Oil collapse means one precious metal is now rarer

[LONDON] America's renewed love affair with the automobile is tightening global supplies of palladium, a metal rarer than gold.

While each car requires only a few grams of palladium, demand in 2015 will probably exceed supply for a fourth consecutive year, according to Johnson Matthey Plc, a maker of catalytic converters for automobiles that use the metal to reduce harmful tailpipe emissions.

Global car sales rose 3.4 per cent last year to a record 81.6 million vehicles, Macquarie Group Ltd said in a report last week.

The lowest oil prices in five years and cheap bank loans are helping to extend a rebound in automobile sales that began in 2009, boosting demand for everything from catalytic converters to Alcoa Inc's aluminum sheets and Goodyear Tire & Rubber Co's wheels.

Even after palladium prices soared to a 13- year high in September, Morgan Stanley and Deutsche Bank AG remain bullish because car parts account for 70 per cent of the metal's use.

"Palladium is an exciting place to be because of its exposure to gasoline," Scott Winship, a fund manager at Investec Asset Management, which oversees about US$112 billion, said by telephone from London.

"US auto demand is incredibly strong and might even surpass previous peaks that we saw before the financial crisis."

Palladium, used mostly in gasoline-fueled vehicles that dominate markets in North America and China, is approaching a bear market after falling 3.3 per cent this month to US$770.75 an ounce in London.

The Bloomberg Commodity Index is down 2.7 per cent in January, after touching a 12-year low last week.

The Bloomberg Dollar Index has risen 1.1 per cent, and the MSCI All- Country Index of world equities slid 1.4 per cent.

Interest rates near zero and a strengthening job market are providing a boost to US auto sales, which in November rose to an annualized rate of 17.2 million vehicles, the highest since November 2003, according researcher Autodata Corp. December was slightly less at 16.9 million, based on data adjusted for seasonal trends.

Cheaper fuel "might attract some drivers to buy a car when they otherwise wouldn't have," said Jonathon Poskitt, the head of sales forecasting for Europe at Oxford, England-based researcher LMC Automotive Ltd.

Regular Gasoline The average cost of regular gasoline in the US has tumbled 43 per cent in the past six months to US$2.05 a gallon, the lowest since April 2009, based on data from AAA. Crude-oil prices have collapsed as rising US production compounded a global glut and sparked a price war among members of the Organization of Petroleum Exporting Countries.

An ounce of palladium supplies enough of the metal for catalytic converters in about 10 vehicles, according data from Stillwater Mining Co, the largest US producer. Higher prices increase the risk that auto companies start using more platinum, also needed in catalytic converters, instead.

When palladium surged to a record in 2001, carmakers cut usage by 40 per cent the next year, according to London-based Johnson Matthey, which makes a third of the world's catalytic converters. While palladium has been cheaper than platinum for more than a decade, the gap is narrowing. In December, the metal was the most expensive relative to platinum in 12 years.

Palladium prices are also vulnerable to a drop in car sales and a slower economy, according to Daniel Belchers, a fund manager who helps oversee US$600 million in commodities at Threadneedle Investments in London.

Data last week showed US jobless claims reached a four-month high and the World Bank cut projections for global gross domestic product. The International Monetary Fund lowered its global growth forecast by the most in three years in an outlook released late Monday in Washington.

Speculator Holdings Holdings in exchange-traded funds backed by palladium surged 42 per cent last year, reaching a record 3.084 million ounces in August, according to data compiled by Bloomberg.

Supply has lagged behind demand since 2012, with output declines in Russia and South Africa, the top producers. The shortfall doubled in 2014 to 1.2 million ounces and will be 907,000 ounces this year, Deutsche Bank estimates, excluding investment. The bank sees production deficits until at least 2020.

Palladium will average US$881 this year, up almost 10 per cent from 2014, and US$1,003 in 2016, Morgan Stanley said. Deutsche Bank forecasts US$850 this year on average.

While China's economy is slowing, car sales will rise enough to support higher palladium prices, according to Jeremy Baker, who helps oversee about US$500 million as a senior commodity strategist at Harcourt Investment Consulting AG. Total deliveries may exceed 25.1 million vehicles, from 23.5 million last year, the China Association of Automobile Manufacturers said this month.

"There's a very bullish story there that's going to play out in the long term," Mr Baker said by telephone from Zurich. "There is a good argument that palladium should outperform other precious metals."

BLOOMBERG