The platinum price rallied on Tuesday as investors priced-in a strong recovery of the global auto sector and the likely supply deficit in 2021. It is trading at $1,225, which is 11% above the March 5 low of $1,107.
Platinum role in the automobile industry
Platinum is an important metal used in the automobile industry. It is mostly used in the manufacture of catalytic converters, which are useful in cleaning exhaust fumes.
Platinum belongs to the same family as rhodium, palladium, and iridium, which are collectively known as platinum group metals (PGMs). As a precious metal, platinum is also used in jewelry manufacture.
To a large extent, the price of palladium depends on the performance of the global auto industry. The biggest buyers of catalytic converters are companies like BASF and Johnson Matthey. Indirectly, the biggest buyers are automakers like Volkswagen, Toyota, and General Motors. Therefore, platinum and palladium tend to do well when the automobile is doing well.
Further, palladium and platinum prices have done well in the past few years because of the strict enforcement rules by many governments. This gained steam after the Volkswagen fuel emissions scandal.
Global auto sales to rebound
After contracting in 2020, analysts expect that auto sales will rebound this year as more people move to buy new cars. Indeed, recent numbers from China showed that the sector is booming. According to the China Passenger Car Association, the number of auto sales in the country surged to more than 1.18 million in February.
In the United States, car sales declined slightly in February, mostly because of the winter conditions in some states. According to Cox Automotive, the number of car sales in February declined to 16.3 million. This was a slight decrease from the previous month’s 16.8 million. The recently signed $1.9 trillion stimulus package will also boost demand.
The same trend is happening in other leading auto purchasing countries in Europe and Asia.
Still, some analysts question whether platinum prices will keep the pace as more people shift to electric cars. In an event this week, Volkswagen said that it will invest more in electric vehicles. Other companies like Volvo and General Motors have pledged that they will stop making fossil-fuel cars in the future.
However, in reality, demand for platinum and gasoline cars will remain. Despite their growing popularity, the shift to EVs will not be manageable in the nearest future.
A key challenge for platinum is that the automobile industry is currently facing a global chip shortage. This could affect demand.
At the same time, analysts predict that the industry will go through another year of supply shortage this year. According to the World Platinum Council, supply declined by 17% in 2020. Demand fell by just 7%, even with the pandemic. The report also said that demand from automakers will rise to 25% this year.
Platinum price forecast
The four-hour chart shows that the palladium price declined from $1,336 in February to $1,105 in March. This happened as investors reacted to the global chip shortage. Since March 5, the price has risen by more than 11%. It is slightly above the 15-day and 25-day moving averages, while the Relative Strength Index (RSI) and the MACD have moved above the neutral level.
Therefore, there is a possibility that the price will keep rising as bulls target the year-to-date (YTD) high at $1,335. This price is about 8.7% above the current level. A drop below $1,105 will invalidate this price action.