The Palladium Deficit and What it Means for MLCC in 2013 and Beyond
On November 13, 2012 Johnson Matthey, a globally respected specialty chemicals company that refines and fabricates precious metals, announced in their annual interim report covering the Platinum Group Metals that they forecast a 915,000 Troy ounce deficit for palladium for calendar year 2012. The report also states that Johnson Matthey expects the deficit to continue in 2013 due to increased demand at odds with falling supply.
In the highly anticipated report, Johnson Matthey forecasts that gross demand for palladium will reach 9.725 million Troy ounces in CY 2012, up by 15% from CY 2011. While other industries struggled in CY 2012, the primary consumer of palladium, the automotive industry did not. In fact, demand for palladium consumed in emission control devices (i.e. auto-catalysts manufactured from palladium metal convert almost 90% of damaging hydrocarbons, nitrogen oxide and carbon monoxide into more manageable nitrogen, carbon dioxide and water vapor) increased by an estimated 7.5% to 6.48 million Troy ounces (an industry record), or 67% of total worldwide palladium consumption for CY 2012. The remaining 33% of global palladium consumption is divided up among a variety of additional professional, industrial and consumer applications; including dental fillings; cracking catalysts for chemical processes; jewelry; investments (holding the metal by banks and other financial institutions); other electronics applications, including connectors and lead-frames; and of course, electrodes for multilayered ceramic capacitors, the primary focus of this story.
Figure 1: Palladium Consumption by End-Use Market Segment: 2012 CY Forecasts
Source: Johnson Matthey; MLCC Estimated by Paumanok at 500,000 Troy ounces; “Other Electronics” applications include connectors and lead frames. Auto-catalyst demand will continue to demand more palladium at the expense of other industries, including the multilayered ceramic chip capacitor.
Supply Shortages and the Potential Impact on the Price of Palladium
Shortages in supply of raw materials typically translates into higher prices, and palladium is no exception. The variable associated with palladium however, is that it is a precious metal that is held by banks and other financial institutions and therefore subject to additional price pressures brought about by trader speculation. Subsequently, the price for palladium has demonstrated significant volatility between 1994 and 2012, and this tendency for the metal price to suddenly skyrocket has caused many end-use markets (especially multilayered ceramic capacitors) to try to create distance from the metal. Auto-catalysts on the other hand, have embraced palladium for its lower price compared to the more expensive platinum ($1600.00 per Toz), which is the only other viable choice when it comes to controlling vehicle emissions through the use of auto-catalysts. The volatility in price for palladium, and its tendency to rapidly rise in price due to shortages and trader speculation has caused much of the MLCC market to displace palladium in favor of nickel and copper electrodes since 1994.
Figure 2: Average Annual Cumulative Price For Palladium Metal Per Troy Ounce: 1994-2012
Source: KITCO, Cumulative Yearly Averages For Palladium in USD per Troy Ounce
Palladium Applications and Consumption Trend in MLCC:
Palladium is used as an electrode material in multilayered ceramic capacitors (MLCC) because of its excellent conductive properties. Palladium is almost always mixed with silver in MLCC to lower costs. MLCC manufacturing techniques that use high-fire kilns employ high palladium content (about 70% pd loading); while MLCC manufacturing techniques that use low fire kilns employ low palladium content (about 30%) in the electrode alloy (some MLCC manufacturers also employ relaxer ceramic technology to further reduce the palladium loading content). Due to the volatility of palladium pricing (Shown in Figure 2 Above), MLCC manufacturers in Japan began to displace palladium with nickel electrodes in 1993/1994, and this ultimately caused palladium consumption in MLCC to drop substantially (as is shown in Figure 3 below). Since the high point of palladium consumption in MLCC of 2.3 MM Troy ounces in the year 1995, palladium consumption in electrodes has dropped about 78% to an estimated 500,000 Toz in CY 2012. However, since 2009 the consumption levels have remained in the 500,000 Toz range, leading many to believe that the market has reached its threshold and that those that wish to transition to base metal have already done so and what remains must remain palladium due to technical requirements or precise customer specifications. This makes a metals shortage particularly troublesome for the MLCC industry.
Figure 3: Average Annual Cumulative Price for Palladium Metal Per Troy Ounce: 1994-2012
Source: Paumanok Publications, Inc. Multiple Market Studies Published Between 1993 and 2012 On The Subjects of MLCC, Palladium and Base Metals.
Breaking Down Palladium Displacement in MLCC:
Palladium displacement in MLCC due to price volatility for the metal began with high layer count parts which consumed the largest electrode to ceramic ratios. These were initially found in Y5V parts and high layer count X7R parts, which we believe by 2012 have all switched to nickel electrode. NPO type MLCC on the other hand, have always been low layer count ceramic devices and many of these chip capacitors remain air fired and still consume palladium. Based on our customer survey results for this article, we believe that 70% of NPO MLCC produced today still contain palladium electrodes (mixed with silver), and 20% of X7R MLCC produced today consume palladium (also mixed with silver). The remainder of the market consumes nickel electrodes and have completely displaced palladium-100%.
End-Markets Still Consuming MLCC with Palladium Electrodes
Many of the specialty end-use market segments that require MLCC to operate in mission critical environments will employ MLCC with palladium electrodes, and these specialty markets make up a significant portion of the 500,000 Toz of palladium still being consumed by the industry. In many instances, the high voltage, high-frequency and high-temperature MLCC being used in defense electronics, Class III medical devices, some downhole pump applications and many aerospace designs still consume palladium because these capacitors are based on rigid and decades old military and industry specifications. The automotive markets are also large consumers of MLCC with palladium electrodes, although as respondents to our survey noted, in Japan and Asia the automotive industry has largely switched toward base metal in automotive circuits, while in the Americas and Europe the markets still prefer MLCC with palladium.
Why is Palladium in Short Supply?
The reason why the Johnson Matthey report is predicting a shortfall for palladium supply in 2012 is that the world’s two largest producers of the metal, Russia and South Africa are expected to mine much less palladium in 2012 than in previous years. The Russian government’s palladium stockpile has long served as an additional source of palladium metal supply to the world market and has been instrumental in preventing market deficits in the past. However, the Russians have admitted for the first time that their stockpiles are dwindling, and Johnson Matthey estimates the Russians will supply only 250,000 Troy ounces of palladium in 2012 which is 68% lower than the 775,000 Toz supplied from Russian stocks in 2011. At the same time, supplies from South Africa are estimated by Johnson Matthey to be down by 6% in 2012 to an estimated 2.4 million ounces due to well-publicized labor disputes and associated mine shutdowns in that country. Since Russia and South Africa supply a combined 76% of the net new supply of palladium, their shortfall in production will be hard felt by multiple industries.
What will the MLCC Industry do to Cope?
A shortage of palladium will result in increased competition among industries for the metal. This in turn should mean higher prices for palladium in 2013 (with some analysts suggesting a 30% increase in the price of palladium is possible for the coming calendar year). Automotive manufacturers will continue to consume palladium for use in auto-catalysts regardless of the price increase because their alternative is platinum, a metal that trades at more than $1600 per Troy ounce. The MLCC industry on the other hand, may be more flexible; and metals suppliers are hopeful that MLCC manufacturers will switch to base metals such as nickel and copper to displace higher cost palladium so that additional supply can be freed up to satisfy the increasing demand from the auto-catalyst segment. However, many of the end markets that consume MLCC with palladium bearing electrodes are either unwilling or unable to convert to base metals (defense applications for example are bound by military specifications) and other mission critical end-markets depend upon palladium bearing electrodes because reliable test data in the field is more than 20 years old. The area of highest probability for switching remains in the automotive markets in the West which are very price sensitive and may be influenced by the successful use of MLCC with base metal in the automotive industry in Japan.
What is the Long Term Prognosis for Palladium in MLCC?
Paumanok Publications, Inc. believes that if palladium prices continue to increase, this will encourage new prospecting for the metal and the re-animation of idled mining assets around the world. This will in turn create an eventual excess of palladium and drive the metal price back down over time, encouraging its continued use in certain specialty segments of the global MLCC markets.
Please note that in a survey conducted for Marketeye, Paumanok asked 10,000 recipients if they believe that palladium consumption in the global MLCC business would increase, decrease or remain unchanged over the next five years. 31% of respondents believed that palladium consumption in the global MLCC business would remain unchanged and hover right around 500,000 Troy ounces (the threshold). Many respondents wrote in and stated they believe that the specialty MLCC markets that consumed palladium will grow, while the commodity segments in NPO MLCC still consuming palladium would turn to either copper or nickel as a viable replacement. The net effect of this would be a stable market. About 27% of respondents believed that palladium consumption in MLCC would continue to decline; and that base metals would become more accepted in specialty markets over the next five years, causing further declines in palladium consumption in MLCC. About 15% of the respondents believed that palladium consumption in MLCC would increase over the next five years; and that every customer who wished to switch away from palladium bearing electrodes had already done so, and therefore consumption would be directly dependent on end-market growth in the Western automotive markets, the defense, class III medical and oil and gas electronics markets. 27% of respondents were unsure of what to expect because the available data was equally conflicting.
Figure 4: Survey Question: Will Palladium Consumption in MLCC Increase, Decrease or Remain Unchanged Over the Next Five Years?
Source: Paumanok Publications, Inc. Survey for MarketEYE November 2012 of 10,000 Passive Component Related Customers