December 22, 2017 / 11:28 AM / a year ago

PRECIOUS-Shortages help power palladium to 17-year pinnacle

    * Palladium faces headwinds from slowing car sales growth
    * Palladium substitution unlikely to be imminent

 (Updates prices)
    By Pratima Desai
    LONDON, Dec 22 (Reuters) - Palladium prices jumped to
17-year peaks on Friday as strong demand from autocatalyst
makers reinforced the prospects of market shortages, but slowing
car sales are expected to challenge further gains.
    Spot palladium        was trading down 0.6 percent at
$1,031.75 an ounce from an earlier $1,042.50, its highest since
February 2001.
    Analysts think about 80 percent of global palladium demand,
estimated at more than 10 million ounces next year, will come
from autocatalysts for gasoline powered cars, which many now
prefer over diesel fuelled vehicles. 
    Palladium prices have doubled since January 2016 after
Germany's Volkswagen             in Sept. 2015 admitted it had
used illegal software to cheat U.S. diesel emissions tests. 
    "Diesel's share of the European auto market is falling and
the flip side of that is gasoline's share is rising," said
Julius Baer analyst Carsten Menke.
    "Chinese car sales supported palladium, but there will a
reality check as tax incentives are removed. In Europe and the
United States car sales look to be peaking."
    China's vehicle sales in the first 11 months of this year
totalled 25.8 million units, up 3.6 percent from the same period
in 2016, data from a local association showed.             
    "Next year is set to be the seventh successive year of large
deficits in the palladium market," GFMS analysts said in a
recent research note. 
    "We expect another deficit next year in excess of 1.5
million ounces and unlike in 2015 and 2016, and to a much lesser
extent this year, we think this will stop being accommodated for
by sales from ETF holders.
    Shortages have in recent years been partly offset by
investors selling their holdings in physically-backed exchange
traded funds                . The palladium held in ETFs has
halved to around 1.3 million ounces since July 2015.
    Platinum       , used in autocatalysts for diesel cars, was
down 0.1 percent at $914.25 an ounce. Prices have more than
halved since hitting a record above $2,200 an ounce in March
2008 and pushed the ratio of platinum to palladium prices to
below 1 from above 5.
    This has led to talk of platinum substituting palladium.
    "We do not expect an imminent shift away from palladium. The
price differential needs to be favourable for an extended period
of time as redesigning automotive catalysts is quite costly, a
lot of research and development is involved," Menke said.
    "A change in design also needs regulatory approval, which
adds to the costs and lengthens the time until the new catalyst
can be used. Hence, car makers are reluctant and prefer to
introduce a new design only once the model cycle changes."
    Spot gold        was up 0.2 percent at $1,268.9 an ounce,
while U.S. gold futures         gained 0.1 percent to $1,272.5.
    Silver        added 0.4 percent to $16.17 an ounce.

 (Editing by Toby Chopra and Jane Merriman)
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