A machine engraves information on an ingot of 99.97 percent pure palladium at a plant owned by Krastsvetmet, one of the world's biggest manufacturers of non-ferrous metals, in Krasnoyarsk, Russia April 9, 2019. REUTERS/Ilya Naymushin/File Photo
LONDON, Sept 17 (Reuters) - Palladium has the best chance of rebounding from a rapid sell-off of precious metals used by the auto industry, but the longer a chip shortage hobbling vehicle production lasts, the weaker its recovery may be, analysts said.
Palladium, rhodium and platinum are embedded in vehicle exhausts to reduce harmful emissions, and prices have crumbled as manufacturers unable to get enough chips have cut output, reducing their need for the metals. read more
Palladium has tumbled from a record high above $3,000 an ounce in May to around $2,000, rhodium from a record high of almost $30,000 an ounce in March to $12,000 and platinum from a seven-year high of $1,336.50 an ounce in February to $950.
More losses are possible in the near term, but a rebound could be on the horizon in 2022 and 2023, particularly for palladium, which unlike platinum and rhodium has suffered years of supply deficits, said Oliver Nugent, an analyst at Citi.
Auto makers have run down inventories of finished vehicles to meet demand and to replenish these when chips become available, they will have to overproduce, Nugent said.
"There is an almighty restock waiting for this industry," he said. "If you want to play this, palladium is the way to do it."
Auto makers consume around 80% of the roughly 10 million ounces of palladium used each year, 90% of the 1 million ounce rhodium market and 40% of platinum demand of 8 million ounce a year -- making platinum less vulnerable to the chip shortage.
Around 7 million fewer light vehicles will be produced this year than initially thought, consultants LMC Automotive estimated in a report published by precious metals refiners and traders Heraeus on Thursday.
Most of these would have contained a combustion engine. Each million such vehicles uses around 100,000-150,000 ounces of palladium, 40,000-50,000 ounces of platinum and 8,000-10,000 ounces of rhodium, said Wilma Swarts at consultants Metals Focus.
However, auto makers are working to save money by replacing palladium with cheaper platinum and moving towards electric vehicles that have no exhaust fumes to clean.
That means the longer the shortage takes to resolve, the less likely palladium and rhodium are to return to their record levels, said Nicky Shiels at MKS PAMP GROUP, an industrial and trading services company.
Reporting by Peter Hobson in LONDON and Nakul Iyer in BENGALURU; editing by Pratima Desai and David Evans
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