Palladium’s Power

Palladium’s demand has seen a steady increase in recent years, owing in large part to its use in the automobile market as it relates to combustion engines. Platinum, on the other hand, is the most recent darling for speculators, owing in large part to its use in the electric vehicle market. 

Which is the better investment? Let’s discuss:

ted a scientific innovation that should be on your radar. Palladium’s next several years overall look likely to generate increased market demand.  

Auto / Combustion Engine Markets

The lion’s share of palladium is purchased to manufacture catalytic converters. Part of the exhaust system in cars, trucks, and buses, catalytic converters use palladium to convert toxins that can kill humans (e.g. carbon monoxide) into carbon dioxide and water. Wherever there’s an internal combustion engine in a country with modern emissions regulations, there’s a catalytic converter. 

We know consumer belt-tightening is coming out in global consumer reports. Macro data around the sector’s awful. Lots of layoffs, too. There’s no demand. There’s high inventories. One great way to play an economic downturn in the consumer automotive market is to count on car owners preferring to repair instead of buy a new one. Auto parts were my play back in 2017 when there was a glut of used cars. I see a chance to play it again. 

Owners of automotive fleets (in the public sector and private sector) will be similarly motivated in a downturn. City bus systems, funded by elected city council members who need to keep their seats, will replace bus parts instead of splurging for new buses. Trucking companies will replace parts instead of buying new trucks. Heavy construction companies will replace parts instead of purchasing new heavy machinery. Look no further than Caterpillar’s October 23 earnings report, where they missed EPS by $0.24 and missed on revenue. 

Palladium in Agritech Markets

Just because motor vehicles are the biggest palladium market doesn’t mean they are the only market. Like the catalytic converters invented to convert smokestack poisons in the 1950s and the combustion engine’s exhaust fumes in the 1970s, today’s applied researchers are figuring out how to convert toxic agritech waste products into safer waste products using catalytic converters. And where there’s catalytic converters there’s sure to be palladium.

Large companies like Google, sovereign wealth funds, and other heavy hitters have already made their moves and funded billion dollar agritech startups. Today’s agritech market is estimated at 5.3 Billion Euros for Africa alone, with expectations to hit a Trillion by 2030. And the USA as the largest agritech market globally, meaning it is even bigger. 

“Agriculture is the last of the large industries to really adopt new technologies and business models,” says Mr Perry. “In retail, there is Amazon, automotive has Tesla, transportation Uber and Lyft and there is Netflix in media. In every other large industry we can point to a new company that’s changing the way the business is done.”

As agriculture and biotechnology innovations come together, the agricultural byproducts left behind in the soil have been changing the land. In Houston, Texas, Rice University’s Nanotechnology Enabled Water Treatment (NEWT) Center is engineering catalysts to convert the toxins in agriculture water runoff. 

“Nitrates come mainly from agricultural runoff, which affects farming communities all over the world,” said Rice chemical engineer Michael Wong, the lead scientist on the study. “Nitrates are both an environmental problem and a health problem because they’re toxic.” 

At the environmental level nitrates add toxins to the land, water, and air. At the human body level, there is reason to believe nitrates may also be carcinogenic, though more research is needed to confirm. Regardless, investors have already been convinced by the facts available today to build a new era of catalytic converters. Hazardous farming byproducts like nitrates are on the rise due to technical innovation, productivity increases, and changes in land use. More palladium demand grows as agritech grows. 

Palladium in Smog Treatment 

It’s not just agricultural runoff that’s motivating a new palladium market. Smog, too! Remember how bad Los Angeles’ smog used to be? That turnaround was an American solution using catalytic converters. As you’re probably heard, smog is now a major problem in Asia. People and cities are suffering.

In January of this year, the President of Pakistan declared air quality a top priority as hazardous smog necessitated a two-month shutdown of factories in twelve districts, including Lahore, for public safety. Last November Lahore’s High Court ordered the provincial government to implement modern technological solutions currently in use in many Western countries, as Pakistan regulations did not previously require catalytic converters in automobiles and smokestacks. Those relatively little costs had an impact on wallets. Now, things are so bad they are losing money because their factories cannot operate. An era of regulation has begun in Pakistan. Catalytic converters are being phased in to support the people and the industrial operations of Pakistan, and they have even started fining the worst polluters. The economic incentives have been flipped. Enter, palladium!

Because smog treatment is preventative in nature, it’s the same strategies we’ve been using (smokestack converters, combustion engine converters), but now with a major motivation for real volume increases in catalytic converters. This pain has a market solution.

China’s situation is similar to Pakistan but they have gone further. Having recognized their smog problem, they have been taking action for a while now. A 2019 United Nations report found that China reduced its smog particulate by 35% in Beijing and 25% in the surrounding area from 2013 to 2017. “No other region or city on the planet has achieved such a feat,” the report praises. Their emissions standards have been tightened which means more palladium will be required.  

This didn’t happen by accident, of course. It was the result of an enormous investment of time, resources and political will, including President Xi’s vision of an Ecological Civilization, “wars on pollution control” launched by the State Council, a substantially revamped Air Quality Law, new penalties for noncompliance, local clean air action plans, and Beijing’s own cutting-edge initiatives.

Other nations have not moved forward, but certainly have reason to. Reuters is currently reporting that this week’s winter smog in New Delhi, India is “like smoking 50 cigarettes a day.” Flights have been delayed due to poor visibility and the smog emergency has required the cancellation of school. The BBC reports context for how the smog became what it is today, citing widespread famine in the late 1960s that drove a major effort to update farming to mid-century practices. Along with the food surge came a farm pollution surge. Presently, the government is not acting. How long will they hold out on regulations?  With the new land runoff catalytic converters coming in agritech, will that be the right first step for India?  

United Nations report from China highlights these lessons while encouraging hesitant countries to move forward for their own sake:

• Heavy industrialization leaves a long legacy of tainted water, soil and air. Diversifying one’s domestic economy is a wise move at any state of development.
• Vehicle emission control is of key importance for clean air. Especially, old cars and trucks disproportionately contribute to urban air pollution.
• Private enterprises have little incentive to install emission controls until they are mandated to do so. Governments should consider other ways to induce companies to do the right thing. 
• Air pollution crosses every jurisdictional boundary: international, national, regional and local. Cooperation across borders is critical to forging effective and lasting solutions. 

This past year has also seen a dramatic increase in public demonstrations for climate issues. Swedish teenager Greta Thunberg’s School Strike for Climate, also known as “Fridays for the Future,” now has 161 countries participating in a youth-led movement. The pressure isn’t just coming from single-issue problems like smog or land toxins, but from citizens demanding widespread climate solutions. Since the government has historically been the driver of catalytic converter purchases (by requiring their use via regulation) protest is another warning sign that regulation is coming. That’s good for palladium holders.

Perhaps Palladium Returns to Chip innovation?

Here’s a long-term palladium bull case to keep in the back of your mind. Bloomberg reports that China is spending $29 Billion on microchip innovation. 

Now, currently there’s no evidence that they have chosen palladium to use in their semiconductor innovations. But palladium semiconductors can enable photocatalysis to directly, rather than preventatively, purify the air. As smog gets worse, especially in China, I now see a market-friendly path where China’s commitment to fighting smog aligns with their $29 Billion in chip innovation. More generally, semiconductors for consumer electronics (computers, phones, etc.) used palladium in the 1990s chip innovations. Much has been innovated in semis since then. It’s not a stretch to imagine there is reason to keep an eye on how they may use palladium for their modern chips in interesting ways.

Overall, palladium products are only going to increase moving forward. Long-term, demand is rising. That’s sure to make the bulls cheer.