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Will Automakers Switch Metals After Palladium Hits Record High?

Kitco News

(Kitco News) - Palladium prices hit a record high this week and widened the premium over sister metal platinum, which ultimately could encourage automakers to switch to platinum for auto catalysts, analysts report.

“In a year that’s seen losses for most other commodities, the rally in palladium has been exceptional,” said commodities brokerage SP Angel. “It’s the one major metal that’s at an all-time high and prices have almost doubled in the past two years.”

While down from Tuesday’s record high of $1,137.30 an ounce, Nymex December palladium prices are still holding onto most of their recent gains. December palladium futures last traded at $1,111.10 an ounce, down 1% on the day. Spot metal traded near $1,150 on Tuesday.

“Although the price increase of the past two days was accompanied by a high trading volume – 60% more futures were traded yesterday than the average so far this year – the palladium market is currently very tight and very illiquid,” Commerzbank analysts said in a research note. “This is also evidenced in palladium’s forward curve, which is in backwardation throughout.”

Backwardation is when nearby contracts are more expensive than the deferred, seen as a sign of supply tightness since users are paying a premium to obtain metal right away.

“Lease rates also remain very high, which likewise underlines the tightness on the market,” the bank added.

SP Angel said the rally accelerated in recent days due to growing geopolitical tensions between the U.S. and Russia, one of the top producers of palladium. The firm also cited stimulus measures in China, the world’s largest auto market.

The primary industrial use of platinum group metals is catalytic converters for automobiles. Historically, palladium was cheaper, thus used for gasoline-powered cars. Platinum was more expensive but was required for diesel-powered vehicles. For more than a year now, however, palladium has been more expensive, thus analysts cite the potential for manufacturers to start shifting toward more platinum instead.

The palladium market has been in a supply deficit for years, while there is a modest surplus in platinum, according to reports compiled by most analytical firms.

“As a result of palladium’s strong upswing, the price gap between palladium and platinum has widened to over $320 per troy ounce,” Commerzbank said. “This could prompt auto-catalyst manufacturers to consider using more platinum in their auto catalysts again after all.”

SP Angel offered a similar view.

“The rally raises the risk that the auto industry, the biggest user of palladium, will look to reduce consumption and instead use more platinum in catalytic converters,” SP Angel said. “It’s been 17 years since palladium was last this expensive relative to platinum.

“Both metals are used in varying amounts in different engine types, depending on efficiency and price. While it can take years to design auto catalysts, sizable switching has happened before. The car industry cut palladium usage by almost 50% in two years through 2002 after prices spiked, and increased platinum purchases by 37%.”

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