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Heraeus Precious Appraisal

  • Edition 45 - 21 January 2019

Palladium indicator flashing; Chinese car sales turning down

Chinese auto companies’ shares are slumping as automotive sales fall. This could be a leading indicator for the palladium price as SAIC’s share price has turned down before the palladium price in the past, although most recently it was the palladium price that took the lead. SAIC is the largest Chinese automaker and its share price has a 0.77 correlation with the palladium price. However, unlike the palladium price, which has rallied strongly in the last few months after declining earlier in 2018, SAIC’s share price has failed to bounce back. Other major Chinese auto manufacturers’ share prices have also been falling for over a year.

Chinese car sales in 2018 saw the first annual decrease in over 20 years. Sales were down 19% year-on-year in December for seven consecutive months of decline. Retail sales dropped 6% to 22.7 million units last year, according to the China Passenger Car Association (PCA). The PCA expects sales to rise by 1.2% in 2019, assuming that there is a relaxation of car-ownership restrictions in major cities including Beijing, which would boost sales this year. However, the China Association of Automobile Manufacturers expects sales to be flat in 2019. Electric vehicle sales are estimated to grow by around 50% to 1.2 million units this year, but that means gasoline vehicle sales will fall if total sales are flat. However, palladium demand will still grow as manufacturers prepare for tighter emissions standards in 2020 which require a significant increase in autocatalyst loadings. China is the largest auto market in the world and used over 2 moz of palladium last year (~20% of total demand).

For now, the tight palladium market is sustaining the high price and, with elevated lease rates and another deficit market expected this year, near term the rally could continue. However, the share price action of the major manufacturers could be an amber warning light for downside risks to the palladium price.

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