Analyzing Palladium Price Drivers

If you’re considering trading palladium (PA), it’s helpful to understand what is likely driving palladium prices. While palladium is traded on the bullion market as a precious metal identified by the ticker symbol PA, it is highly sought after in a number of industries, principally the automotive industry, making it an industrial commodity.

Palladium has a history of price volatility. For example, it fluctuated between as low as US$1,700 and as high as US$3,000 per troy ounce in 2022. But what causes prices to rise and fall? This Plus500 article will examine the market forces influencing palladium prices, particularly supply and demand.

Fundamental Driver: Supply and Demand

Although palladium is traded on bullion markets, it’s primarily used as an industrial commodity. This means its value is significantly influenced by supply and demand dynamics.

As an industrial commodity, palladium is used in various industries, and its price is directly linked to the level of its industrial usage. When industries demand more palladium and the supply is limited, prices rise. Conversely, if industries require less palladium or if there is an oversupply, prices drop.

Palladium Supply

The vast majority of palladium comes from just four countries: South Africa, Russia, Canada, and the United States. This concentration of supply highlights potential vulnerabilities within the global palladium supply chain.

In 2022, the production of palladium was 210 metric tons worldwide. Russia produced around 88 metric tons of palladium, and South Africa produced 80, compared to 15 and 11 metric tons from Canada and the United States, respectively. Consequently, South Africa and Russia's economic and political conditions can significantly impact palladium prices.

For instance, the onset of the war in Ukraine and fears that sanctions on Russian exports would limit access to palladium were key driving factors in the increase in palladium prices at the beginning of 2022. This led to a historic peak of palladium prices of over $3400 in March of 2022.

In 2023, palladium prices fluctuated due to various factors. The metal faced headwinds as automotive demand shifted to platinum despite having similar uses. Retail investment in palladium contracted, and manufacturers restructured their supply chains to decrease reliance on Russia. These dynamics influenced the price trajectory of palladium throughout the year.

The palladium supply faces significant restraints due to inadequate infrastructure in the two major producing countries, Russia and South Africa. Consequently, the output can lack consistency.

A secondary source of palladium stems from the recycling of catalytic converters, which play a crucial role in vehicles' emission control systems. As vehicles age and are taken out of commission, their catalytic converters are often salvaged and recycled to extract precious metals like palladium.

Monitoring geopolitical factors that affect palladium-producing regions, along with trends in recycling rates and technological developments in recycling processes, is essential for understanding the likely dynamics of the palladium market and assessing its future supply outlook.

Palladium Demand

While you’ll find palladium accessories at specialist jewelers, the major demand for palladium comes from the automotive industry, consuming almost 82% of the market’s palladium in 2022. Specifically, palladium is used in catalytic converters installed in both fossil fuel and hybrid vehicles to neutralize harmful toxins in the exhaust. Therefore, demand for palladium is directly linked to the health of the automotive industry.

Demand, and in turn, the price of palladium, generally rises when there is high demand for vehicles and government policies regulating exhaust fumes that drive demand for catalytic converters. Recent rises in demand for palladium can be linked with China, the world’s largest automotive market, implementing stringent emissions standards for new vehicles.

Forecasters predict that as demand for traditional cars is replaced by demand for electric vehicles, which do not have catalytic converters, demand for palladium will decrease. Palladium is also used in the medical, dental, electronics, and photography industries, but its use in these industries is not likely to replace the high demand from the automotive industry.

Understanding Palladium Price Drivers

If you intend to trade palladium, it’s important to understand the supply and demand factors that influence its price and the market forces that can push prices up or down.

Most palladium is mined in South Africa and Russia, which means that geopolitical events that impact these regions can have a significant impact on the price of palladium.

The principal use of palladium in 2024 is in fossil fuel and hybrid vehicles, so the health of the automotive industry and the pace of transition to electric vehicles are the key drivers on the demand side.

Understanding and monitoring these factors can help you better predict potential movements in palladium prices.

Palladium Price FAQs

Why is palladium down in 2024?

The price has been on a steady decline since early 2022 until now (January 2024). Palladium demand is currently strong, which should be encouraging healthy prices.

Prices increased due to concerns about losing access to Russian-supplied palladium, which makes up approximately two-fifths of the global palladium supply, because of the war in Ukraine. While the war continues, Russia also continues to export palladium without sanctions.

Moreover, high palladium prices led some automotive producers to switch to more affordable platinum, which could decrease demand.

Why is palladium so expensive compared to silver?

While silver is arguably more highly valued than palladium as a precious metal and has more industrial applications, it’s significantly less expensive than palladium because it is more abundant and, therefore, more available. This also leaves the silver market more liquid than palladium.

How does the automotive industry affect palladium prices?

The automotive industry currently consumes around 80% of all palladium each year, which means that the health of the automotive industry is critical to the cost of palladium.

However, while palladium is used in fossil fuel and hybrid cars with catalytic converters to limit exhaust toxins, fully electric vehicles do not need catalytic converters and they produce zero emissions. This means that as electric cars continue to absorb a large portion of the automotive market, there may be a tipping point where palladium is no longer as vital.

How does market speculation affect palladium prices?

Speculators trading in palladium futures and derivatives can cause short-term price volatility. Speculative buying can drive prices up rapidly, while selling can lead to sharp declines. While these tend to be rapid responses, long-term market movements are more closely linked with supply and demand and concerns about broader geopolitical events, such as the fear of palladium shortages at the start of the war in Ukraine.