Palladium is at 26-year highs – is it time to call the top?
Palladium hit a 26-year high yesterday, so is it time to start thinking about shorting the precious metal?
The metal, mainly used in car exhausts to reduce polluting emissions, hit $US1328.80 an ounce yesterday as car makers demand more of the precious metal and supplies dwindle after mine closures.
By comparison gold, which is also on a run due to economic fears, recently peaked at $U1297.15 an ounce.
Canary Capital analyst Martin Duriska says palladium is a metal to watch and be ready for what he believes will be a long decline caused by electric vehicles (EVs).
“It’s going to be an absolutely amazing short in my mind, but if you’re a year too early you’ll lose everything, and if you’re a year too late you’ll miss the run,” he told Stockhead.
“A lot of combustion engines make up the vast majority of cars being sold today, but we know there is an EV car shift and that’s going to grow and take up more and more market share.”
‘Shorting’ is where instead of betting an investment will rise in the short or long term (also known as going ‘long’), you bet that it’ll fall. Investors do this by borrowing shares in the investment, selling them and buying them back at a lower price in order to return them to the owner.
Palladium is peaking. Why would it go down?
Palladium is a critical part of catalytic converters in internal combustion engines, which reduce dangerous car emissions.
The argument for a price decline is two-fold: the increasing adoption of EVs and a price-derived bump in recycling.
Cumulative EV sales hit 4 million in August last year and the 5 millionth sale is expected in March this year, says Bloomberg New Energy Finance.
Experts told the Financial Times in December sales of internal combustion cars may have peaked in 2018, after demand began to fall in the second half of the year.
Furthermore, China is demanding a sub-$US8000 EV for the mass market, which will help make them a viable alternative to internal combustion cars for mass buyers.
And in May, Bloomberg reported that in 2018 palladium consumption in vehicles was set to hit record levels, thanks to Chinese environmental regulations. But demand for new palladium was set to fall — due to recycling.
They picked recycled palladium to rise by 192,000 oz to 3.099m oz.
The other view
Podium Minerals boss Tom Stynes is hoping his company will become Australia’s first ‘PGM’ producer — platinum group metals which include platinum, palladium, ruthenium, rhodium, osmium and iridium.
“The palladium price is fairly straightforward. To me it’s really just fundamental supply and demand. Even though it’s just surpassed the gold price in recent weeks, it’s not an overnight sensation,” he told Stockhead.
“In the last three years it’s gone from half the gold price to surpassing it.”
Podium is one of 17 ASX companies with projects that include palladium.
The vast majority of production comes out of South Africa’s platinum mines as a by-product, or Russia, and a bit from Zimbabwe and North America.
And demand is being driven by increasing petrol and petrol-hybrid vehicle manufacturing which need catalytic converters, rather than diesel, and tightening global standards on emissions.
Mr Stynes says there’s no quick fix for bringing on more palladium production and recycling is already substantial at 30 per cent of supply.
Furthermore, if hydrogen fuel cells really do take off, palladium is a crucial element of those.
Watching the clock
If the big short is coming, picking the right moment will be critical.
Minerals market analyst Roskill believes 2022 is the year when EVs are going to take off.
In Australia, Senator Tim Storer, who is leading a Senate committee on EVs that’s due to report back at the end of January, believes EV pricing should start to come down from 2020.
Mr Duriska says keeping an eye on internal combustion vehicle sales could be an indicator when palladium is ripe to short. If 2018 really was the peak the time could be sooner than expected.
The miners are safe enough, because palladium is a happy by-product of projects looking for metals such as copper, gold or nickel. Mr Duriska is looking for muffler makers and palladium CFDs — contracts for difference — which directly mirror the metal.
Here’s a list of all ASX companies with palladium projects, courtesy of leading ASX data provider MakCorp