Palladium-tracking ETFs, such as the ETFS Physical Palladium (LON: PHPD), are amongst the top performing exchange-traded funds over the past month to 26 June 2017, as the metal’s price has jumped 19% over this period. The strong month continues the run of good performance for Palladium which has risen 57% over the past year.
The majority of Palladium is mined in South Africa and Russia. The metal is closely linked to the fortunes of the global car market as some 80% of total palladium production is used in the production of catalytic converters to reduce harmful emissions in combustion engines. A greater proportion platinum is used in the production of petrol engines than diesel engines, which use a higher proportion of sister metal platinum.
The recent price rise seen in palladium has pushed the spread between palladium and platinum to its lowest level for 15 years (see graph below). “Consumer preferences have tilted towards petrol vehicles away from diesel and that accounts for the rise in palladium demand relative to platinum demand,” said Nitish Shah, director, commodity strategist at ETF Securities.
Palladium is benefiting from tighter global emissions standards, as well as a shift in consumer sentiment away from diesel engines following heightened awareness about the levels of pollutants that these engines produce compounded by the scandal involving diesel engines at Volkswagen. Major European cities including Paris, Munich, Oslo, Madrid and Athens have introduced, or are planning to introduce, bans or higher taxes on the vehicles.
Palladium remains a relatively small market, making the price vulnerable to high volatility caused by speculation. “Strong speculative demand, especially from Asia, has tightened conditions so much that there is anecdotal evidence of difficulty obtaining the metal in the spot market,” said Shah. Demand for the metal has outstripped supply for the last six years, reducing world inventories to levels last seen in 2003.
The question now on investors’ minds is can the recent rally continue and will the new norm be palladium costing more than platinum? Shah is cautious. “With speculative positioning in palladium looking stretched, we believe there could be better entry points into the metal once it becomes less of a crowded trade. Palladium’s medium term fundamentals remain strong, but we think the recent rally looks over-done and fuelled by speculation.”
There is also some evidence that car sales in important markets are softening. In the US, a large petrol car market, auto sales have contracted in 2017 and a similar story is being seen in China. And in the long term, the debate surrounding palladium versus platinum in catalytic converters could be largely academic as electric vehicles become more widespread.
PHPD has AUM of $111m with a management expense ratio of 0.49%.