Stricter emissions control in China to drive palladium prices higher

Even with prices at a 13-year high, analysts see more gains for the metal that goes into cleaner exhaust systems required by new mainland rules

PUBLISHED : Tuesday, 29 July, 2014, 10:58am
UPDATED : Wednesday, 30 July, 2014, 5:31am

Tight supply and stricter vehicle pollution control standards on the mainland will continue to be key drivers of higher prices of palladium this year and next year, even as the industrial metal's price reached a 13-year peak, analysts say.

The introduction of the stringent National IV vehicle emissions standard and Beijing's order last month to take pollution-prone pre-National III "yellow-label" vehicles nationwide off the road this year will drive up demand for new cars.

Emissions of pollutants are cut by 30 per cent or more when the standard is raised from III to IV and from IV to V.

Palladium, platinum and rhodium are used in catalytic converters attached to vehicles' exhaust systems to turn toxic pollutants into less harmful substances.

The price of palladium, already the best-performing metal last year, will likely be pushed higher by tight supplies, a Bank of America Merrill Lynch report said.

A five-month miners' strike that ended late last month in South Africa, a major palladium producer, resulted in the loss of about a quarter of the annual output of the metal and has largely depleted producers' stock, the report said.

It said it would take up to four months for production to return to normal, as workers need medical examinations and training before returning underground.

"Supply from South Africa is likely to remain significantly restricted for some months yet, while demand from the automotive industry in particular is very robust … inflows into exchange-traded funds are likewise lending support to prices," a Commerzbank report said.

Palladium's average price is seen rising to US$900 an ounce in the first quarter of next year from US$857 in this year's fourth quarter. Bank of America analysts projected the annual average to rise 14.9 per cent to US$834 this year and a further 13.9 per cent to US$950 next year, after gaining 12.6 per cent last year.

The metal's spot market price hit US$884.30 on July 17, the highest in more than 13 years. The record peak of US$1,110.50 was seen in January 2001.

Palladium demand may exceed supply by 1.61 million ounces this year, the highest since records began 34 years ago, the Commerzbank report said, citing projections in May from Johnson Matthey, the world's largest refiner of the metal.

It would be the third straight annual deficit, as mine output is projected to fall by 5.4 per cent to 6.18 million ounces.

Demand this year is tipped by Johnson Matthey to rise 10.9 per cent to 10.5 million ounces, with 7.1 million ounces from the vehicle sector.

Palladium demand is also expected to be bolstered by technology advances that could allow half the platinum used in diesel cars' catalytic converters to be replaced by the cheaper palladium, used in petrol-powered cars, according to Norilsk Nickel, the world's largest palladium producer, Commerzbank said.

China, the world's largest car market, posted sales growth of 9 per cent in the year's first five months to 9.8 million units, according to the China Association of Automobile Manufacturers.

Jiangsu province-based vehicle components maker Weifu High-Technology, the country's largest maker of catalytic converters for commercial vehicles, is running its plants at close to full annual capacity of about one million units, a Barclays report said.

Shenzhen-listed Weifu said last month it expected to post net profit growth of 50-65 per cent for the year's first half, partly thanks to the new standards.

The National IV standard was rolled out for passenger vehicles three years ago, and commercial vehicles will have to comply with it from the start of next year.

Beijing and Shanghai have already imposed the National V standard, and the rest of the country is expected to follow suit.

"About [half] of commercial vehicle manufacturers will likely need to upgrade their catalytic converter designs, according to Weifu, and the planned scrapping of six million yellow-label vehicles announced a couple of months ago will likely add to the demand outlook," Barclays said.