|11 September, 2018

Palladium: The impact of falling Chinese car sales

Carsten Menke joined Bank Julius Baer in December 2009. In his current position, he is responsible for the analysis of commodity markets, in particular base metals and precious metals. Before moving to Bank Julius Baer, Carsten Menke worked at Sal. Oppenheim Jr. & Cie. in Cologne, where he set up the Commodity Research unit. In 2002, he started working for Deutsche Bank as a Relationship Manager and became investment advisor in 2003. He received his degree in Business Administration at the University of Cologne in 2007 and became a CFA Charterholder in 2011.


Traders have shrugging off news that sales were down for the third year in a row

Despite mounting global trade tensions and growing concerns about a slowdown in China, which weighed heavily on most cyclical metals, palladium has been relatively resilient.

Prices temporarily moved towards USD 1,000 per ounce yesterday, shrugging off news of a softer Chinese car market. Sales were down around 7.5 percent year-on-year in August, marking a third consecutive decline.

While concerns about an economic slowdown weighed on consumer sentiment, we believe the car market’s softness is first and foremost a consequence of the past two and a half years’ tax-driven boom.


We estimate that average sales growth during that time was around twice as much as justified by China’s income level. The market faces a reality check as sales return to normal levels.

Stuttering engines in China do not bode well for global car sales. We see a flat to slightly lower trend as the extended economic cycle and the maturity of the markets leave little upside for Europe and the United States while the backdrop in some emerging markets is weakening as a result of the recent woes.

While we share the view of a supply-constrained palladium market, we believe this is well reflected in prices and any attempt to move higher – such as yesterday’s – is primarily due to speculative buying in the futures market rather than evidence of tightness in the physical market.

We stick to our Neutral view but lift our three-month, twelve-month and longer-term target to USD 950, USD 900 and USD 900 per ounce. One key question for the longer term is when and to what extend car companies start substituting palladium with platinum, given the latter’s price discount.

First we expect platinum to regain market share in catalysts of diesel-fuelled cars but we do not see any technical hurdles for gasoline-fuelled cars either.

Any opinions expressed here are the author’s own.

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