Palladium on the back foot as auto sales plummet

Palladium on the back foot as auto sales plummet
Written by:
Sundeep Goyal
25th April, 01:47
Updated: 26th April, 14:11
  • The dramatic plunge in auto sales will crimp demand for palladium
  • Palladium is used extensively in catalytic converters for gasoline-powered vehicles
  • China’s strict emission regulations will ensure demand for palladium

Palladium prices have come off their February highs sharply as car sales slide amidst the unprecedented coronavirus pandemic. Palladium is extensively used in catalytic converters in gasoline vehicles to limit emissions from their combustion engines. Demand for palladium has declined even as mines that produce the metal are shut due to virus lockdowns. Norilsk Nickel (OTCMKTS: NILSY) confounded analysts this week with its projection that the palladium market will end the year with a small surplus.

Car sales collapse

New car sales in Europe have cratered 55.1% in March, according to data from the European Automobile Manufacturers’ Association on new car registrations. Sales fell from 1.26 million vehicles a year ago to 567,308 in March, their lowest level in at least 30 years.

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In the U.S. new car sales crashed by 38% to 992,400 vehicles in March, while China reported a 48.2% slump to 1.02 million vehicles.

The economic ramifications from the coronavirus crisis have crushed employment, consumer confidence, and credit – essentials that drive auto sales.

Has palladium’s bull run ended?

Increasingly stringent norms regarding auto emissions have had a bullish impact on palladium. Spot palladium rose from $473.80 per ounce in January 2016 to $2875.50 in February 2020, a gain of over 500%.

But the virus may have put paid to that stellar run. Spot palladium closed at $2095 per ounce on April 24.

It is uncertain when auto sales will recover. Meanwhile, certain long-term shifts in the auto market do not augur well for the palladium.

The advent of three-way catalytic converters, which cut the concentrations of three major exhaust gases—hydrocarbon, carbon monoxide, and nitrogen oxides—in gasoline-powered vehicles, has encouraged a shift towards rhodium. Electric cars driven by rechargeable batteries do not currently use palladium in their components, and in case demand for these vehicles takes off, demand for palladium could take a huge hit.

Meanwhile, locked-down mines in South Africa, which produces 30% of palladium, are coming back online in a phased manner.

Auto sales to determine palladium direction

However, “supply-side issues won’t offset the hit to demand due to falling auto sales,” according to some analysts. “We expect world auto sales to plunge by 16–18% y/y in 2020. This will likely weigh on demand for platinum and palladium.”

“I think it’s the auto side that is going to be the key driver, especially for palladium, and any losses in demand are going to be exacerbated if substitution materializes this year,” said Standard Chartered Bank precious metals analyst Suki Cooper to S&P Global Platts in an interview earlier this month. Auto production losses will set the trend, she observed. “If we assume it was similar to the Global Financial Crisis then the market stays in deficit, but if it’s a 20% decline in auto sales then the market moves into a surplus, if it’s 15% then it closer to a balance.”

However, Chinese demand could be the dark horse

According to one view, Chinese buyers stormed palladium after the metal fell to a low of $1,482 per ounce recently, and were responsible for the solid recovery in prices to current levels.

Chinese emission regulations, the so-called “China 6” standards, are the tightest in the world and will continue to drive palladium demand.

Meanwhile, Anglo American (LON: AAL) last month cut palladium production guidance for this year by 300,000 ounces to a range of 1,100,000-1,200,000 ounces.

Conclusion

Currently, there are too many moving parts to the palladium demand-supply situation, with analysts divided in their opinion about its ultimate surplus or deficit status.

However, a Reuters poll earlier this week showed that analysts expected palladium prices to average between $2,100 an ounce this year and $2,150 in 2021.

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