Chart of the Week – Autos Boosting Palladium Demand

We talked earlier this week about the long-term prospects for copper prices but palladium has been the star performer of metals this year. As of yesterday, palladium is up 47 percent in 2010 to $602.75 an ounce.

Palladium has benefited from a rebound in global auto production, which is expected to jump 20 percent from 2009 levels this year. Palladium is used in catalytic converters for automobiles. The average catalyst contains 4 grams of palladium or platinum. With China building between 15-20 million new automobiles a year, much more of the metals will be needed.

Booming Chinese Auto Production Driving Palladium DemandAuto production in China has receded in recent months from its peak earlier this year but remains three times higher than it was just a few years ago. In addition, Macquarie says there is a regulatory bias in China toward regular gasoline vehicles over diesel. Gasoline engines use more palladium for catalyts while diesel engines rely more on platinum.

We’ve also seen a rebound in the U.S. auto market. Production has bounced off of 2009 lows and a report from Experian this week shows new-car registrations rose for the third-consecutive quarter in June. Car registrations were up 13.5 percent from the same period last year.

Like copper, palladium has solid supply/demand fundamentals. Total demand is expected to increase 43 percent from 2009-2015, nearly all of that coming from the automobile industry. Meanwhile, mine supply is only expected to rise by 2 percent over the same time period.

If demand for automobiles continues to rise in China, the U.S. and other emerging markets such as Brazil, Russia and India, it’s possible we could see a large deficit in supply during the next couple of years.

About Frank Holmes 265 Articles

Affiliation: U.S. Global Investors

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.”

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Visit: U.S. Global Investors

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