The metal is more expensive than gold but technological change could tarnish its lustre
John Gapper
The other night at a dinner party in London, talk turned to how one of the couples had just been robbed of a precious metal. The target was not jewellery but the palladium in the catalytic converter of their hybrid car — the vehicle had been jacked and the device sawn off.
Criminals respond to markets as surely as everyone else and the theft of converters to strip for palladium, platinum and rhodium has become commonplace. As palladium has overtaken gold to become the most valuable precious metal, 5g of the silver-white element in some converters is worth £170. Who knew that a car exhaust could be so desirable?
When the metal you drive is worth more than the metal you wear, something odd is going on.
The rise in the price of palladium and fall in the price of platinum has nothing to do with vanity. Sales of diesel cars, which use platinum in catalytic converters, sagged following the Volkswagen emissions scandal; drivers have turned to petrol vehicles, which use palladium.
The volatility of “technology metals” in devices from catalytic converters to phones and batteries is exacerbated by scarcity: every shift in technology leads to big price swings. Gold can also be volatile but there is more of it, thanks to the breadth of demand from central banks, investors and married couples. Palladium and rhodium producers ought to sell more jewellery.
The rarity of elements such as palladium is not immutable — it is possible to uncover more. Aluminium was once so scarce that it was an act of symbolic extravagance to put a pyramid of it at the top of the Washington Monument in 1886 as a lightning conductor. As with nickel, which was scarce before the invention of stainless steel, demand can bring forth supply.
The plentiful supply of gold from many mines and an excess of speculative investment may be easing. Pained investors want gold companies to amalgamate and slim production: Newmont’s $10bn deal to acquire Goldcorp last week was accompanied by promises of greater discipline. Demand has revived and gold prices have risen after a period in the doldrums.
Buyers of platinum group metals, including palladium and rhodium, should be so lucky. It is hard to obtain palladium and Norilsk Nickel, the Russian metals group led by Vladimir Potanin, has not made it easier. Nornickel produces about 40 per cent of the world’s palladium (the metal is mined as a byproduct of nickel and platinum) and keeps supplies tight.
Mr Potanin has relaxed his grip slightly — Nornickel is now investing $12bn to increase its output of commercial metals 25 per cent by 2025. He also plans to create the world’s largest platinum group cluster in Siberia but is not in any hurry — the project is planned for the late 2020s.
One can see his point. The nickel price is far below its peak before the 2008 crisis and platinum has fallen since 2011. Nornickel and South African miners that supply palladium could gear up to meet today’s demand for catalytic converters, only to be caught out again.
The biggest risk is the transition to electric vehicles, which do not produce emissions or need converters. A gradual shift towards electric cars over decades, accompanied by tighter emissions standards in China, might sustain demand for palladium and platinum. A rapid change in consumer behaviour, encouraged by governments and carmakers such as Tesla, is perilous.
Warren Buffett, who specialises in investing for the long term, is placing a bet on electric. His company Berkshire Hathaway is discussing an agreement to extract $1.5bn of lithium each year from geothermal wells in California for use in vehicle batteries. Lithium is less scarce than palladium but the US still listed it last year as one of 35 minerals “vital to the nation’s security”.
This puts precious metals with narrow technological applications in a bind. Morgan Stanley estimates that catalytic converters accounted for 79 per cent of demand for palladium in 2016, making the metal vulnerable. Unlike gold, which is also bought by consumers (jewellery contributed 56 per cent of demand in the third quarter of 2018), it has nowhere else to turn.
Palladium producers can learn from the diamond industry, which has for decades cultivated a market that spans jewellery and industry. The jewel was helped by the power of De Beers, which came up with the advertising slogan “A Diamond is Forever” in 1948. About 30 per cent of platinum is also turned into jewellery but palladium and rhodium are relatively neglected.
As De Beers broadens its reach further by producing synthetic diamonds, the palladium price keeps rising amid a supply shortage. In the short term, that is nicely profitable for Nornickel and others; in the long term it risks volatility, and ultimately obsolescence. In such a tight market, parts suppliers will invest to substitute cheaper metals for palladium in converters.
Geology matters, but platinum group producers have a choice of how rare they wish their metals to be. One day, my friends could drive to a dinner party in an electric vehicle, wearing palladium jewellery.
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