2023-09-25 05:04:30 ET
Summary
- abrdn Physical Palladium Shares ETF allows investors to track the dynamics of palladium without going into the precious metal.
- Palladium has a strong underlying demand from the automotive sector due to the tightening emission standards.
- Despite the recovery in vehicle registrations, I would rather Hold the shares of PALL, as the economic slowdown is weighing on industrial metals demand.
Palladium prices have been consistently trending downward this year, which brought abrdn Physical Palladium Shares ETF ( PALL ) down by 30% since the beginning of the year. The fund was established with the purpose of holding palladium bullion, allowing investors to gain exposure to the physical metal. Its primary application in the automotive sector provides strong fundamentals, as tightening environmental standards for new vehicle emissions could underpin demand for palladium in catalytic converters. However, I would stay on Hold with PALL shares, and wait for the more definitive factor for the palladium market, or reduction in key rates. This could support global economic growth, and boost demand for industrial metals.
Outlook
Palladium has a fairly wide application in the jewelry industry, medicine, electronics, automotive and it has great prospects in the energy sector as well. However, looking at the metal's price dynamics, nothing seems to remind us of the bright future of palladium.
In particular, palladium prices fell from $1800/oz at the beginning of 2023 down to $1250/oz. The dynamic raises concerns about further reduction in the price, as palladium closely correlates with the global economy, which is on the verge of a recession, or has already entered one. In any case, the economies of the EU and the US are far from being in the best conditions, and China is not encouraging with excessive positivity.
Industry-wise, palladium consumption is primarily determined by the automotive industry, which was stalling in 2022. However, since October last year, the EU's automotive industry has shown a strong double-digit recovery. The same relates to the US automotive market as well.
In addition, experts point to the substitution of palladium with cheaper platinum. But currently, the difference in prices between the two metals is approximately $300/oz and is not capable of radically changing the final cost of the car. In terms of catalytic ability, platinum is inferior to palladium and works at much lower temperatures. Hence, it has a wider application in diesel engines. In cars that use gasoline, there are usually two catalysts, one next to the engine (which uses 90% of the platinoids), the other in the exhaust emission system. The temperature in the latter is lower, and there it's technically easier to replace palladium with platinum. In the first one, it makes no sense, as platinum will not last long, but it could be done in American engines, for instance, which used to feature large volumes and low power.
In the meantime, the policy pursued to tighten environmental requirements for exhaust emissions could help maintain orders for palladium. The expansion of production of EVs will not be able to shake the position of palladium, in my view, at least in the medium-term, as electric vehicles still lose in cost to ISE cars and at the same time compete fiercely with hybrid cars. And looking forward to 2024, a reduction in interest rates could be expected, which could support economic growth and boost demand for industrial metals. In addition, the lack of new major palladium projects in the world against the backdrop of increasing demand, I don't expect the price of palladium trading below $1100/oz.
Fund overview
Aberdeen Physical Palladium Shares ETF is established to reflect the dynamics of palladium, an industrial metal that is one of the rarest. The metals reserves are 15 times less than the reserves of platinum and 30 times less than gold in the world. PALL is the only pure palladium ETF in the US market and is a convenient way to invest in physical metal, as there are no pure palladium miners.
The price of PALL has been going through a downturn, as the dynamic of the metal is strongly sensitive to the state of the global economy. The lockdown in China and slower economic growth in Europe are among the factors that reduced demand for non-ferrous and industrial metals.
PALL holds 184.5 koz of palladium at a secured vault and charges investors with 0.60% expense ratio. The latter is fairly reasonable, as looking at the alternatives, Sprott Physical Platinum & Palladium Trust ( SPPP ) has 1% expense ratio, while going into mining stock, like Sibanye Stillwater ( SBSW ), provides for higher risk (operational, political, etc.).
Risk factors
The main use of palladium is for catalytic converters in cars. Hence, the main risk of investing in palladium includes a general economic slowdown, which could constrain vehicle production and decrease palladium demand for catalytic converters.
Conclusion
I believe that demand for this key car component could merely rise due to the strong environmental push in the automotive sector. Holding PALL could also provide for resilience and value preservation as a result of the presence of physical metal in the fund's portfolio, which is especially relevant during an uncertain economic environment. And despite the fact that the automotive sector is recovering solidly, I would rather go for a Hold rating on PALL stock, as the Fed's pivot could revive the economy and give more positive momentum to palladium prices.
For further details see:
PALL: Strong Fundamentals For Growth Remain Intact