Is The Rise In Palladium Telling Us The Semiconductor Shortage is Over?

Palladium is a platinum group metal that cleanses toxins from the environment. Gasoline-powered engines in automobiles require palladium in the catalytic converters. While quantities vary by make and model, an average standard catalytic converter contains around 3-7 grams of platinum, 2-7 grains of palladium, and 1-2 grams of rhodium. 

South Africa and Russia are by far the world’s leading palladium producers. In South Africa, palladium production is primary, while in Russia, the precious metal has been a byproduct of nickel output. About 85% of annual palladium production ends up in catalytic converters. According to Heraeus, a precious metals refiner and merchant, South Africa produced 2.685 million ounces of palladium in 2021, while Russian production was 2.35 million ounces. Total auto catalyst demand was 5.380 million ounces, of which 2.305 million ounces came from recycled converters. Therefore, the market depended on 3.075 million ounces of new supplies. While palladium demand comes from other industries, including jewelry, chemical, dental, electrical, and other industrial applications, autocatalysts are the metal’s primary demand vertical.

The Aberdeen Standard Physical Palladium Shares ETF product (PALL) tracks the metal’s price that trades on the CME’s NYMEX division in the futures market. 

Palladium fell as the demand declined because of the semiconductor shortage

The bull market in palladium began in early 2016 when the price traded to a low of below $470 per ounce. 

The chart highlights the rally that took palladium futures to a record high at the $3000 per ounce level in May 2021. 

Supply chain bottlenecks, labor shortages, and other pandemic-inspired factors caused a semiconductor shortage that interrupted automobile production in 2021. As fewer cars rolled off assembly lines, the demand for palladium for catalytic converters evaporated. The palladium price fell off the side of a bearish cliff, halving in value and reaching a bottom below $1550 per ounce in December 2021. 

The rally since the December low has been explosive

The collapse in the palladium futures market from May through December 2021 took the price to a bottom below the $1550 per ounce level.  

The chart illustrates the recovery that took palladium futures from $1549.40 in mid-December 2021 to nearly the $2370 level in late January. The midpoint between the May high and December low is at the $2,270 level. Palladium moved over to near that midpoint in an explosive move that tells us that the catalytic converter demand has returned. March palladium futures were at the $2250 level on February 7.

A sign the semiconductor shortage is over- The world’s leading producer faces a geopolitical threat

Palladium’s rise is a sign that the semiconductor shortage has eased, and cars are now rolling off assembly lines. The world’s leading semiconductor manufacturer is Taiwan Semiconductor (TSM). At $122.95 per share, TSM had a market cap of over $630 billion. The stock closed 2021 at the $120.31 level and was only slightly higher at $122.95 on February 7. However, TSM rose to a new all-time high at $145 in January, as chip prices increased and semiconductors became more available to consumers. 

Taiwan faces a political hornet’s nest of problems as China has increasingly pressured the country for reunification with the mainland. TSM has a 54% market share of global chip production. Any hostilities surrounding Taiwan could cause chip shortages to return with a vengeance as TSM supplies chips to Apple (AAPL), Intel (INTC), and Nvidia (NVDA). TSM and Samsung are the only companies capable of producing today’s most advanced 5-nanometer chips that are critical iPhone components. 

Geopolitics could impact the chip market in 2022 if China decides to force reunification upon the Taiwanese. 

Russia is a leading supplier- Geopolitics could push palladium to new all-time highs

Meanwhile, palladium is also a political metal as Russia has amassed over 100,000 troops along the Ukraine border. The US and Europe consider Ukraine Eastern Europe, while the Russians believe the country Western Russia. As tensions mount, an incursion or other hostilities could lead to export bans, sanctions, and blockades on both sides. In 2021, Russia supplied 2.35 million ounces of palladium. The palladium market would move into a severe deficit without those supplies, pushing the price into the stratosphere. While platinum and rhodium could substitute for palladium, Russia is also a leading producer of the other platinum group metals. 

The bottom line is war or even deteriorating relations with Russia could cause shortages in the palladium market, pushing the price above the May 2021 all-time high. 

PALL is the palladium ETF product

Palladium will be a highly political commodity in 2022. Geopolitical events stand to cause increased volatility in the palladium market and could impact flows of the metal worldwide. 

The most direct route for a risk position in palladium is via the physical market for bars and coins and the futures that trade on the CME’s NYMEX division. The Aberdeen Standard Physical Palladium Shares ETF product (PALL) offers an alternative as the ETF holds physical palladium bullion. At the $210 level on February 7, PALL had over $388 million in assets under management. The ETF trades an average of nearly 50,000 shares each day and charges a 0.60% management fee. 

Nearby March palladium futures rallied from $1531 on December 15 to $2,449.50 on January 31 or 60%. 

Over the same period, the PALL ETF moved from $143.06 to $227.53 per share or 59% s the ETF did an excellent job tracking the metal’s price. 

The recent rise in palladium is a clue that automobile manufacturing is returning as the semiconductor shortage eases. Chip stocks could benefit from an end to the pandemic-inspired semiconductor issues. Meanwhile, chips face geopolitical pressure from the tensions between Taiwan and China, and palladium shortages could develop if hostilities between Russia and NATO members break out over Ukraine. Palladium supplies could evaporate if Russia decides to ban exports when the demand from automobile manufacturers is getting back on track. 

The most recent trend in the palladium futures market is bullish, and a higher record high could be in the cards for 2022.