Precious Metals: The Next Year of Palladium

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For the year to date, the price of palladium has risen by a majestic 1.3%. That may sound paltry, but the metal’s performance beats its brother platinum, which has fallen in price by 4%; gold, which is down 14.5%; and silver, down 21.4%.

Palladium prices are driven by demand for catalytic converters in light-duty trucks and passenger cars, and in 2012, demand totaled more than 6.6 million ounces, more than double the 3.24 million ounces of demand for platinum which is more extensively used to clean the exhaust from diesel-powered engines. Some 88% of available palladium was used for catalytic converters, compared with 81% of platinum.

Combined with demand for palladium, supplies have declined. In 2012 the deficit was 1.07 ounces. Newly mined supply was down 11%, with recycled supply also down slightly. A third factor contributing to palladium demand was investment, which rose from a negative 565,000 ounces in 2011 to a positive 470,000 ounces in 2012.

There are three ETFs that offer a play on palladium: the ETFS Physical Precious Metal Basket Shares (NYSEMKT: GLTR), the PowerShares DB Precious Metals Fund (NYSEMKT: DBP), and the ETFS Physical Palladium Shares (NYSEMKT: PALL). The two funds from ETFS seek to track the price of the physical commodities, while the PowerShares fund tracks a commodities index.

The ETFS Physical Precious Metal Basket Shares (NYSEMKT: GLTR) currently trades at $78.22 in a 52-week range of $74.24 to $102.05, down about 16% year to date.

The PowerShares DB Precious Metals Fund (NYSEMKT: DBP) trades at $47.61 in a 52-week range of $45.10 to $63.80, a drop of nearly 17% so far in 2013.

The ETFS Physical Palladium Shares (NYSEMKT: PALL) trades at $70.45 in a 52-week range of $54.74 to $77.20, up 0.1% year to date.

U.K.-based chemicals company Johnson Matthey plc, which recently published its Platinum 2013 report, also expects 2013 demand for palladium to outstrip supply. The company notes that sales from Russia’s stockpiles will continue to decline. Supply from South Africa was down 9.3% last year as well and mine closures and continuing labor unrest could rein in supply here as well.

North American Palladium Ltd. (NYSEMKT: PAL) and Stillwater Mining Co. (NYSE: SWC) are the two North American companies actively mining platinum and palladium, but neither is a major source of global supply.

As new car production increases, not just in the U.S., but everywhere around the globe except perhaps Europe, demand for palladium could continue to rise. It’s worth watching.