Scotiabank’s Mohr: Palladium ‘oversold’

Scotiabank economist and commodity specialist Patricia Mohr says palladium offers the greatest upside within the platinum group metals (PGMs) due to rising demand for car ownership in China and the central government’s wish to improve controls on car emissions.

Palladium is the main metal used in catalytic converters to control exhaust emissions in gasoline-driven automobiles, while platinum is used more widely in catalytic converters   employed in diesel-run vehicles, which in China are less popular, Mohr says.

“China adopted what it calls the China IV emission standards, which are equivalent to Euro IV in the European Union, and has given itself until 2016 to implement them fully,” Mohr says. “However, they’re going to have to move to even tighter emission standards in the future, and as they do, this will require higher PGM loadings in the catalytic converters to reduce pollution.” (The China V standard, roughly the equivalent of Euro V, must be implemented in China for gasoline and diesel vehicles, as of Jan. 1, 2018.)

The average catalytic converter in China has 2.4 grams of PGMS, of which 2 grams are palladium and 0.4 gram is platinum, Mohr says. In contrast, North American catalytic converters contain 3.7 grams of PGMs, 2.9 grams are palladium and 0.8 gram is platinum.

“There is a lot of growth that can occur in palladium use, if standards are tightened in China, and I’m sure they will be tightened,” the strategist says. (Under Euro IV, emissions have been tightened to a maximum sulphur content of 50 parts per million.)

While car sales in China have declined during the last three months, the slowdown was largely due to the stock market rout and will be short-lived, she says. “I think that will just be a near-term correction, and motor vehicle sales will get going again fairly soon and will do well in the medium-term, particularly SUVs, which are so popular in China … I  can’t imagine that car ownership is going to stall for long.”

One reason she is so optimistic about the China car market is that it is starting from a low base compared to most G7 countries. Last year, for instance, car ownership per 1,000 people in China was just 104, compared to 803 in the U.S.

“Over the medium-term, auto sales will continue to be a leading sector in China’s economy,” she says. “And as the economy shifts gradually from being oriented towards heavy industry and a reliance on exports, to a more service-oriented economy, cars and particularly SUVs, are going to be a big factor and a growth sector, as they have been in recent years.”

Mohr also points out that the recent scandal at Volkswagen, where management misled the public about emissions, could also affect demand for diesel cars and platinum use in Europe. “The whole controversy at Volkswagen is quite extraordinary,” she says, “and I think there could be some shift away from diesel-run cars, even in the G7 countries, towards gasoline-driven vehicles.”

Recent concerns over the health of the Chinese economy and its demand for commodities has pushed metal prices lower, but Mohr believes palladium was “oversold in the last month, relative to its medium-term fundamentals.”

Mohr contends that US$750 to US$800 per oz. palladium “would be quite conceivable, and it should be there right now.” At press time palladium was selling for US$706 per oz.