Global auto production strengthening into year end

One of the brighter spots in the manufacturing landscape is auto production.  The year to date has seen diverging trends, with China booming, the US stronger and Japan and Europe mostly weaker.  But all major producers now seem to be on the same page of expansion, with China in particular very strong.

Growth in China, US and Japan looks set to be a little of 9% higher YoY in September. China in particular is driving most of the gains, although light vehicle production in Japan has also proven to be stronger than expected in the quarter.

European auto production has also grown, albeit at a modest pace off a low base. PMI data suggest further gains, although the recovery in manufacturing in general appears to be slow relative to the decline in the region.

It also seems likely that growth in autos will be relatively subdued.  Back in 2009/2010, auto production was even stronger than leading indicators and sales suggested thanks to a huge swing in the inventory cycle.

But this time around, this doesn't appear to be nearly as large a factor, with sales more crawling off lows rather than bouncing sharply and inventory levels better managed.  Nevertheless, small growth is better than nothing.

While auto production is important for commodities like steel, aluminium and lead, it is most important to platinum and palladium given the concentration of demand in auto catalysts.

The strength in Chinese auto production in particular is probably the key reason palladium has remained pretty well bid at just under $750oz and has outperformed platinum and most other commodities.

To be sure, there has been a huge drop in the pt:pd ratio since I posted about his here, with a long palladium/short platinum position yielding over 10%.

Its hard to see this trade performing quite so well from here, with perhaps the risk that palladium comes back a bit relatively given the concentration of longs. But with global auto production on the up, PGMs are, in general, a good long exposure in the commodities sphere.