Palladium Futures Index (PALLADIUM)

[Pro-Life]

Analysts: Record Age Of U.S. Autos Portends Pent-Up Demand For PGMs

20 January 2012, 2:11 p.m.
By Allen Sykora
Of Kitco News
http://www.kitco.com/

http://www.kitco.com/reports/KitcoNews20120120AS_pgms.html

(Kitco News) - The average age of automobiles on American roads has hit a record high, and analysts say this could be a harbinger of pent-up U.S. demand for vehicles and by extension for platinum group metals.

Still, while this is price-supportive, they say, the bigger key for the metals during 2012 will be the demand that emerges from developing nations such as China.

Polk, a global automotive-market research firm based in Southfield, Mich., issued a report this week saying that the average age of cars and light trucks in operation in the U.S. hit 10.8 years in 2011, a record high. This is up from 10.6 years in 2010.

The average vehicle age has been increasing “quickly” over the past five years, Polk said. It had stood at 9.8 years in 2007, the year before the financial crisis hit. Polk compiles the data based on analysis of national vehicle registration data.

Several analysts and traders told Kitco News that the report reinforces what the market already knows—there has been a significant decline in U.S. auto sales during weak economic conditions in recent years. This had ramifications for platinum group metals, since their main industrial use is catalytic converters.

But motor vehicles only last so long and eventually have to be replaced, meaning potential for a spurt in PGM demand at some point in time.

“That study shows there is some pent-up demand, and that’s going to be a tailwind for consumer auto sales in 2012 and 2013,” said KC Chang, senior economist who tracks platinum group metals for the consultancy Global Insight.

Rohit Savant, senior commodities analyst with CPM Group, said the pent-up demand was already reflected by increased auto sales during 2011, even though the economy remained on soft footing.

Global Insight’s IHS Automotive unit has projected U.S. sales of cars and light trucks in 2012 of 13.5 million units, which would be an increase from 12.7 million a year ago, Chang said.

“So these statistics (on record vehicle age) show there is a replacement cycle that needs to go through in the next 12 to 24 months,” Chang said. “But with that said, it’s still weak. The auto industry is still not out of the woods.”

Prior to the financial crisis, sales tended to be 15 million to 17 million units a year.

“We’re still below the historical trend,” Chang said. “But you could say there are green shoots in terms of consumers coming back into the market. It’s because you can’t really extend the cars’ lives that much longer. We’re already at historical highs, so you’re going to see some people come back into the market.”

Still, any improved U.S. demand for cars is only one part of the puzzle for PGMs, analysts said.

“On balance, it (aging U.S. cars) is a bullish factor for PGMs,” said Bill O’Neill, one of the principals with LOGIC Advisors. “The real key is an overall economic recovery that includes the U.S., Europe and Asia, and in particular demand for cars in India, China and other developing nations. I would be optimistic on that type of demand.”

Chang’s firm looks for a mild recession in Europe this year, with near-zero growth in auto sales. However, China’s economy has continued to grow, although at a slower rate. The country has become the world’s largest auto market and tends to rely upon gasoline-powered engines that can use palladium, which is far less expensive than platinum.

“In terms of global palladium demand, it still hinges upon emerging markets and how you see (sales of) consumer autos developing in those economies,” Chang said. He later added: “We think platinum and palladium prices are going to be moving upwards over the second half of this year. The statistics (on aging U.S. cars) is a tailwind for this growth, although improvements in the U.S. auto sector may not be the primary source of stronger platinum and palladium prices in 2012.”

An aging U.S. auto fleet also has ramifications for secondary, or recycled, supply of PGMs, analysts said. A trader said scrapping of cars presumably means more recycling of PGMs. However, newer vehicles tend to have higher PGM loadings to meet more strict emissions standards, CPM Group’s Savant said. So when the older vehicles are eventually scrapped, they result in less secondary supply than otherwise might have been the case, he explained.

By Allen Sykora of Kitco News; [e-mail]