Automotive Use and Mine Supply Will Drive the 2017 Palladium Outlook

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Palladium has been the best performer among precious metals for some time now. Since the beginning of 2016, palladium is up 65%, easily beating the price increases seen in platinum, gold and silver.

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What factors made palladium outperform its peers and what should palladium buyers pay attention to this year?

Global Demand for Cars

According to Inside Advantage’s Outlook 2016 report, “the primary bullish factor might be the expansion of auto catalyst demand for palladium, particularly in China where air pollution problems are increasing. The auto sector accounts for around 80% of palladium demand.”

Chinese car sales for the first two months of 2017 beat expectations and were 8.8% higher compared to the same period in 2016. According to a Market Watch report, the pace is still weaker than the 14% increase reported last year by the industry as tax incentives urged customers to buy cars. In Q4 of 2016, China announced a 50% cut in its sales tax from 10% to 5% for small automobiles. The tax cut was effective until the end of 2016.

Most analysts were expecting a big slowdown in the largest automobile market this year, but China continues to surprise markets. The country agreed to extend the cut, although at a higher rate of 7.5%. In 2018 it will revert to 10%. Therefore, while auto sales might not beat the high levels reached last year, Chinese citizens will still likely take advantage of a lower tax in 2017.

According to a recent Reuters article, “March’s figures for the world’s second-largest automotive market came in below market expectations and gave early evidence that the growth in America’s car sales may be running out of steam. Sales in March fell by 1.6% compared with the same month a year ago.”

Overall, auto markets were really strong in 2016, contributing to a 50% rise in palladium prices last year. This market might surprise again in 2017 but signs of a plateau in the U.S. and uncertainties in China due to an extended but higher tax cut are factors to watch this year.

Strong South African Currency

South African Rand Index. Source:MetalMiner analysis of @stockcharts.com data.

South Africa is the largest producer of palladium, and controls around 40% of world output. The Rand (South African currency) has been one of the best performing currencies since 2016. A rising Rand makes South African exports more expensive to the rest of the world, limiting producers margins and potentially leading to a reduction of output.

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South Africa is key exporter of precious and industrial metals. While prices of these two continue to rise, we might see further strength on its currency. Which brings us to the next factor.

Industrial Metals Bull Market

Base Metals ETF (DBB). Source: MetalMIner analysis of @stockcharts.com data.

Unlike gold, palladium is used exclusively as an industrial metal, and its demand can surge based on the economic outlook. Among its metal peers, palladium reacts more or less in sync with other industrial metals. The ongoing industrial metals bull market has contributed to the rise of palladium as well.

What This Means For Metal Buyers

Palladium has outperformed the rest of precious metals for the reasons explained above. These three factors will determine whether it will continue to do so this year or not.

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