Platinum group metals (PGMs) are rare precious metals with unique physical properties that are used in diverse industrial applications and in jewellery. Palladium, like gold, silver and platinum, is a precious metal, as well as one of the six PGMs, which also include platinum, rhodium, ruthenium, iridium and osmium.
The unique physical characteristics of PGMs include:
Strong catalytic properties;
Excellent conductivity and ductility;
High level of resistance to corrosion;
Strength and durability; and
A high melting point.
Demand for palladium is diversified by geography and end market. Palladium is primarily used in the manufacture of catalytic converters in the automotive industry, as well as in the manufacture of jewellery and electronics, and in dental and chemical applications. As a precious metal, there is also investment demand for palladium in the form of doré bars, generally held as physical inventory by exchange traded funds (ETFs) and institutional investors.
Palladium is typically produced as a by-product metal from either platinum mines in South Africa (approximately 38% of world mine production) or Norilsk Nickel’s mines in Russia (approximately 41% of world mine production). North America contributes approximately 14% to the world’s supply of palladium, where the Company’s LDI mine is one of only two primary producers of palladium in the world.
The market outlook for palladium includes continued strong fabrication demand and constrained supply leading to a moderate but persistent supply deficit. Accordingly, the Company believes that its plans to optimize and expand its palladium operations are well timed in the commodity’s cycle.
The two main sources of palladium supply are mine production and secondary recovery. In 2014, approximately 8.9 million ounces of palladium were supplied to the market, of which approximately 6.1 million ounces came from mine supply, and 2.8 million ounces from secondary recovery. Forecast production for 2015 includes 6.7 million ounces from primary sources and 2.6 million ounces from secondary sources (CPM Group Platinum Group Metals Yearbook, 2015).
As a rare precious metal, there are very few palladium producing regions worldwide and few known economically viable ore bodies. Forecasts for 2015 indicate that Russia (38% share) and South Africa (36% share) will account for three-quarters of global palladium mine production, with important contributions coming from Canada (10%), USA (6%) and Zimbabwe (5%).
Growth in mine supply is constrained, largely owing to:
Political, infrastructure and cost issues in South Africa;
Relatively constant palladium production in Russia; and
The very small number of new projects on the horizon in the near- to medium-term.
In particular, South African production is challenged by deeper mines, power and water limitations, increasing labour and operating costs, geopolitical risks, shortage of skilled labour, and a recent under-investment in capital development projects.
Secondary supply is typically derived from recycling of scrap auto catalysts, electronics and jewellery. Additional secondary supply has periodically come from strategic sales from the Russian government palladium stockpile. Supply from recycling of spent auto catalysts has shown a dramatic increase over the past decade, from approximately 700,000 ounces in 2005 to approximately 2,000,000 ounces in 2014 (CPM Group Platinum Group Metals Yearbook, 2015). There has been considerable speculation about the current holdings of the Russian government’s palladium stockpile that, historically, has been an overhang on the market. Credible forecasters have recently indicated the state stockpile has declined to relatively low levels and will no longer be a significant contributor to the palladium market going forward. A more recent secondary source of palladium has developed from outflows from ETF investments. Gross palladium holdings in global ETFs are expected to decrease by 600,000 ounces by the end of 2015, reflecting significant de-investment in the second half of the year.
Forecast 2015 global palladium mine supply. Labels on pie chart include thousands of palladium ounces produced (top) and percentage share of total forecast mine supply (bottom).
Source: CPM Group Platinum Yearbook, 2015.
Demand for palladium continues to grow, driven primarily by the automotive sector that consumes nearly 80% of world palladium supply for the manufacture of catalytic converters in cars that help reduce toxic emissions into the environment.
The demand for palladium in the automotive industry has more than doubled in the last ten years due to an increase in global automotive production and the tightening of emissions standards worldwide, resulting in steady growth in the use of catalytic converters.
The primary driver of growth in the automotive sector is from the emerging economies, especially China and India, where there is emerging affluence, very low penetration of vehicles per capita, and the affordability factor is high due to low interest rates and leasing programs. In addition, the recent recovery of the US auto sector has also strengthened demand for palladium.
Key factors affecting demand include:
Increasing vehicle production: Light global vehicle production is forecasted to increase at a compound annual growth rate of 3% to over 100 million units by 2020, with most of that growth driven by China;
Stricter emission controls that mandate the use of catalytic converters;
Technological advancements for palladium’s use in diesel catalytic converters, which continues to replace platinum owing to similarity in performance and price differential; and
The recent growth in palladium exchange traded funds (ETFs) that significantly contributed to a rapid increase in investment demand over the past several years, despite a recent sell-off of palladium ETFs by less bullish investors.
Global palladium demand for the period 2012-2015. 2015 numbers are estimates.
Source: Johnson Matthey, Precious Metals Market Report, November, 2015.