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Palladium rally does not remove questions about the future

06 june 2022

At the end of last year, a significant part of experts expected a rally in palladium in 2022 after its price approached the COVID lows reached in December at $1,600 an ounce. This forecast was based on a revival in the automotive sector due to the normalized availability of chips and a shortage of metal in the market coming to 500 000 ounces.

The palladium rally indeed happened - but the reason for this was not the normalized situation in the auto industry, which is so far producing disappointing results this year primarily due to a slower than expected elimination of the chip shortage. In early March, palladium peaked at $3,339 an ounce amid wide-ranging Western economic sanctions against Russia and concerns about the availability of Russian metal. Although the price dropped to $2,200 an ounce later in the month as Norilsk Nickel's palladium continued to enter the market, the risks associated with Russian palladium create additional uncertainty for consumers and contribute to price volatility.

At the same time, such an existential threat to palladium as the development of electric vehicles is not removed from the agenda. It received a boost last year when automakers, amid a chip shortage, redirected resources to electric vehicles, focusing on strong demand for zero-emission cars and meeting carbon targets. Even though electric vehicles typically consume twice as much semiconductors as an internal combustion engine (ICE) vehicle of similar size and class, the share of hybrids in global passenger car production in 2021 rose to 14% from 9% in 2019, while the market share of battery electric vehicles (BEV) has tripled in the last two years to 6% in 2021.


The palladium market will be close to balance in 2022, with a slight deficit of 100,000 ounces, according to a market review prepared by Norilsk Nickel experts. In February, Norilsk Nickel expected a deficit of 300,000 ounces for this year, but now the estimate has been lowered due to a slower recovery in demand in the auto industry, which is caused by a continuing shortage of chips and a military conflict in Ukraine.

A year earlier, the palladium market was broadly balanced, with a deficit of around 650 000 ounces in 2020.

Although the pace of the auto industry recovery this year has been much slower than expected, palladium should be balanced by lower primary supply as South African companies revised their production targets and also reduced refining, according to a review by Norilsk Nickel.

The accumulated work-in-progress materials that could make up for this year's decline in South Africa's production have already been processed in 2021. On the other hand, Norilsk Nickel's operations should fully recover in 2022 after the temporary shutdown of the Oktyabrsky and Taimyrsky mines and the incident at the Norilsk concentrator. As a result, the supply of metal will grow within 1%.

Total global demand for palladium in 2022 will rise by 3% to 10.3 million ounces, mainly due to a partial recovery in the automotive sector from a low base in 2021, Norilsk Nickel believes.

The world's largest producer of materials for autocatalysts, the British Johnson Matthey, also believes that palladium may become scarce in 2022 amid risks of disruption in supplies from Russia and a reduction in output of the metal in South Africa.

South Africa will cut palladium supplies by more than 6% yoy to 2.49 million ounces in 2022 due to depletion of work-in-progress stocks and planned maintenance of processing facilities, as well as ongoing operational problems, according to Johnson Matthey.

Demand for platinum group metals will also be affected by the conflict: while Russia is not a major consumer of platinum group metals, the crisis will exacerbate existing supply chain difficulties, increase inflation and slow economic growth, Johnson Matthey believes.


The shortage of chips remains the most important deterrent to the development of the automotive industry. In 2021, car and chip makers expected the crisis to ease significantly in 2022 and eventually end in the first half of 2023. The consensus now is that the shortage of chips will continue through 2023 and 2024, Nornickel notes.

While car production continues to suffer from a shortage of chips, sales are being stifled by high inflation and long waiting times, prompting potential buyers to reevaluate the need for a new car.

In North America, passenger car sales in the first quarter of 2022 were down 16% from a year ago, with production losses reaching 400,000 vehicles over the period. While car inventories reached their all-time low in February, falling below 65,000 units, signaling significant pent-up demand and potential sales growth as car availability resumes, shortages will continue through at least 2022, Nornickel opines.

In China, the recovery of the auto industry was interrupted by the COVID outbreak, which prompted the authorities to impose brutal lockdowns, the most serious of which was the closure of Shanghai, which is not only an important automotive market, but also a large assembly base for cars and auto components. China sales data in April was disastrous, with a 45% drop, bringing sales down 8% since the beginning of 2022. Although demand for cars is being delayed rather than lost, production losses are unlikely to be reversed this year.

Another feature of China is the growing decline in the share of PGM loadings in autocatalysts. With the next phase of tightening emissions regulations not implemented until mid-2023, the Chinese auto industry has had time to breathe. As a result, according to Johnson Matthey estimates, the average PGM load in Chinese gasoline cars has decreased by more than 10% in 2021.

This contrasts with the situation in the EU, where all new passenger cars registered in 2021 must fully comply with Euro 6d standards, which has led to a double-digit increase in the average load of PGM in catalysts. The average palladium content of gasoline-powered vehicles in the US also rose in 2021, thanks to the strict Tier 3 federal regulations.

On the other hand, the use of PGM in the industry of China is growing, which, as part of its five-year development plans, widely uses these metals in the modernization of the oil and chemical industries. Thanks to the activity of China, which accounts for 38% of global industrial demand for PGM, consumption in this area has been at unusually high levels over the past four years, peaking in 2021.

Positive for palladium in the long term could be the introduction of the Euro 7 standard this year, which is expected to affect car production in Europe from 2025. Although the impact on demand for PGM can only be quantified once the program is officially announced, it is clear that it will lead to higher loadings of metals into catalysts.


The conflict in Ukraine has also taken a toll on the automotive sector, which has yet to fully recover from a semiconductor shortage, as European automakers cut car production due to a lack of wire harnesses supplied from Ukraine. In April, the output of cars in the EU collapsed by 28% year-on-year, from the beginning of the year the fall was 16%.

Another consequence of the conflict, immediate for the semiconductor industry, is a disruption in the supply of neon, 90% of the world's demand for which is supplied by Ukraine. A mixture of gases with the participation of neon is used in lasers, which are used to photolithograph silicon wafers. The shortage of this raw material could undermine the emerging recovery in the semiconductor industry, analysts polled by the Financial Times say.

Taking into account all these factors, Norilsk Nickel adjusted its expectations for the production of cars. The forecast for global passenger car production in 2022 has been lowered to 80 million from the 86 million units expected in November last year, which means lower demand by 570,000 ounces of palladium and 170,000 ounces of platinum. Next year, 91 million instead of 93 million cars will be produced, which will result in a drop in demand for 370 000 ounces of palladium and 120 000 ounces of platinum.

Johnson Matthey estimates passenger car production this year to be below 80 million units.

Demand growth this year will be held back by weak auto production and cost-cutting programs by metal consumers, Johnson Matthey said. High palladium prices, fueled in large part by concerns about supplies from Russia, have prompted significant savings on the part of Chinese automakers and have also accelerated the pace of replacing palladium with platinum in gasoline autocatalysts.


The substitution of palladium for platinum has gained further momentum as automakers' fears of possible supply disruptions from Russia are prompting them to move away from this source. This can be achieved either by switching to alternative suppliers, or by accelerating the replacement of palladium with platinum, according to a review by Norilsk Nickel.

At the same time, according to Norilsk Nickel, given the technical limitations in the process of replacement, the rate of substitution of palladium by platinum cannot be increased above the level stimulated by the price difference between the two metals.

In any case, this process does not seem realistic, at least in the short term, since Russia accounts for about 40% of the world’s primary palladium supply, which means that it cannot be quickly replaced by other market participants, believes Norilsk Nickel. According to the company, the rhetoric of South African mining companies shows their inability to quickly ramp up production.


In 2021, global refined palladium production rose 12% to 7 million ounces, above pre-pandemic levels in 2019, as mines resumed operations and logistical challenges eased. This year, production is stabilizing, as South African miners have already processed the major share of the previously accumulated backlog. Norilsk Nickel expects global production of refined palladium to fall by 1% to 6.9 million ounces.

In South Africa, Norilsk Nickel believes that palladium output will fall by 12% to 2.5 million ounces due to normalized amount of work in progress, after rising by 58% in 2021.

Anglo American Platinum, which saw sales up 75% in 2021, cut its annual PGM production guidance from 4.2-4.6 million ounces to 4-4.4 million ounces in the first quarter of this year due to excessive rainfalls and the ongoing impact of COVID-19 on the supply chain. Planned maintenance of the Polokwane smelter and Mogalakwena south concentrator leaves the company no way to make up the shortfall by the end of 2022, especially since there is very little work-in-progress inventory, Nornickel said.

Another major producer, Impala Platinum, also adjusted its forecast from 3.3-3.56 million ounces to 3.1-3.2 million ounces due to the maintenance of the furnace at Rustenbourg, which the company will have to completely reconstruct.

In addition to planned furnace overhauls, South African manufacturers face wage talks with unions this year, usually fraught with strikes, especially in the second half of the year, Johnson Matthey recalls, although the company's baseline forecast does not include long downtime for this reason.

Output of platinum group metals in North America (the region accounted for 13% of global production in 2021) will remain weak compared to the historical average, writes Johnson Matthey. The Vale mine, part of the Sudbury nickel operation, was closed between September 2021 and February 2022 due to damage to one of the mines, while SibanyeStillwater in Montana cut its production forecast due to operational problems.

Supply of secondary metal to the market this year, according to forecasts by Johnson Matthey, will decrease by almost 5% (to 3.21 million ounces), reflecting the effects of a shortage of semiconductors. Due to the shortage of new cars, used cars will be used longer than usual, which will limit scrap volumes in the short term, especially in Europe and North America.


The largest producer of palladium, Norilsk Nickel, noted that it is operating as before, despite certain difficulties with logistics and the supply of equipment, spare parts and consumables due to the difficult geopolitical situation. The company confirmed its production target for 2022 at 2.451-2.708 million ounces of palladium and 604 000-667 000 ounces of platinum.

Obligations to customers are fulfilled in full, despite the logistical obstacles caused by the restriction of international flights, since the Russian government has not introduced any restrictions on the export of these metals from Russia. Clients do not break contracts, being interested in further expansion of cooperation, stressed Norilsk Nickel.

LPPM's decision to revoke the Good Delivery status of two major Russian refineries, as well as the UK's imposition of a 35% import duty on Russian PGM, did not have a noticeable impact on Norilsk Nickel, the review says. The company has always focused on sales to industrial customers, not London OTC, and direct imports to the UK are negligible (31 000 ounces of palladium and 5 000 ounces of platinum in 2021).

Johnson Matthey is more cautious about the situation with shipments of Russian palladium. Now the precious metals of Norilsk Nickel continue to enter the market, since after the termination of air traffic with Russia, Nornickel ships the metal through hubs in the East. However, the delisting of Russian refineries from LPPM raises concerns about the future availability of the metal, as it means that bars and solutions produced by them after April 8 are no longer Good Delivery in the London and Zurich precious metals markets. This will affect deliveries to Western buyers in the future, according to Johnson Matthey. Due to uncertainty on this issue, Johnson Matthey does not provide guidance on palladium supply this year.

In addition to the withdrawal of the Good Delivery status, there is also the problem of concerns about the Russian origin of the metal, according to a review by Johnson Matthey. Until recently, Europe and the US accounted for more than two-thirds of Russian palladium, but now the direction of part of Russian exports is changing. Shipments could be redirected to other destinations, possibly at a discount, but it will take some time for new contracts to be awarded, the review said.

As a result, Norilsk Nickel, although having confirmed the production forecast, may not be able to supply all of its products to the market, Johnson Matthey concluded.

In addition, economic sanctions and loss of access to Western technology could reduce the efficiency of mine operations in the short term, and Norilsk Nickel could experience delays in the implementation of expansion projects in the long term.

Igor Leikin for Rough&Polished