All that glitters is not gold

Palladium, rarer than gold

Palladium is a precious metal 30 times as rare as gold. The price of palladium has soared on global commodities markets having recently peaked at about $2,500 an ounce – almost double its value a year ago. Indeed, it is now even more expensive than gold, but why has its valued rocketed? As ever it’s all about demand and supply.

Palladium is a critical component in catalytic converters, that control exhaust emissions in petrol and hybrid vehicles. China has been introducing new regulations to improve air quality. This requires an estimated 30% more palladium per vehicle. In Europe, the diesel emissions scandal, has seen a shift away from diesel to petrol cars, which use palladium in catalytic converters.  The soaring price of palladium has also led to a jump in the theft globally of catalytic converters. London’s Metropolitan police estimate such thefts have increased by 70%! In particular hybrids – because hybrids contain more precious metals than other vehicles.

By way of example, there are about two grams of harvestable palladium in a Toyota Prius converter, which can fetch up to around £350 at scrapyards.

Russia and South Africa, each produce around 40% of the world’s supply. The amount of palladium being produced has fallen short of global demand for eight years in a row. Palladium is a secondary product of platinum and nickel extraction and miners therefore have less flexibility to quickly step up output in response to rapid increases in prices.

The current coronavirus outbreak may slow China’s economic growth and in turn demand for some commodities. There are already early signs of supply shortages of parts for new cars. However, given the growing concern about air quality in major cities, palladium producers must be feeling pretty upbeat about longer-term prospects.

What have we been watching?

The number of deaths from coronavirus surpassed that from SARS over the weekend, although the  number of newly-infected people per day appears to have stabilised. The performance of risk assets suggest that investors are looking through the economic impact, but the coronavirus outbreak cannot yet be confidently described as under control.  

Companies with Chinese operations are beginning to highlight coronavirus and Chinese factory closures in trading updates, but it is still too early to quantify the impact on global supply chains beyond the direct short-term impact on China’s economy. Japanese car manufacturers are also beginning to flag coronavirus adversely impacting Chinese car sales. However, Fiat-Chrysler has announced it may be forced to halt production at one of its European car plants in matter of weeks due to its Chinese suppliers of critical parts being impacted by coronavirus. Elsewhere, technology companies are starting to pull out of some European conferences and exhibitions. While many Chinese go back to work today after an extended New Year holiday some local authorities are taking a more cautious stance and mandating a return to work on 1st March. In Shenzen, the local authority is reported to have rejected a request by Foxconn to resume production at a key plant.

Despite concerns about the impact of coronavirus on the Chinese economy, market sentiment was helped as China announced it is going to halve tariffs on $75bn of goods imported from the US. Tariffs will be cut on some goods from 5% to 2.5% and on others from 10% to 5% from 14th February.

Meanwhile, UK equities received unexpected support from a dip in Sterling below $1.30 as trade talks got underway between the UK and EU. PM Boris Johnson said he favoured a Canada- style free trade deal, but would use the existing Withdrawal Agreement with the EU if they failed to reach terms.


Read our latest UK investment insights from Alpha PM

 

In the UK, some signs of a ‘Boris bounce’ are emerging. ‘Flash’ manufacturing activity indicators stabilised at the start of the year as political uncertainty declined. Property website Rightmove also reported its busiest-ever month in January with 150million visits. Activity in the service sector was also much better than expected with business sentiment at its highest level since mid-2015. 


Read our latest EU investment insights from Alpha PM

 

In Europe, ‘flash’ manufacturing activity indicators showed that in January German businesses were less gloomy that they have been in recent months. However, China is Germany’s biggest trading partner so markets will be watching next month’s data closely given the coronavirus outbreak.


Read our latest US investment insights from Alpha PM

 

In the US, manufacturing activity returned to expansion after five months of contraction, while employment was also higher than expected. President Trump was cleared by the Senate on both articles of impeachment he faced, which clears the way for this year’s presidential election campaign.


Read our latest investment insights from Alpha PM

 

Brent oil drifted to its lowest level in over a year to $54. Meanwhile, members of OPEC along with Russia met last week to discuss the fall in oil prices due to the coronavirus outbreak but have not yet agreed on a course of action.


Finally, some examples of how fear about coronavirus can have unintended consequences for some businesses. Some Chinese restaurants in London’s Chinatown have reported bookings down by 50% since the Chinese New Year. Elsewhere, in global soft commodity markets, the price of arabica coffee beans has fallen by 25% – the Chinese are big coffee drinkers.

 

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