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Why is Platinum So Much Cheaper than Palladium?

Why is Platinum So Much Cheaper than Palladium?

The Soviet 25-rouble commemorative palladium coin is a rare example of the monetary usage of palladium.
Figure data from: Macrotrends Data Download

Introduction:

Platinum and Palladium are mainly used in the three-way catalyst in the exhaust system of gasoline vehicles as an automobile exhaust catalyst. Therefore, the demand for platinum and palladium mainly come from gasoline vehicles. The consumption of platinum, palladium per vehicle and the production and sales of gasoline vehicles will be the main factors affecting the demand for platinum and palladium. 

Palladium is a cheaper alternative to platinum. The graph above shows the spot price for platinum and palladium from Feb.2015 to July.2022. It illustrates the prices of these two metals are highly correlated, keeping almost the same trend. Statistically, the correlation coefficient between the two prices is above 0.7.

The auto industry consumes about 85% of palladium supply, but automakers may turn to cheaper platinum due to cost concerns. 

Period: May.2021 to December.2021

Based on environmental requirements, U.S. light-duty vehicle Tier 3 emission standards from 2017 to 2025. EPA Tier 3 standards implemented in phases. As emission standards become stricter each year, automotive engine manufacturers need to reduce the use of platinum and palladium for this purpose. This has led to a decline in demand for platinum and palladium. Together with the sales of new energy vehicles have increased significantly in recent years, from May. 2021 to December.2021, the price for Platinum and Palladium decreased significantly. People were shifting their investment focus to sectors related to new energy vehicles and clean energy.From a market perspective, the investment sentiment for Platinum and Palladium are low during this period.

Period: Januanry.2022 to May.2022

The situation will change by 2022. The war between Russia and Ukraine happened at the beginning of the year. Due to market expectation about restrictions on Russian palladium exports (Russia accounts for 40% of total global palladium production), the price of Platinum and Palladium dramatically increased from January to May. In mid-March, prices of both metals reached annual peaks. As prices react to market expectations, the rise in these months became strongly influenced by market anticipatory sentiment. 

Period: May.2022 to July.2022

However, there are indications that Russian palladium exports will not be hit as hard as initially thought. Russia’s MMC Norilsk Nickel PJSC (the world’s largest palladium producer), claimed that they can re-route the cargo through other routes. Then, the price of palladium begins to retreat. In addition, the demand for these metals has fallen as many factories shut down in China because of the Covid-19 outbreak, this further led to lower prices of platinum and palladium. Also, factory shutdowns in China lead to shortages in car chip manufacturing. Therefore, the U.S. auto sales also fell in the second quarter. 

In conclusion, recently, these factors above have led to the decline of platinum and palladium prices. In addition, according to the News from Bloomberg on July 1st “Car Sales in the US Slow on Rising Sticker Prices and Scant Supplies”. Lastly, so I think there may still be downside risks to platinum and palladium prices in the near term.

Why is Platinum So Much Cheaper than Palladium?

Written by Tingjun Kang

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