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A reverse in platinum-for-palladium substitution and new applications of palladium: factors in favor of the palladium market growth

05 february 2024

The substitution of palladium with platinum in gasoline vehicles is a tailwind for platinum producers and a nightmare for palladium producers such as Norilsk Nickel and Sibanye-Stillwater. It is doubly disappointing that this is happening amid the growing vehicle electrification, which is reducing the interest in internal combustion engines (ICE) vehicles that use over 80% of palladium supply. Now that the difference in the price for an ounce of palladium and platinum has dropped to a minimum, a reverse substitution is quite possible, Norilsk Nickel believes.

In addition, the company does not rule out a short squeeze next year amid an excess of short positions, a continuing shortage of metal and a badly needed transition to an inventory replenishment cycle. Long-term demand for palladium can support its expanded use in renewable power generation and chemical industry, Norilsk Nickel hopes as the company develops new products in these sectors.

Reverse substitution

Palladium is better suited than platinum for use in gasoline engines’ exhaust gas converters. But the higher price for palladium and concerns about the fact that 40% of its production is in Russia contributed to the substitution of platinum (that has many similar characteristics) for this metal. As estimated by the World Platinum Investment Council (WPIC), the substitution of platinum for palladium was expected to rise by 50% to 540 thousand ounces (about 17 tons) in 2023 after an 80-percent increase a year earlier. But now, some automakers have already begun to accept obligations regarding the reverse substitution of these metals, with palladium being used instead of platinum, notes Norilsk Nickel.

“[Chinese] automakers say that their plans for the next 2 years include the reverse substitution of palladium-for-platinum in gasoline engines. We see that not only the tougher environmental requirements result in increased vehicle loads, but also the price spread between the metals determines now the reverse substitution, which should have a positive effect on demand [of palladium],” Denis Sharypin, director of the Norilsk Nickel marketing department, said at the SberCIB webinar held in December.

The substitution process has reached its peak, says Norilsk Nickel’s report on the platinum group metals (PGMs) market, and over the years, the platinum content in ICE vehicles will decrease substantially. The reintroduction of palladium into autocatalysts will occur at a faster pace than the initial substitution of platinum-for-palladium, since palladium-dominant autocatalyst technology is familiar to the stakeholders, the company notes.

There is also the opposite opinion. Citi believes that despite the platinum shortage, catalyst manufacturers will not return to using palladium. In the long term, the main challenge for automakers will be the transition to BEVs (battery electric vehicles), but not the investment in the shrinking ICE vehicle market.

Another driver in support of palladium could be the removal of restrictions on engine temperature according to the basic Euro 7 standard (expected to be adopted in mid-2025), says the director of the Norilsk Nickel department. In this case, “[petrol vehicles’ catalysts in the EU] will have to be converted back to palladium” because platinum is less stable at high temperatures. The previous factor of the demand growth also continues to have effect that is the increased total loadings of the PGMs into autocatalysts due to environmental requirement toughening.

Under the influence of residual replacement of palladium and lower consumption of this metal in electronics, demand for palladium in 2023 was expected to decrease by 1% (by 100,000 ounces) compared to the previous year, according to Norilsk Nickel. Primary palladium production was expected to decrease by 2% to 6.4 mn ounces, and secondary palladium production - by 15% to 2.2 mn ounces. As a result, the market was expected to have a shortage of 900,000 ounces, which was expected to be covered by previously accumulated reserves. In 2024, the shortage will decrease to 400,000 ounces amid an expected recovery in recycling volumes.

Price for palladium and the cost achieved by manufacturers

The price of palladium that approached $3,000 per ounce in the spring of 2022, fell to around $1,000 per ounce by mid-December 2023. In addition to general macroeconomic reasons, the weakening of the price was caused by the optimization of autocatalyst manufacturers’ inventories and sales by investors. Major automotive manufacturers and catalyst manufacturers accumulated the strategic metal for their own use as they were worried about the stability of its supplies from Russia, but when their fears dissipated, the automakers made no new purchases.

A price recovery is possible in the first half of next year when the market can evaluate the operational and financial problems experienced by major platinum group metals (PGM) producers from South Africa, Sharypin believes. The second half of 2023 was difficult for them, largely due to the sharp decline in the price of rhodium that accounts for an important part of their revenues. This metal coming to the market mainly from South Africa, brought 40 to 45 percent of revenue some time ago when its price was about $30,000 per ounce ($4,200 now). The price of platinum is stagnating, despite the expectations associated with its role in the hydrogen energy generation.

Another major producer, US-based Sibanye-Stillwater, producing mainly palladium, is also unprofitable taking into account current metal prices, with production costs of $1,700 to $1,800 per ounce. Late in the year, Stillwater announced it would cut some of its workforce at its mine in Montana as part of cost-cutting efforts during a period of low PGM prices.

The Norilsk Nickel representative believes that closer to the summer of next year, the situation can result in shutting down a number of unprofitable production facilities.

“When they release their reports in January-February, the market will see a reaction from the production sector that the companies are suffering losses, this should certainly support prices [for PGMs],” he says.

There are difficulties with the supply of PGMs due to structural underinvestment in the South African platinum industry after the 2008 crisis and systemic problems with power supplies, Sharypin emphasizes. Significant production disruptions due to power outages were expected this year, but the situation was mitigated by strong winds in the Cape Town area, which facilitated record levels of wind power generation. The platinum production is expected to decline by 15 to 20 tons over the next two years from 120 tons this year - even in case of rising platinum prices. It will take at least 10 years to change this trend, the Norilsk Nickel representative believes.

Slowdown in vehicle electrification rate

While ICE vehicles dominate the production pattern (accounting for 76 to 78 mn out of 86 mn units), the trend towards vehicle electrification has eroded the confidence in prospects for palladium. In less than 5 years, the electric vehicle market has grown by 5 times to 10 mn vehicles. Sharypin states that the market cannot keep on growing at this pace. There is a slowdown in the rate of growth in the EU and the United States due to a limited charging infrastructure and increased competition with China where batteries for electric vehicles are mainly produced. Chinese EVs are 30% cheaper than their Western counterparts, so European and US automakers take an increasingly cautious stand on the vehicle electrification goals.

For China, this industry is a strategic one, however, subsidies for the purchase of EVs are reducing. There are also technical limitations because the capacity of existing types of batteries decreases in winter and besides, they are inconvenient for long-distance traveling. As a result, plug-in hybrid electric vehicles (PHEVs) using both nickel for their battery and palladium in the autocatalyst showed stronger growth in China than classic EVs, the Norilsk Nickel representative noted. The PHEVs now account for 10% of the Chinese market, and electric vehicles account for 20%.

“Until mass-produced electric cars are made comparable to the ICE ones, we will not see high pace of growth in production and sales,” says the director of the Norilsk Nickel department.

New applications of palladium

Norilsk Nickel expects to gradually compensate for the decline in demand for palladium in autocatalysts by introducing new products in the hydrogen energy, new chemistry, and solar power to the global market. Norilsk Nickel intends to invest over $100 mn over 5 to 10 years in the development of new palladium-based products.

Dmitry Izotov, head of new product development at Norilsk Nickel, said that the projects from the Norilsk Nickel portfolio would increase the demand for palladium by 40 tons by 2030, stimulating demand and prices for this precious metal. This will mitigate the effect of the reduced demand for autocatalysts, which is estimated by the market at 15 tons. “Our task is to fill this potential surplus and create a reserve for further increase in the demand for the product,” he says.

Currently, the global demand for palladium is about 290 tons (200 tons is for primary palladium and 90 tons - for recycled metal), 240 tons of which are used for the autocatalyst production. Norilsk Nickel produces over 40% of the world’s palladium, which amounts to about 85 tons.

Palladium, as Norilsk Nickel notes, can be a more effective alternative to other PGMs or other metals (in solar energy, it is possible to replace silicon, tellurium and copper). During testing, the substitution of palladium for 30% of iridium in catalysts for electrolyzers ensured a threefold increase in catalyst activity, and the replacement of 25% platinum in catalysts used for fuel cells ensured a twofold increase in catalyst activity, Izotov noted.

Norilsk Nickel’s portfolio now includes about 20 palladium-based products at various stages of development. A number of them are related to hydrogen energy where palladium is used at every stage of the production chain in the form of catalysts or membranes. During the first quarter of 2024, these samples will undergo pilot testing by some Asian partners and will be sent to end users for testing as part of a full-scale production plant. The company expects to make finished products in late 2024.

Fundamental researches are also underway, including in the field of superconductors and supercapacitors for energy storing and transmission, and they are aimed at “finding a market as large as autocatalysts are now,” the top manager said.

Sergey Bondarenko for Rough&Polished