On the 9th January 2019, Palladium prices rose by 2% to a record high of $1,337 and has continued to rise to $1,518 by close of trade on the 25th February, 2019, amidst low precious metal prices. Palladium is currently priced higher than gold and platinum which both closed at $1,331.05 and $856 respectively on the 25th February, 2019.
We cannot fail to mention that Palladium is a member of the Platinum Group Metals (PGMs) and the most important commercially. It is critical in the use of Catalytic Converters, a pollution-control device found in cars and trucks. A catalytic converter is an emission control device that converts harmful gases such as hydrocarbons and carbon monoxide to harmless gases by catalyzing a redox reaction. Palladium is also used as a catalyst for bulk chemical production, petroleum refining, computer hard disks and thermocouples, dental restorative materials (silver-palladium alloys), amongst others. About 80% of palladium demand is from the auto catalyst sector.
Although the record high on the 9th of January, 2019 was merely due to the announcement by a Chinese official stating that the Chinese government is considering policies that would aid the domestic consumption of United States’ automobiles, we believe that Palladium might just be the next gold. Would this be an opportunity for the Nigerian economy through the Nigerian Commodities Market?
The Commodities Market which is simply a market, a medium for connecting buyers and sellers of commodities. Our focus is however, primarily on promoting the formal or organized market such as commodity exchanges, which provide a formal and more structured mechanism for trading in designated commodities.
It is also believed that such markets provide significant value addition to economies; a reason why countries make concerted efforts to develop them. This opinion was reinforced by Chuck Kowalskiwho observed that “it’s unlikely that the United States would have experienced as much economic growth in the last 100 years as it has without them (commodity exchanges).’’
Stricter pollution regulations around the world has made production of catalytic converters a top priority for car makers. A positive sales outlook for the automotive industry is an indicator of a prospective rise in demand for palladium as there would be a rise in production of catalytic converters.
A quick look into HIS Markit Light Vehicle sales forecast, global light vehicle sales are projected to reach about 110 million vehicles by 2025. From its current 95 million, this is an impressive 1.9% Compound Annual Growth rate (CAGR) in vehicle sales between 2019 – 2025. This estimate rides on the back of strong sales in emerging markets.
“The prospect of significant growth in Chinese palladium loadings has moved closer, because it looks increasingly likely that some cities and provinces will implement” new regulations early, Peter Duncan, the general manager of market research at U.K.-based Matthey, said in the report. “This could happen as early as next year and would result in a double-digit increase in palladium consumption on Chinese cars”. With the rise in usage by various governments especially the Chinese government, tighter regulations on vehicle pollution which forces car makers to increase the amount of palladium used, amongst other things, have led to increased demand which does not commensurate with the current global supply.
Our Take
If Palladium has climbed up more than 600% since its 10-year low (the 2008 financial crisis), we are of the view that there is a further upside for this commodity. This strong upward potential may only be dampened by the increase in production of electric cars which may largely not need the metal for its production. However, we may not witness this for another decade or so.
The demand for “Platinum” from investors, as holdings in exchange-traded products collectively surpassed 1.5 million oz. in 2011 since the first Platinum ETF was launched in 2007, following this pattern, investment demand could be a significant surprise factor in driving Palladium prices higher.
We would be open to a structure by the Nigerian Commodities Exchange (“NCX”) where palladium and other metals could be traded to meet investor’s demands and to promote economic growth.
Nancy Ezeonugo & ABISINUOLA DAVID-OLUSA
Ezeonugo is a Legal Practitioner and an Investment Banker and David-Olusa is an Investment Banker with Planet Capital Limited.
