The price of palladium reached US$2,231 per ounce in afternoon trading Jan. 15, according to London Bullion Market Association data, having risen 77% since the start of 2019 amid an ongoing supply shortage and growing demand for the precious metal from automakers as they increase loadings in catalytic converters to meet tightening emissions regulations.
"Palladium continues to make new highs as market fundamentals remain tight and we think there is little scope for material easing anytime soon," UBS strategist Joni Teves wrote in a Jan. 14 note. UBS expects the price of the metal to average US$2,200/oz in 2020 and said it could reach US$2,350/oz by the end of the year. In the years ahead, the upside could be as much as 27%, according to Teves.
The automobile sector accounts for about 80% of demand, which is expected to continue to grow alongside stiffening emissions standards despite weak car sales. While platinum is better suited for diesel engines, palladium is better for petroleum engines, demand for which has risen since the Volkswagen emissions scandal of 2015.
"The market has little ability to cover the shortage in the short term due to the lack of inventories and inability to quickly ramp-up production," VTB Capital Research analysts wrote in a Jan. 15 note.
Russia and South Africa have been vying for the title of largest producer of the white metal, with Russia taking the lead in 2019 and expected to move significantly ahead of South Africa in the coming years.
North American production is expected to have dipped 1.7% in 2019 to 1.1 million ounces but should jump to 1.2 Moz in 2020 as Sibanye Gold Ltd.'s Blitz development ramps up at its Stillwater operation in Montana, according to S&P Global Market Intelligence data.
In late 2019, South Africa's mining industry faced significant disruption from the worst power outages in over a decade due to heavy rains and flooding. State-owned power generator Eskom Holdings SOC Ltd. curtailed power supply, and platinum group metals operations were badly affected.
"Although both platinum and palladium prices reacted to headlines out of South Africa in December, palladium is more vulnerable given the market is already in deficit," Teves wrote. "Lingering risk of supply disruptions as Eskom continues to face issues is likely to aggravate an already tight and jittery market like palladium."
Russia's PJSC Norilsk Nickel Co. is the largest individual producer of the white metal and had a 39% share of the market in 2018. The company is looking to raise its combined platinum group metals output by as much as 95% from 2017 levels to up to 205 tonnes per annum by 2030. The Arctic mining group produces roughly 4.5 grams of palladium for each gram of platinum, while South African deposits tend to have a higher content of platinum.
Additional mine supply is unlikely to come online anytime soon, due in part to long lead times for project development. Norilsk has estimated combined palladium and platinum production of between 106 and 108 tonnes in 2019, compared to 105 tonnes in 2018. Combined production is forecast at 103 to 106 tonnes of platinum and palladium in 2020 and between 105 and 115 tonnes for 2021 to 2022, according to a November 2019 presentation.
Russian palladium output is unlikely to expand meaningfully until Norilsk's South Cluster project ramps up, according to a Jan. 13 note from James Steel, HSBC's chief precious metals analyst. The project is on schedule to begin ramping up in 2021 to 2022 but is not expected to reach full capacity until 2027, the company said in November 2019.
As such, Steel outlined a palladium deficit of 540,000 ounces in 2020, rising to 589,000 ounces in 2021, citing limited prospects for greater mine supply and adding that rising recycling rates are unlikely to meet the deficit.
Norilsk's Arctic Palladium joint venture with Russian Platinum LLC lies at the heart of its long-term plans to increase PGM production. The project aims to bring together three licenses south of the city of Norilsk to create the world's largest greenfield PGM cluster.
However, the Arctic Palladium project has yet to be approved, and Norilsk already plans to more than double capital expenditure — at the expense of dividends and debt — compared to 2018 to fund major growth and environmental projects.
Norilsk's shares have risen in lockstep with palladium's buoyant price, hitting new highs and returning 52% over the year to Jan. 15. Its shares closed Jan. 17 in Moscow at 21,524 Russian rubles apiece.
As of Jan. 16, US$1 was equivalent to 61.66 Russian rubles.