Business / Financial Markets

After 59% returns, palladium rally endangered by massive drop in China car sales

Bloomberg

A record 22 percent slump in China’s January car sales is threatening to derail the rally in palladium, used to curb emissions from vehicles.

The precious metal generated a 59 percent return for investors last year, the most of any commodity tracked by a DCI BNP Paribas gauge. The rally was fueled by expectations that stricter Chinese environmental standards will spur higher loadings of the material in cars. The bullish sentiment is wavering, with hedge funds paring their bets on higher prices to an eight-month low.

On Thursday, the China Passenger Car Association predicted a worsening outlook for the industry, saying sales may drop more than 30 percent this month. The coronavirus that spurred factory shutdowns in China has also disrupted the global supply chain, prompting Nissan Motor Co. and South Korea’s Hyundai Motor Co. to halt some operations in their home countries due to shortages in auto parts.

“Suspended operations could create a short-term bottleneck and a temporary dip in demand” for palladium, Suki Cooper, precious metals analyst at Standard Chartered Bank, said in an emailed message. “The key question will be how deeply auto sales are impacted thereafter.”

Citigroup Inc. sees prices falling $2,100 an ounce in the near term under a base case scenario where the market remains tight. A more drastic scenario where a worse battle with the disease drags on could see the metal slide to as low as $1,600, the bank’s analysts said.

Output in the world’s largest auto market could be cut by more than 1.7 million cars should the spreading virus result in more shutdowns of manufacturing facilities across China, lasting into mid-March, according to an IHS Markit estimate last month.

The auto industry accounts for more than 80 percent of demand for the precious metal, according to a Johnson Matthey report released Wednesday. That makes it difficult for the market to ignore the shutdowns in China.

“The effects on the wider, global supply-chain are also starting to show,” refiner Heraeus Holding GmbH said in a research note. “Plants across Europe and the wider Asia region are also at risk now because of problems sourcing Chinese-made parts.”

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