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London. Motor-vehicle catalyst material palladium is facing headwinds after its sharp run higher, but is still set to outshine platinum this year as a recovery in car demand lifts buying and investment holds firm.

Fears that palladium had become overstretched in its run up to two-year highs in April and concerns over resurgent euro-zone sovereign risk have sparked a correction.

But analysts are broadly confident that underlying demand will lift palladium back toward $600 an ounce this year.

This would take prices back to levels not seen since 2001, when No. 1 producer Norilsk Nickel stopped selling palladium on the spot market. It has built on a stellar 2009, when it more than doubled in price.

It climbed another 41 percent to a year high of $570.50 an ounce, while at their 2010 highs, its sister metal platinum was up 19 percent and gold just 7 percent.

The palladium-to-platinum ratio — the number of ounces of platinum needed to buy an ounce of palladium — hit its highest since 2006 in April at 0.33, up from 0.20 a year ago.

“Of the two, I would pick palladium to be the better performer,” said David Wilson, an analyst at Societe Generale. “I can see prices being a lot stronger.

“There seems to be a general acceptance that the palladium story is fundamentally stronger, largely because of the Chinese motor-vehicle sector, while the platinum motor-vehicle-catalyst market in Europe is still looking not particularly healthy.

“There seems to be upward momentum in buying of particularly the New York exchange-traded fund, but there seems to have been a loss of momentum on platinum on the ETF side.”

With motor-vehicle catalyst manufacturing accounting for more than half of palladium demand, any price rise will largely be predicated on a recovery in car sales, especially in primarily gasoline markets such as China and the United States.

The Asian physical market has seen a flurry of activity in recent weeks. Dealers report steady purchases of palladium from the vehicle-catalyst, electronics and chemical sectors. Some automakers in Asia have also shifted to using more palladium in diesel and gasoline engines because it was much cheaper than platinum, while hopes for a further recovery in the global motor-vehicle sector supports demand, dealers said.

“We are seeing quite a strong demand from the industrial sector. There is interest in platinum, but it is not strong compared with palladium,” a Tokyo dealer in gold and platinum-group metals said. “The rise in platinum is more driven by speculative buying.”

The resilience of Chinese car sales last year while other markets slumped was a major factor in palladium’s rise.

Further demand from the United States is forecast in 2010 after light-vehicle sales rose 19.4 percent in March.

“The big story is that for the past three or four years, we had a Chinese boom in car sales, but that was matched by a US slump,” said Matthew Turner, an analyst at VM Group. “March was the first indication that we might be having a continuing Chinese boom, but also a US recovery. We then get two major markets growing at the same time.”

While car sales are a key factor in its current rise, a new strand of demand has also emerged in the palladium-backed exchange-traded fund launched in New York in January.

ETFS Physical Palladium Shares now holds nearly 670,000 ounces of the metal, equivalent to more than 10 percent of annual global mine supply. But small outflows from European exchange-traded products are concerning some investors.

Analysts say fears that palladium has risen too sharply this year and the high volume of metal held in easily liquidated investment vehicles mean prices may correct from current levels.

Analysis

Reuters