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Chip crisis: Palladium price squeezed by falling auto output

By Angelique Ruzicka


A stack of palladium ingots
Palladium has come down in price since the conflict in Ukraine began – Photo: Shutterstock

The outlook for platinum group metals (PGM) supply and demand is highly uncertain, according to a report published by Johnson Matthey this month.

The report highlights that PGM price movements during the first quarter of this year largely reflected the degree of exposure to Russian supply, which has been affected by the country’s conflict with Ukraine. Palladium, it added, has suffered the most.

Palladium has also been affected by falling auto output. So, what recovery – if any – can investors expect to see in 2022?

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Palladium prices have been falling

Palladium highs and lows

One thing palladium investors can certainly expect is more volatility. Indeed, it’s something they’re very familiar with, given the performance of palladium over the past 12 months.

A shortage of liquidity drove palladium to a peak of $3,000 in May 2021, but the price plunged below $1,600 in December, following a strong recovery in the supply of the precious metal from South Africa.

It hit a peak again  in March, reaching $3,288 (£2,646.27) per troy ounce, only to come plunging back down again in April, and at the time of writing is trading at $1,664.46.

The reasons behind palladium’s highs and lows are many and varied.

Ukraine conflict

The war between Russia and Ukraine has hurt supplies of palladium, particularly in Russia – the world’s largest palladium supplier.

Johnson Matthey’s report highlights that in 2021, around 28% of combined primary and secondary palladium supplies came from Russia.

It adds: “While Russia is not a major PGM consumer, there are wider risks to PGM demand, with the crisis expected to exacerbate existing difficulties in supply chains, augment inflation and depress economic growth.”

Initially, sanctions imposed on Russia did not affect PGM producers, but that has now changed. Supply issues are set to be exacerbated even further now that Russian palladium and platinum exports to the UK have been slapped with a 35% tariff by the UK government.

The conflict has also created supply chain challenges for the auto industry, which resulted in some German automakers halting production in March due to shortages of wiring harnesses, which are made in Ukraine.

China shut down

Covid-19 has also continued to cause problems. China resorted to stringent lockdown measures during March and April, which resulted in the temporary closure of some vehicle assembly plants – adding to the consumer demand.

According to Heraeus’ Precious Metals Forecast 2022, light vehicle sales fell 12% year-on-year in March as a result of the lockdown in Shenzhen.

Fears of a drop in Chinese demand have been a major factor in platinum and palladium price declines in recent weeks. There’s now concern that if lockdown measures tighten and spread through the rest of the country, there will be further downward pressure on PGMs, and production in the auto industry will also be negatively affected.

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The ongoing surge in Omicron infections in China has caused temporary interruptions at semiconductor manufacturers, while there are concerns that an interruption in supplies of neon gas from Ukraine might hit chip production from mid-year,” warns the Johnson Matthey report.

“Any unscheduled semiconductor plant downtime, or delays in bringing on planned new foundry capacity, would create renewed downside risks for car and truck output.”

Is there value to be found?

So where might bullish PGM investors turn in 2022 to find value?

It’s possible that South Africa will fill in the gap left by Russian PGMs. The country’s president, Cyril Ramaphosa, has recently said the country is ready to take advantage of the shift in demand from Russian PGMs to other countries as a result of western sanctions.

If the shift to South Africa carries through, winners could include PGM producers like Anglo American Platinum (AMSJ) and Impala Platinum (IMPUY). The big loser will be Russia’s Norilsk Nickel – one of the largest producers of platinum, palladium and gold in the world.

But there are still many challenges ahead for South African PGM miners.

Maintenance and strikes

South Africa still has a few of its own issues to iron out which – if no quick solution is found – could adversely affect the amount of palladium mined. These include potential strikes, plant maintenance and its ongoing loadshedding (electricity supply disruption).

When it comes to maintenance, for instance, Johnson Matthey’s report points out that South Africa’s largest PGM producers, Anglo and Impala, are both undertaking major furnace overhauls this year.

It adds, however: “While processing plant maintenance does not affect the volume of PGM mined, it usually results in a temporary increase in work-in-progress inventories, which may take some time to draw down. As a result, both companies have reduced their production guidance for their 2022 financial years.

“Although refined PGM output is set to fall, we expect underlying mine production in Southern Africa − including PGM mined in Zimbabwe and refined in South Africa − to be broadly stable this year, assuming there is no serious labour disruption.”

Consumer demand reduced?

While all these factors have had an impact on PGM supply, they are unlikely to negatively affect consumer demand for vehicles – at least for now. The Johnson Matthey report highlights that this is supported by an increase in used car prices and the current long lead times for new orders.

It adds that further conflict in Europe and higher inflation will not quell consumer demand, and that these factors are “unlikely to have a significant impact on global vehicle sales in 2022”.

“Our current forecast is for an increase in automotive PGM consumption this year, although much will depend on how the production picture evolves,” the report says.

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