Palladium Down – Can Auto Demand Pull It Back Up?

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MetalMiner coverage has underserved the platinum-group metals (PGMs) market lately, but recent releases of US auto sales and certain M&A activity have both conspired to bring them back on our radar. One recent acquisition saw Stillwater Mining of Billings, Mt., snap up Peregrine Metals, which opens the former up to copper and gold.

Hard Assets Investor interviewed Stillwater CFO Greg Wing, who said that China is still a primary driver in the palladium market, since most auto production and auto sales activity is centered on that country. To know what palladium prices will do, in other words, is to keep a close eye on how Chinese consumer demand drives auto production targets and sales.

“The projections are that by 2015, we could be producing 100 million vehicles in the world, Wing said in the interview, “a one-third increase over where it is today.

That would be pretty great news for palladium, as China will be doing the heavy lifting of fulfilling that projection — the US auto market, although slightly better in August, isn’t as influential on palladium demand — although it doesn’t look like it in the short term. Both auto production and sales in China were down from June to July. Yet Chinese auto production reached 10,462,400 units over the first half of this year, an increase of 2.33 percent compared with the same period of last year, according to the China Association of Automobile Manufacturers (CAAM). Also, sales were up 3.22 percent in H1 2011, compared with the same period in 2010.

Investors Flushing Palladium From Portfolios Lately

Luckily for industrial buyers, the palladium situation from an investment standpoint has looked pretty grim lately, as the metal has sorely underperformed this year so far as compared with 2010 causing investors to drastically reduce holdings. A Reuters report in late August cites a 5 percent decrease in palladium prices to $750 an ounce this year, the worst performing metal commodity this year to date.

That’s because when global growth enters a slowdown and causes concern over future prosperity, the industrial metals tend to suffer (at least in the speculative realm as an investor.) Palladium’s dip in early August coincided with worries over US and Eurozone debt issues, as well as reports that manufacturing and other economic sectors proved more sluggish than expected.

Source: Kitco

As a result, more metal had been sold off at once since 2006. Speculative holdings on the NYMEX have fallen roughly 20 percent this year, equivalent to about 286,300 ounces, according to Reuters.  Physically backed ETFs, such as the palladium ETF held by ETF Securities, have seen “unrelenting outflows this year.”

Well, this cycle will undoubtedly end sometime the only question is when. One possible answer could be not until the second quarter of 2012.

Platinum demand, on the other hand, looks like it could be lower in the long-term.  The reasons for this are 1) companies are already looking to substitute platinum with other metals in catalytic converters, such as gold, as Wing mentions. If other metals can (effectively) replace it, platinum demand will ostensibly drop and so will prices; and 2) platinum only constitutes 5 percent or less of the catalytic converter a “pretty small component, Wing said. Since so little platinum is used in the converters anyway, effective substitutes will reduce platinum’s industrial demand. (On the other hand, if Europe’s car market improves especially its diesel vehicle production, which is the primary user of platinum in its catalytic converters it could be a different story. Don’t hold your breath, though.)

As far as palladium’s future, however, once the global growth picture improves, and if China weathers inflationary storms to continue to make and sell cars, the metal’s price should remain supported reaching at least as high as its mid-summer 2011 levels, if not what it was in 2010. But we’ll have to wait a bit for that.

–Taras Berezowsky

Comments (5)

  1. Penbat says:

    There are other relevant factors not mentioned:
    1 – the Japanese earthquake has been one big reason for Pt and Pd’s underperformance – that should cease to be a factor very soon
    2 – Historically Pt has usually cost about twice as much as Gold, they are currently about equal. A significant number of jewellery buyers would prefer Pt to Au especially if similarly priced
    3 – Pt and Pd are vulnerable to major supply issues in Russia and SA. They are both much rarer than Gold very expensive to mine.

  2. tberezowsky says:

    True, the earthquake certainly had an effect, and we should see a recovery for Japanese automakers as we shift into 2012; the supply situation for platinum and palladium, while obviously tight, remains in a sort of stasis as far as Russia (and their stockpiles) and South Africa are concerned…the main thing to take away here is that we will shift from seeing speculation driving things and into the industrial fundamentals.

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