North American Palladium Ltd. (fka PALDF)

[JD400]

Palladium and copper have been moving in the same direction – higher – during 2019 as the global economy has been able to shake off concerns that it was headed for a recession, but the difference in the moves between the two metals could be quite instructive for stock investors.

Palladium (PA) futures started 2019 at $1,200 per ounce and have since soared 30% to approximately $1,555 per ounce. Copper (HG) futures, on the other hand, started 2019 at $2.60 per pound and have since climbed only 12% to $2.92 per pound.

So what accounts for the difference? Both metals are considered industrial metals, and demand for these metals is on the rise. Palladium is primarily used in auto manufacturing for catalytic converters in gasoline-powered automobiles, and manufacturers need more of it as emissions standards are increasing. Copper is used in far too many industrial applications to list here, but as the global economy continues to grow, manufacturers are demanding more of the metal.

However, even though demand for both metals is high, the supply of palladium is becoming a growing concern. Copper is produced in many areas around the world, but the majority of palladium comes from either Russia or South Africa.

Currently, Russia appears to be mulling over the idea of prohibiting the export of nickel mining tailings – the source of most of Russia's palladium – in the hope that the country can build up its own palladium refining capacity. Russia won't be able to build up its refining capacity overnight, so if it takes this step, palladium may be much harder to come by in the short term.

Knowing that potential supply-side disruptions are likely driving palladium's outperformance, I'm still cautiously optimistic that both metals are signaling strength in the global economy, but I'm watching to see if copper can break out of its consolidation range (see the red box in the chart) and move higher before getting too excited about what I see in the commodity market.

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