2021 auto demand key to palladium usage recovery: analysts

London — Strong palladium demand from the automotive sector in 2021 is central to an overall recovery in global demand for the precious metal, said analysts at UK-based precious metals consultancy Metals Focus.

Palladium is a key ingredient in gasoline engine autocatalysts, which lower emissions.

Automotive demand is forecast to hit a record high this year driven by two main factors, Metals Focus said late Jan. 7.

"First, we expect to see a strong recovery in China. Representing one-third of global automotive production, healthy growth expectations, together with the roll-out of more stringent emission legislation, should support domestic demand," Metals Focus said in a report.

"Second, North America should see growth both from the economic recovery and tightening emissions legislation as a Biden presidency acts more decisively against climate change, having put forward an aggressive green agenda during his election campaign."

Auto sales rebounding

US new vehicle sales were forecast to have fallen in 2020 by around 15% year on year to 14.4 million units, the lowest total since the beginning of the decade, but the industry's performance finished the year stronger than anticipated, according to analysts.

Cox Automotive said strong December sales boosted the year's final projection, according to a report Jan. 6.

"The final days of December appear to have been stronger than forecast, and a number of [automotive] OEMs have cited unexpected robust retail activity over the holidays," said Charlie Chesbrough, Cox senior economist.

"There was also no shortage of positive news in the last week of December, and that may have encouraged consumers and lifted sales – passage of the stimulus package, more certainty around the election outcome, coupled with a lot of vaccine news."

Metals Focus said General Motors' fourth-quarter US sales saw an increase of 4.8% year on year, though its 2020 total sales fell 11.8%.

Cox said sales in 2020 were similar to those in 2012 when the automotive market was recovering from the 2008 financial crisis.

Though the 14.4 million vehicles sold in 2020 was the lowest figure in nine years, a number of market observers were surprised by how rapidly auto sales rebounded after collapsing due to the coronavirus in spring of last year, said Commerzbank commodities analyst Daniel Briesemann in a research note Jan. 8.

"Apparently, many people were encouraged to buy cars by the stimulus measures and news about the coronavirus vaccines. Vehicle sales are expected to continue to recover steadily this year," Commerzbank's analyst said.

"After China, the US is the world's second-largest auto market, with gasoline-powered vehicles predominating. Consequently, there is greater demand for palladium there. The solid sales figures probably lent support to the palladium price in recent months, in other words."

China is expected to publish its official auto sales figures over the coming days, with the EU auto figures the week after next, Briesemann said.

Supply shortage

On the subject of palladium supply, in April of last year tight lockdown regulations saw a number of South African industries hit by the effects of COVID-19, with mining companies suspending operations as well as production guidance, boosting palladium prices.

"The recovery this year in mine supply and expectations of increased recycling will not offset growth in demand, resulting in the tenth successive physical deficit in 2021," Metals Focus said.

"This will further deplete above-ground stocks, placing additional upward pressure on the palladium price."

According to UK platinum group metal (PGM) refiner Johnson Matthey, palladium in 2019 was the most diversified metal geographically with around 38% of supply coming from South Africa, around 41% from Russia and the remaining 21% from elsewhere.

ABN AMRO Group FX & precious metals senior strategist Georgette Boele expects higher palladium prices in 2021, though the increase is likely "to be modest," she said.

"There is still a supply shortage because of higher palladium demand for car converters to meet the more stringent emission standards in China and Europe in the future," Boele said in a research note.

"We expect a rise in car sales in China, Europe and the US and higher palladium loadings in converters. We also expect higher industrial demand because of the ongoing recovery in the global industrial sector."

Standard Chartered Bank global research precious metals analyst Suki Cooper said: "The palladium market is set to remain undersupplied, while platinum is likely to tighten in H2-2021 as substitution risk gains momentum towards the end of the year."

The palladium spot price, as of 1200 GMT Jan. 8, stood at around $2,426/oz.

Current palladium base prices from PGM refiners Johnson Matthey and Engelhard Materials Services (BASF) of Germany are at $2,420/oz and $2,445/oz respectively.