PALL: Palladium Market Set To Remain In Deficit Despite The Contraction In Chinese Auto Sales

August 19, 2019

New York (Aug 19)  While the Aberdeen Standard Physical Palladium Shares ETF (PALL), which replicates the performance of palladium prices, has come under intense downward pressure since mid-June on escalating US-China trade frictions, we believe that the recent weakness offers a buying opportunity at this level, because the fundamental picture of the palladium market remains tight despite the weakening of auto trends. The backwardation in Nymex palladium corroborates this view.

Even in a bearish scenario in which Chinese auto sales continue to weaken in H2 2019, the palladium market would still experience a deficit, which would therefore warrant ultimately a stronger equilibrium price to correct the supply/demand imbalance.

In this context, we believe that PALL will rally stronger in the near term. For August, we expect a high of $153 per share, representing an upside of 12% from its current level.

For investors seeking exposure to the fluctuations of palladium prices, PALL is an interesting investment vehicle because it seeks to track spot palladium prices by physically holding palladium bars, which are located in JPM vaults in London and Zurich. The vaults are inspected twice a year, including once randomly.

The fund summary is as follows:

PALL seeks to reflect the performance of the price of physical palladium, less the Trust’s expenses.

Its expense ratio is 0.60%. In other words, a long position in PALL of $10,000 held over 12 months would cost the investor $60.

Liquidity conditions are poorer than that for platinum. PALL shows an average daily volume of $3 million and an average spread (over the past two months) of 0.33%.

The Chinese auto market - the world’s largest passenger vehicle market - continued to struggle in July. The China Association of Automobile Manufacturers (CAAM) shows that passenger car sales dropped 3.9% YoY in July (-7.8% YoY in June), marking the 13th month of uninterrupted decline.

In the first seven months of the year, passenger car sales contracted by 12.8% YoY, on track to post the second year of contraction in a row (2018: -4.3% YoY)

Here is a more detailed breakdown showing new vehicle sales per type:

CAAM forecasts a decline of 5% for passenger car sales in the whole of 2019, which assumes a recovery in the second half of the year.

If we assume that CAAM is too optimistic, what would happen if auto sales in China remain weak in the second half of the year.

According to a stress test conducted by our friends at SFA Oxford, a decline of 10% in passenger car sales in China in 2019 would cut palladium annual domestic consumption by 80,000 oz, or 3.8%, to 2 million oz, in sharp contrast with Johnson Matthey’s projections of a 477,000 oz increase in Chinese autocatalyst demand.

Still, this would not be enough to balance the expected deficit for this year (around 800,000 oz, according to Johnson Matthey), unless there is a global contraction in global autocatalyst demand across the board. Johnson Matthey’s projected deficit assumes an increase of 775,000 oz of palladium (+9% YoY) from the automotive sector.


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