By Allen Sykora
Kitco News: Any weakness in the U.S. auto sector is likely to be offset by still-strong car sales in China and India, enabling platinum and palladium to fare better than many other industrial metals, perhaps holding in a trading range for the rest of the year.

Furthermore, supply issues are likely to offer at least some underlying support, analysts said.

Both metals slid Wednesday when U.S. equities sold off. Traders often look to stocks as a harbinger for the economy and thus demand for commodities.

They stabilized on the New York Mercantile Exchange Thursday, however. October platinum closed up $11 at $1,531.60 an ounce, while September palladium rose $6.35 to $471.05 an ounce.

The monthly U.S. employment report Friday showed fewer private-sector jobs were created in July than economists expected, and a statement from the Federal Open Market Committee on Tuesday conceded that the economy is not recovering as quickly as anticipated.

The main industrial use for platinum and palladium is auto catalytic converters. Thus, traders monitor the economy and auto sector for clues on demand for PGMs.

There was some optimism for the auto sector when General Motors announced a second-quarter profit of $1.3 billion Thursday, said Sterling Smith, commodity trading adviser and analyst with Country Hedging. Still, the economic picture remains uncertain, he said.

“So that is going to probably limit the upside of platinum at least for the next three or four months,” Smith said.

Yet, the market is probably “technically oversold” on the charts after a recent pullback, thus is due for some kind of bounce, he said. Smith called for benchmark platinum to trade mostly between $1,520 and $1,600 and palladium between $440 and $540 for the remainder of the year.

Meanwhile, auto sales remain strong in key Asian nations, others said.

“Platinum and palladium are both going to be range-bound to the end of this year,” said K.C. Chang, economist who tracks the metals with the consultancy IHS Global Insight. “Relative to the base metals, the overall fundamentals are much better.”

Chang said he looks for platinum to trade mostly between $1,550 and $1,600 for the remainder of the year, with palladium to be mostly between $450 and $500.

“The key driver for platinum and palladium demand is auto catalysts,” Chang said. “If you look at auto sales in China and India, they are still growing.”

China has become one of the world's largest auto markets. The pace of growth in Chinese sales has abated some, but overall remains “robust,” Chang said.

Global platinum-jewelry demand has remained resilient despite a price rise for the metal since commodities collectively tumbled after the 2008 global credit crisis, said a PGM trader. China accounted for two-thirds of the world's jewelry demand in 2009, he added.

He said platinum demand is continuing to benefit from a shift toward diesel-powered vehicles in Europe, which requires platinum rather than palladium for catalysts. Yet, global palladium demand should not suffer either, he continued, due to continuing auto sales in Asia and prospects for the U.S. to eventually recover.

Supply Constraints To Provide Underlying Support

Meanwhile, the PGMs face potential supply constraints. Platinum hit record highs just a few years ago due to electricity shortages and labor issues in South Africa. The impact was more pronounced than might be the case in most commodity markets, since some 75% to 80% of the world's primary platinum supply comes from that one country.

Those issues haven't gone away.

“The underlying electricity problems they are facing in that country, as well as potential labor strikes, does create pressure in terms of how much more additional supply can enter the market,” Chang said. “We don't see any relief in the underlying electricity issues in South Africa over the next 24 months.”

The metals have also drawn support in recent years from the launch of exchange-traded funds, including two that began trading in the U.S. early this year. Metal is put into storage to back ETF shares that trade like a stock but track the price of the commodity, thereby creating physical demand. Global platinum ETF holdings are estimated to be in the neighborhood of 1 million ounces, with some 2 million in palladium ETF holdings.

However, a trader also characterized investment as an unpredictable “wild card” for the metals. Whereas investors so far have shown a willingness to stay in ETF positions even on price pullbacks, there is always the potential for them to turn into sellers if the market goes against them, he said.

Author is associated with Kitco News:asykora@kitco.com