Analysis of the palladium market, supply deficits, and future price outlook.
The palladium market has remained in structural deficit for several consecutive years. Under normal market conditions, persistent supply shortages would be expected to support higher prices. However, palladium has moved in the opposite direction, declining significantly from its 2021 peak.
The explanation lies not in today's market balance, but in what investors expect over the coming years.
2010–2016: Low Prices
For many years, the market assumed that palladium was continuously entering the market from former Soviet strategic stockpiles. Although the exact size of these inventories was never publicly known, their perceived availability reduced concerns about future shortages.
At the same time, global mine supply appeared sufficient. Despite production already being highly concentrated, with Russia and South Africa together accounting for around 80% of global output, there was little concern that supply would become constrained.
2016–2019: The First Major Bull Market
The market began to change after the Volkswagen Dieselgate scandal. As consumer demand shifted toward gasoline and hybrid vehicles, demand for palladium increased because gasoline engines primarily use palladium-based catalytic converters.
At the same time, increasingly strict emissions regulations required larger quantities of platinum group metals per vehicle.
Mine production was unable to respond quickly. Since most palladium is produced as a by-product of nickel and platinum mining, supply could not be expanded simply because prices increased. The market gradually realised that structural deficits were becoming unavoidable.
2020–2022: Price Spike
Several events pushed prices to record highs.
The automotive industry recovered rapidly after COVID-19 lockdowns, leading many manufacturers to purchase catalyst metals simultaneously. Investors also feared physical shortages as demand remained strong while supply remained vulnerable.
The outbreak of the war in Ukraine created additional uncertainty. Russia, the world's largest palladium producer, became the focus of supply concerns due to fears that exports from Nornickel could be disrupted.
These factors helped drive palladium prices above USD 2,300 per ounce.
Why the Deficit Is No Longer Driving Prices
Although the palladium market continues to operate in deficit, investors increasingly believe these shortages are temporary.
The market can sustain deficits over long periods by drawing on stockpiles, provided there is an expectation that those deficits will eventually disappear through substitution.
Most palladium is produced as a by-product, making mine supply relatively inelastic. However, market participants increasingly expect future deficits to shrink because of several structural trends.
These include:
- Increasing substitution of palladium by platinum
- Continued growth in electric vehicles
- Higher recycling supply
- Sufficient above-ground inventories to bridge current shortages
As a result, today's price reflects expectations for future market balance rather than current physical availability.
Platinum Substitution Has Accelerated
The most significant structural change has been the substitution of palladium with platinum in automotive catalysts.
When palladium prices reached record highs during 2021–2022, manufacturers accelerated redesigns to reduce catalyst costs.
According to the World Platinum Investment Council:
- Approximately 390 koz were substituted in 2022
- 620–670 koz in 2023
- Around 700 koz in 2024
- Substitution is expected to remain above 700 koz during 2025
Although substitution has significantly reduced future demand expectations, it has not yet been sufficient to eliminate the structural deficit.
Above-Ground Stocks
Current market deficits have largely been supplied from above-ground inventories.
These inventories may include:
- Industrial users
- Automotive manufacturers
- ETF holdings
- Investor inventories
- Trader inventories
- Producer inventories
- Potentially historical Russian stockpiles
While Russia has historically held significant strategic reserves, there is currently no public evidence that recent deficits have primarily been covered by Russian government stockpile sales.
Looking Ahead
The World Platinum Investment Council expects the palladium market to move gradually toward surplus around 2026–2027, primarily due to increasing recycling supply and slowing demand growth.
Financial markets generally price assets one to three years ahead. Consequently, investors are already valuing palladium based on the expected future balance rather than today's deficit.
Conclusion
The palladium market demonstrates that commodity prices do not necessarily follow today's supply-demand balance.
Although the market remains in structural deficit, investors increasingly expect platinum substitution, expanding recycling, electric vehicle adoption and sufficient inventories to reduce future shortages.
Unless these assumptions change materially, palladium prices are likely to remain driven by future expectations rather than current physical deficits.