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Record car sales extending palladium shortage

18th January 2013

By: Bloomberg

  

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Demand for palladium, last quarter’s best-performing precious metal, is exceeding supply for a second consecutive year as mine production stagnates while sales by automakers, the biggest buyers, reach record highs.

Consumption will beat production by 511 000 oz in 2013, or about what the car industry uses every seven weeks, Barclays estimates. Morgan Stanley expects deficits to persist until at least 2017 and predicts a record annual price average in 2014. Palladium will average at least $770/oz in the fourth quarter, or 15% more than now, according to the three most accurate forecasters tracked by Bloomberg Rankings over the past two years.

The commodity is one of three supply shortages left among the ten base and precious metals tracked by Barclays, along with tin and platinum. Palladium is still 40% below the record $1 125/oz reached in 2001. The slump spurred a 45% surge in buying by carmakers in the past five years and Morgan Stanley expects record autocatalyst demand in the next five. Hedge funds are now the most bullish on prices in at least three years.

“Palladium looks very good,” says John Stephenson, who helps manage about C$2.7-billion ($2.74-billion) in assets at First Asset Investment Management, in Toronto. “Investor demand is pretty strong for palladium. It also has its auto demand kicker.”

The 10% gain in palladium during the past quarter contrasts with retreats for platinum, silver, gold and the LMEX gauge of base metals from aluminium to zinc. The Standard & Poor’s GSCI gauge of 24 raw materials declined 2.9% and the MSCI All-Country World Index gained 2.5%. Treasuries lost less than 0.1%, a Bank of America index shows.

Global car sales exceeded 80-million for the first time ever in 2012 and will advance 2.4% to 82.7-million this year, says LMC Automotive, a research company in Oxford, England. Americans will buy more for a fourth year, matching the longest run of gains since the 1940s. An average autocatalyst contains about 4 g (0.13 per troy ounce) of palladium, platinum or rhodium, according to London-based Johnson Matthey, which has made one in three of them.

Supply from mines and stockpiles will rise 0.3% this year after contracting almost 11% in 2012, according to Barclays. Pay protests spread across South African mines after starting in the platinum pits in August. The issues that sparked the disputes were persisting and more disruptions were likely this year, Tim Murray, a GM at Johnson Matthey, told a conference in New York in November.

Sales from Russian government stockpiles will drop to 200 000 oz this year, from one-million ounces as recently as 2010, according to Barclays. The reserves, a State secret, are probably close to being depleted, Johnson Matthey estimates.

Hedge funds and other large speculators almost tripled wagers on higher prices since the start of November, US Commodity Futures Trading Commission data show. The palladium futures market is valued at about $2- billion, New York Mercantile Exchange data show. The funds have never been more bullish in the data going back to December 2009. This contrasts with seven consecutive monthly declines in metal held through exchangetraded products, data compiled by Bloomberg show. Holdings stand at 57.6 t, valued at $1.27-billion, still 12% more than a year ago. Investment demand will probably total 100 000 oz (3.1 t) this year, down from 430 000 oz in 2012, Barclays estimates.

Some investors are concerned that global economic growth will slow after Japan and the 17-nation euro area tumbled back into recessions and US policymakers failed to resolve all the budget issues after settling a dispute over $600-billion of automatic tax rises and spending cuts this month. China, the biggest car market, is only now quickening again after slowing for seven quarters.

The expected surge in prices poses a risk because it threatens to crimp demand. Carmakers cut consumption 48% between 1999 and 2002 as palladium reached a record because of disruptions to Russian exports. The amount they used in 1999 was not reached again until 2011, Johnson Matthey data show.

Carmakers also may be more reluctant to commit to future demand as prices climb. Ford Motor Company, the second-largest US automaker, used futures and options to lock in palladium costs during the surge to the record in January 2001. That culminated in a $1-billion loss for the Michigan-based company as prices tumbled as much as 72% in the following 11 months.

The most accurate analysts tracked by Bloomberg are not expecting a repeat of that this year. Eugen Weinberg, head of commodity research at Commerzbank, in Frankfurt, expects a fourth-quarter average of $950/oz, while Michael Widmer, at Bank of America, in London, projects $800/oz. Tom Kendall, head of precious metals research at Credit Suisse Group, in London, forecasts $770/oz. Palladium for delivery in March traded at $668.85/oz last week.

Equity analysts are bullish too. OAO GMK Norilsk Nickel, the biggest producer, will report a 15% gain in profit this year to $3.34-billion, according to the mean of seven estimates compiled by Bloomberg. Shares of the Moscow-based company rose 17% in 2012. Those of Johannesburg-based Anglo American Platinum, its nearest rival, retreated 16% as strikes disrupted work at its South African mines.

Chinese sales of passenger vehicles rose to their highest in almost two years in November, the China Association of Automobile Manufacturers said in December. Sales should increase by about another 10% in 2013, says Xu Changming, director of information resource development at the State Information Centre, part of the country’s top economic planning body.

“The expectations are very bullish for palla- dium,” says Frank Holmes, CEO of San Antonio-based US Global Investors, which oversees $1.8-billion worth of assets. “Inven- tories for palladium in Russia have dwindled down and, on the demand side, we have emerging-market growth in auto sales.”

Edited by Bloomberg

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