Strong Chinese autos propels palladium even higher

Chinese auto sales continue to be healthy, growing at 8.3%YoY YTD.  This comes after explosive growth in 2013, with the level of sales just under 20m on an annualised basis. This is probably higher than even optimists would have thought a couple of years ago.

Not all categories of auto sales are strong, with commercial vehicle sales particularly weak in the last couple of months.  This is a useful barometer of the macroeconomic pressures on businesses, which continue to be a burden despite the stabilisation in top line economic indicators.

Consumers, however, are not feeling this pain yet, with passenger vehicle sales still very strong.

The key beneficiary of this strength in the commodity world is palladium, which is predominantly used in emissions catalysts in gasoline vehicles.  As shown on the left, Chinese imports of palladium have been very strong in the YTD, notwithstanding the plunge in shipments in May.

It's not just China that is providing a solid backdrop for palladium. Combined vehicle production in the US, Japan and China is growing at a healthy clip.

These signs of strong demand, along with crimped supply from South African, have seen palladium prices soar close to 25% higher in 2014.  Palladium has also radically outperformed platinum, although this ratio is currently a little higher than its most recent low point.

The strong fundamentals and price growth has helped propel physical interest for metals via ETFs, particularly in the newly launched products based in South Africa.  This buying activity has almost certainly been pro-cyclical, with the shifting of stock into ETFs reducing availability to other parts of the demand chain.

Interestingly, the most recent surge in prices hasn't been driven by increased speculative length in futures positioning.  If anything, it has generated a little more short interest.

This could create further opportunity for price gains if shorts get squeezed out by those chasing recent gains.