Major automobile manufacturers around the world are now using platinum instead of palladium in gasoline engine catalysts. This heavy shift in priorities is mostly due to all-time higher palladium prices and limited supplies of the metal.
A steady supply of platinum in the market and a demand-supply balance recently caused platinum's price to drop 350 dollars lower than palladium. Let’s take a look at some factors leading to this gap in the price of two platinum group metals (PGM).
Platinum as a substitute:
Traditionally platinum has been used in catalytic converters of luxury cars only, whereas palladium was used as the default metal for most automobile companies. However, platinum has always served as a substitute for palladium in the automobile industry whenever the price of palladium increases or its supply goes down. Platinum was used back in the 2000s when palladium’s price went up. But according to the experts, in today’s scenario, the price is not the only issue since the supply of this metal has also become short in the recent years making it difficult for the manufacturers to rely on it.
While palladium cannot be utilized in the diesel catalysts, palladium can be replaced with platinum in gasoline catalysts. But the process is not as simple as it sounds. Some catalytic systems only support one of these metals.
The platinum-palladium demand cycle:
As many of their commercial applications are basically the same, the prices and demand for platinum and palladium depend on each other to some extent.
Platinum is mostly utilized in the fuel catalyst industry (about 42% of its total annual global demand coming from auto-catalyst industry). However, its demand has decreased considerably after the Volkswagen emissions scandal in 2015. The scandal saw a huge decrease in the purchase of new diesel cars in Europe (from 56% in 2011 all the way down to 35% in mid-2018). These events hurt the demand of platinum, and hence its counterpart (palladium) occupied the empty space.
Palladium, after occupying platinum's market, is witnessing an all-time high price and has already left platinum behind by $350 per ounce. Today, 79% of its market supply goes to the gasoline catalyst sector, which was once owned by platinum.
One can see that these metals depend on each other in a somewhat cyclic way.
The demand and supply theory:
When we talk about the awesome performance of palladium, we must consider the demand and supply theory. The prices of a metal increase when demand outpaces supply. This is the case with palladium, as its supply was 7.4 tonnes less than the market demand in 2018 (some even say 34 tonnes). This shows how the price of palladium has been affected by higher demand and lower supplies.
On the contrary, platinum's supply was actually 15 tonnes ahead of its market demand, which caused its price to drop significantly.
The price of palladium has tripled in the last ten years or so. However, its supply increased by only 10%. Why? One reason is because the rocks containing palladium usually contain many other metals as well. That is why palladium is not the primary source of income for many major refineries of the metal. In fact, a Russian refinery, which is a global leader in palladium production only earns 36% of its total revenue from its sales.
The future of PGM industry:
From 1999 and 2001, platinum demand grew significantly due to an increase in the palladium’s price and low supply. That was because the automobile industry was thriving in Europe and the United States.
Palladium benefited the same way in 2015 after the VW emissions scandal and grew its market. Europe and the United States came up with strict laws in automobile emissions which was good news for the platinum-palladium industry.
New potential market, China:
Most recently, China has passed many strict rules on emissions, following Europe and Americ's lead. Keeping in mind the huge market volumes that exist in China, many experts predict that palladium’s low supply could become a concern for Chinese manufacturers.
Strict rules would certainly require more supply of palladium or its substitute platinum to meet Beijing’s requirements. Therefore, market conditions indicate that palladium and platinum prices will both continue to remain strong in the near future.