal in the spot market for short-term use and its supply growth is “as limited as the platinum supply growth”.


Even before the aggravation of the situation in Ukraine, the palladium market had a shortage, although not so significant, which supported the prices.

The palladium production increased by more than 0.5 Moz in 2021 driven primarily by a recovery in South Africa and the processing of the stocks of work-in-progress accumulated by Anglo Platinum and other African producers. This was enough to fully compensate for the decline in the metal production in Russia (because of the reduction in the Norilsk Nickel’s output due to accidents). The growth in deliveries could have been more significant, but the recycling volumes did not eventually exceed the weak level of 2020, as the shortage of new automobiles delayed the “parting” of the owners with their used automobiles, which affected the collection of scrap.

After depleting its stock of work in progress, Amplats cut its PGMs output forecast for FY 2022 by 10%. Impala Platinum has postponed the start of work at its Rustenburg factory in South Africa by at least 4 weeks after the production shutdown in November. Its production losses have not yet been disclosed, but the situation can put pressure on the metal production in December and January. Rustenburg produced 635,000 oz of platinum and 311,000 oz of palladium in 2020. SibanyeStillwater also cut its FY2022 production guidance by 8-11% due to disruptions related to repairs and upgrading of its production facilities.

Taking into account the improved supply in Russia in 2022, Norilsk Nickel expects the deficit to increase up to 300,000 oz this year (from 200,000 oz in 2021).


With the recovery in the automotive sector, palladium could expect a rally next year, but it will likely be the last one, according to the Reuters survey. The expected expansion of electric vehicles will result in a long-term decline for palladium.

In the meantime, the market looks opportunistically at the current low prices taking into account their reversal in the short term. “With these levels, we’re bullish,” said Marcus Garvey, an analyst at Macquarie.

He estimates that the automobile production can rise by 15% in 2022 as chip shortages ease leading to a shortage in the palladium market of about 500,000 ounces and the price will return to $2,500 an ounce or higher.

As the auto industry returns to normal, a rally in palladium prices can be swift, said the Citi analyst Max Layton, as speculators will have to cover their short positions that have reached a record high (400,000 oz) on the Nymex since 1995, at least.

But the picture for the metal will soon be bearish, he agrees. “Whatever price we see in the next 12-24 months, this will be the high of the cycle,” Layton said. “Palladium is the exact opposite of battery materials. Apparently, the demand for it will consistently decrease from 2024,” he added.


If shortages of chips or magnesium are an acute problem but more of a tactical one, the growing production of the electric vehicles looks like a long-term negative trend for palladium.

The global market for electric vehicles by the end of 2021 was estimated at 4.2 mn EVs, which is up 91% than a year earlier. From this point of view, China - the most growing region of the world in this respect - grew by 130%, to 2.4 mn EVs. In the EU, the growth was 70% (1 mn EVs), in the USA the growth was 38% (600 thousand EVs).

In the face of chip shortages, the automakers have begun to prioritize their most profitable and hyped car models, which are usually electric vehicles, especially since buyer demand in this category is less price elastic, according to the review prepared by Norilsk Nickel and ICBC Standard Bank. This decision allowed automakers to meet average CO2 emission targets, which is especially important for the EU and US markets. Another reason for the strong demand for EVs is a lot of tax incentives and preferences for buyers and manufacturers of electric vehicles, which allows them to maintain comfortable prices for EVs.

Norilsk Nickel estimates that the exceptional EV growth in 2021 driven by a combination of these factors is unlikely to continue into the future. The consensus forecast based on the expectations of several agencies and investment banks estimates a CAGR of 33% worldwide for EV sales in 2020 to 2028.

Once the availability of conventional vehicles and hybrids improves in 2022, Norilsk Nickel expects the EV growth to slow down. As the share of electric vehicles increases, the problems with the availability of charging stations and the expansion of electric grids, as well as with the introduction of new generating capacities, will become more acute. “We see that even with the accelerated introduction of electric vehicles, the hybrids of all types and conventional cars will remain the mainstay of automotive production with shares of 24% and 60% in 2026, respectively,” the survey says.

However, due to the excessive dependence on the auto industry, the strategic prospects of palladium look quite vulnerable, and this cannot but worry the major palladium producers. In October last year, Norilsk Nickel announced the launch of the Palladium Challenge competition in partnership with the International Precious Metals Institute (IPMI), the goal of which is to expand the scope of this precious metal and search for new areas of its use after 2030. “The Palladium Challenge competition is an initiative the goal of which is to inspire researchers, inventors and businesses to do a research work and develop a scenario for the sustainable use for palladium and increasing the demand for it,” the company explained.

“We believe that palladium has great potential, not only in the field of autocatalysts. We see strong demand for palladium in other sectors, including the “green” economy and decarbonisation. There are many other areas where palladium can play a key role... We hope that this competition will help obtain outstanding research results,” commented Anton Berlin, Vice President, Head of Sales and Commerce at Norilsk Nickel.

Igor Leikin, Rough&Polished