Why palladium is piping hot

“Dieselgate”, the emissions-testing scandal that has cost German car maker Volkswagen billions of dollars in fines, has produced a metallic winner and loser.

The price of palladium has accelerated, while its sister metal, platinum, remains stuck in neutral.

Both precious metals have properties that make them an important part of exhaust cleaning systems, which remove polluting gases such as nitrogen oxide (NOx). Platinum performs better in diesel engines and palladium best in petrol engines.

Falling demand for diesel-powered cars, especially in Europe, has helped the price of palladium rise by 26 per cent since the start of the year. Platinum is up by 2 per cent.

Over the past 18 months the share of the European car market taken by diesel cars has dropped from 50 per cent to 46 per cent, reducing demand for platinum.

At its latest price of $US862 an ounce palladium is close to a three-year high, whereas platinum at $US920/oz is down $US500/oz on where is was three years ago.

The palladium price was even higher two weeks ago, briefly touching a 15-year high of $US900/oz on a day when the platinum price was only just ahead at $US929/oz.

Those close prices on June 13 are in dramatic contrast to prices of nine years ago when there was a 10-to-1 gap in favour of platinum. It was commanding a price of more than $US2000/oz and palladium was selling for less than $US200/oz.

Most Australian investors, mainly because there are few ways of directly investing in either metal, have not been followers of the palladium versus platinum situation, with South Africa the home of platinum and Russia the dominant palladium producer.

Sending money to either country with their weak currencies and unwelcoming investment climate is not recommended by anyone. That only leaves open exchange-traded funds such as the London-quoted ETFS Metal Securities Physical Palladium fund (LON:PHPD) or one of several platinum funds, such as ETFS Physical Platinum Shares (NYSE:PPLT).

Over the past 12 months, as diesel car sales have stalled, the platinum fund has fallen from $US98.90 a unit to $US88.03. The palladium fund has risen from $US56 to $US82.22 over the same time, driven in part by speculative interest.

Can that trend continue? That's a question which is being asked in the small world of platinum and palladium traders. Because both metals face a long-term crisis in the form of electric-powered vehicles which do not emit noxious gases, but do use large amounts of new-age metals such a lithium, graphite and cobalt.

Since the start of the year palladium has risen from $US684/oz to $US862/oz. Platinum has crept up from $US906/oz to $US923/oz – not even keeping pace with the other two leading precious metals, silver and gold, which are up 3.6 per cent and 8.9 per cent respectively.

In time, platinum should resume its role as the leader of the two because it has an important secondary market that palladium does not have: jewellery.

There is another reason to believe that platinum is likely to recover lost ground, and that's because both metals can be used in diesel and petrol engines (along with another related metal, rhodium) with engine makers sometimes switching the mixture they use in coating exhaust-gas (catalytic) converters when the price of one rises too high.

Reliability of supply is another issue for carmakers, and while South Africa often has industrial problems in its mines there is greater concern in dealing with Russia, which has been known to use its resource exports, especially natural gas, as a commercial weapon.

Historic price trends indicate that the next move in the platinum v palladium market is likely to be a recovery in platinum, especially as the threat of trouble in the South African mining industry boils over as it did five years ago when 34 striking miners were killed while protesting poor pay and working conditions.

The same problems remain in South Africa's platinum mines today, compounded by the relatively low platinum price. That is pressuring the major producers of the metal, such as Anglo American Platinum, Lonmin and Impala Platinum, which argue they cannot afford to pay more while the platinum price is low.

The recent burning of a bus used to ferry workers from the townships to the mines is being seen as an early warning that platinum production could be curtailed by industrial action.

Losing supplies of freshly mined platinum should, in theory, lift the price of that metal. However, whether it can reopen its historic 10-to-1 lead on palladium seems unlikely because palladium supplies from Russia, which supplies 40 per cent of the world's palladium, are also under pressure.

The specialist precious metal trading company, Johnson Matthey, estimates that Russian palladium supplies this year will be 3 per cent less than last year, leaving the global palladium market with a 24.4 tonne supply deficit.

Which country represents the greater risk is a question no-one can answer, with South African platinum mines under employee and government pressure, whereas Russian palladium supplies are as unfathomable as the country itself.

But, if palladium keeps rising and platinum does not, then vehicle makers will adjust the coating they apply to exhaust systems and use more platinum because it is relatively cheaper.

A fine place for speculators with money to burn, the platinum versus palladium game is not for the risk averse – but it is interesting to watch.