Palladium is one of the rarest metals on earth, about 15 times more rare than platinum and 30 times more rare than gold. Belonging to the platinum group of metals, around 80% of the world's palladium production comes from two countries: Russia and South Africa. In fact, Russia alone accounts for roughly half of the world's production, which is estimated to be 200,000 ounces per year. This can create cause for concern as any decrease in exports from these countries can contribute to volatility in palladium prices.
In comparison to platinum, palladium shares similar chemical properties but is less dense and has a lower melting point.
SEE: Futures Fundamentals
Uses of Palladium
With this in mind, it is important to take a look at the various uses of the metal. The unique composition of palladium makes it ideal for the auto industry, dentistry, electronics and fuel cell production. However, the most important use of palladium by far is the auto industry. Used in catalytic converters, the auto industry accounted for over 60% of the demand in 2010. To put this in perspective,about 80 million vehicles will be produced in 2011 and on average each catalytic converter requires about 1/20th of an ounce of palladium or platinum. Jewelry and industrial use, which comprises of dentistry and electronics, are the next highest users with approximately 29 and 7% of the demand in 2010 respectively.
Supply and Demand
Because Russia controls roughly 50% of the worldwide palladium pricing, and South Africa around 30%, palladium prices can be quite volatile. Between 2005 and 2011, palladium has gone from a low of about $168 per ounce to approximately $858 per ounce, settling around $630 per ounce as of Dec. 29, 2011.
Demand has also contributed to this volatility. With China's auto industry booming this could put a strain on supplies. Furthermore, the size of Russia's stockpile is a state secret so it is unknown how much supply they will export in future years.
There are a variety of ways an investor can gain exposure to this metal, whether through physical palladium, palladium futures, palladium miners or palladium exchange-traded funds (ETFs). Many miners are engaged in mining a variety of metals however, and since palladium is so rare it only makes up a small portion of a miners output. Nevertheless there are a few pure play mining companies that an investor can invest in.
As for palladium ETFs, the ETFS Physical Palladium Shares (ARCA:PALL) holds physical palladium and moves in tandem with the market price.
Lastly, palladium futures can be used to gain exposure. They are traded on the New York Mercantile Exchange (NYMEX) and are available over 15 months, starting at the current month, then the next two following months before going onto the quarterly cycle of March, June, September and December.
Sample Futures Contract
A sample palladium futures contract is shown in this table:
|Palladium Contract Specifications|
|Ticker Symbol||Open Outcry: PA (NYMEX)
CME Globex Electronic: PA (NYMEX)
|Contract Size||100 troy ounces|
|Deliverable Grades||In fulfillment of each contract, the seller must deliver 100 troy ounces (±7%) of palladium, not less than .9995 fineness and with no single piece weighing less than 10 ounces. Each contract unit may consist of ingots or plates, each incised with the lot or bar number, weight, grade, name or logo of the assayer and symbol identifying the metal.|
|Contract Months||All months|
|Trading Hours||NYMEX Open Outcry: Monday-Friday 8:30 a.m.-1:00 p.m. EST
CME Globex Electronic: Sunday-Friday 6 p.m.-5:15 p.m. EST
|Last Trading Day||Third to last business day of the contract month. Trading terminates at the close of business on the third business day prior to the end of the delivery month.|
|Last Delivery Day||Last business day of the contract month|
|Price Quote||U.S. dollars and cents per troy ounce|
|Tick Size||NYMEX: 5 cents per troy ounce ($5 per contract)|
Palladium Futures Contract in Detail
Every commodity has its own ticker symbol, margin requirements and contract value so it is important to know how to read the ticker. A palladium quote would look like this for example:
PAF9 @ 650
This would be like saying Palladium (PA) 2009 (9) January (F) at $650 per ounce.
Using the information in the chart above, the palladium contract equals the equivalent of 100 ounces multiplied by the $650, so: $650 x 100 ounces = $65,000
Metals are traded based on margin and this rate can change based on the volatility of the market. Typically if the margin rate increases, the price of palladium will drop and vice versa. The leverage gives speculators a higher risk return investment.
Palladium trades on the NYMEX and the Tokyo Commodities Exchange (TOCOM), each have their own contract size and minimum price fluctuation.
Change in Price
Each metal has its own contract size so the change in price can differ from other metals. For palladium, every 10 cent move is equal to $5, or 100 cent move the equivalent to $50. This is demonstrated below:
|Buy Price||Sell Price||Total Value|
|Palladium Contract Price (100 cents move = $50)||$650||$750||$100 or $5,000|
The Bottom Line
Palladium is one of the rarest metals on earth and is often neglected in favor of its more popular brother, platinum. However because of its unique qualities it is being used more and more in the auto industry, and as it is cheaper than platinum and comes from a limited number of sources, prices should rise in tandem. With this in mind, if traders and investors want exposure to this precious metal they can start looking at specific stocks, futures and ETFs.