How the Auto Industry Impacts precious Metals

Platinum group metals (PGM) are vital components of catalytic converters. Catalytic converters use these metals as catalysts which convert the toxic substance from engine exhaust into inert or less toxic substances. This in turn generates cleaner exhaust which conforms to emission standards.  While there are a few different precious metals which can be utilized as catalysts the most widely used in the automotive industry are platinum and palladium.  With that in mind the demand for both of these metals is highly dependent on the state of the automotive sector worldwide and as a result of that their price levels too. As both platinum and palladium considered safe haven investments alongside gold they have been known for their strong volatility over the course of the years as a result of the disruptive auto sector.

Despite the fact that both palladium and platinum depend on the automotive sector palladium seems to be more dependent on it as a demand driver. Palladium, unlike platinum which is also widely used in in jewellery, relies in large part on the industrial demand from the car industry.

As the US economy recovered from the crisis the autos demand remained robust through 2016 pushing the demand up for both metals. Year 2017 brought political uncertainty in the US with future policy outcomes largely unknown for many manufacturing industries at present, potentially creating a downside for the price of metals in the near to medium term. Additionally, Chinese demand within the automotive sector is softening and this has the potential to present the PGM sector with a major blow to its demand and as a result price.   The first two months of 2017 saw Chinese market soften considerably and largely stabilize in March. That said, the outlook for the rest of the year remains uncertain. Dealer inventories are high and the combinations of high inventories and weak retail demand have led to price declines in all segments.

Another potential factor threatening further upward price movements is the metals reliance on the diesel car sector. The recent Volkswagen scandal where the company rigged its diesel cars with the goal of passing environmental regulations while emitting extremely high levels of pollution is increasing global concern in this area. The trend that is currently gaining traction is the emergence of disruptive technologies within the electric car industry in order to tackle this issue. For example, one of the largest and growing autos sectors China, have been promoting and subsidizing the electric car industry to combat its horrid record in air pollution levels. As a result bus sales plummeted 21% year to date through March as the government offered subsidies of almost one half the price of the bus to promote the production and the sale of electric buses. As a result, China now leads in the sale of all electric buses in the world. All of this has a potential for a large knock on effect on demand and price of palladium and platinum over the near to medium term. And finally, many car manufacturers are looking at producing smaller more efficient converters thus decreasing the demand for precious metals on this front. For example, Toyota has recently announced the availability of a new smaller catalyst Flow Adjustable Design Cell (FLAD). It uses 20% less precious metal and 20% less volume.

All in all, both palladium and platinum are currently enjoying high prices but we do however see several downside risk factors to the price in the future 1) auto industry softening in China and potentially in the US, 2) switch from diesel cars to the electric cars, 3) inventions of smaller more efficient catalysts. However, all of these factors need time to take full effect and the strong downside on the fundamentals side is still some time away and is unlikely to push prices down significantly in 2017.