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Palladium Gains From Environmental Rules

Robust auto sales in U.S. and China add to demand for metal, used in catalytic converters









A machine engraves a palladium ingot at a Siberian factory in 2012. Palladium has been shining brighter than other precious metals in recent weeks. ENLARGE
A machine engraves a palladium ingot at a Siberian factory in 2012. Palladium has been shining brighter than other precious metals in recent weeks. Photo: REUTERS
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By
Biman Mukherji

Updated May 19, 2015 3:38 p.m. ET

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HONG KONG—Among precious metals, palladium has rarely shone brightest for investors.

Yet in recent weeks, the metal, used mostly in catalytic converters for cars, has been commanding more attention than gold, silver and platinum, its more glamorous counterparts.

Analysts expect solid auto sales in China and the U.S., together with tighter environmental standards, to keep growth in demand for palladium strong enough to potentially outpace increases in supplies. The market was in deficit last year, and there could be shortfalls this year, in 2016 and in 2017, analysts at Australia & New Zealand Banking Group Ltd. predict.

Already, palladium’s price has risen 8% to $785 an ounce since hitting $726 an ounce in March, its lowest point so far this year.

“Fundamentally, palladium is our favorite metal,” says Simona Gambarini, an analyst with Capital Economics in London, citing the likelihood that demand will persistently outstrip supplies.



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Auto sales—and their geographical composition—remain the key factor for palladium prices. The industry typically accounts for more than 70% of annual consumption of the metal.



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Global auto sales rose only 2% last year, but the Chinese and U.S. markets have held up well so far in 2015. China’s car sales aren’t growing at breakneck speed anymore, but still increased 3.9% year on year in the first quarter. U.S. car sales were up 6.4% in the same period.

Palladium is used heavily for catalytic converters in gasoline-fueled cars, which predominate in the U.S. and China, so the relative strength of those markets is critical. Together, Chinese and U.S. auto sales account for about a third of global palladium demand.

Platinum is used more in European autos because it is better suited to reducing emissions from diesel-run cars, widely used on the Continent.

In all, demand for palladium for catalytic converters increased 5% last year, quicker growth than in global car sales, according to the GFMS Platinum and Palladium Survey.

In part, that reflects more stringent emission controls in many countries, particularly in China, which have led to the use of increasing amounts of palladium per vehicle, says Mike McGleone, director of research at U.S-based ETF Securities.

While demand looks secure, there are clouds over supply from Russia and South Africa, the countries that produce the bulk of the metal.

Russia’s Norilsk Nickel, the world’s largest palladium producer, has signaled its output could decline by around 5%-6% this year. It accounts for about 45% of global production.

Meanwhile, in a sign Russia may be getting close to exhausting government stockpiles of palladium, sales from those holdings have declined over the last decade, Goldman Sachs said in a report last week. Goldman also noted that political tensions between Russia and Ukraine could cause a “Russian supply shock,” adding another upside risk to palladium prices.

For sure, South African production is still forecast to rise, but the mining sector there has been beset by regular strikes in recent years.

In a sign that sentiment among investors is upbeat, the flow of money into exchange-traded funds backed by palladium has been robust.

“While we are seeing outflows of platinum from physically backed exchange-traded funds, we are not seeing that in palladium,” said Victor Thianpiriya, a commodity strategist at ANZ.

Indeed, the poor relation among precious metals has now overtaken platinum in terms of popularity among investors, ETF Securities data indicate. Holdings of palladium by ETFs, which buy the metal as funds flow in, have increased by about 7% in the past year to about three million ounces. Platinum ETFs’ holdings of metal have declined 2% to 2.7 million ounces.

ANZ’s Mr. Thianpiriya reckons palladium prices could slide if there are sudden withdrawals from ETFs, but that a decline isn’t likely. “That is a low risk given the extent of deficit and poses more of a risk for platinum,” he says.

Still, palladium still has a long way to go before it outshines gold and silver. The total value of palladium ETF holdings currently stands at around $2.31 billion, according to Capital Economics. By contrast, gold and silver ETFs are worth around $63.38 billion and $10.87 billion, respectively.

http://www.wsj.com/articles/palladium-gains-from-environmental-rules-1432062921





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