Chinese tax breaks do nothing for palladium price

On Tuesday, the palladium price continued to drift lower with Nymex contracts for March delivery down nearly 1% to $665 an ounce, bringing losses for the precious metal in December to some $110 an ounce. Sister metal platinum is flat for the month, exchanging hands for $919 an ounce on Tuesday.

Palladium's continued weakness comes despite news from top consumer China of the extension of tax breaks on purchases of small vehicles due to expire at the end of the year through 2017. Roughly 75% of palladium demand is from the autocatalyst sector.

Palladium finds application in gasoline engines and is more exposed to the Chinese and US markets where diesel hardly features in the passenger vehicle segment.

The 2009 tax cut stimulated year-over-year auto sales growth to 45.5% in 2009 and to 32.5% in 2010 from 6.6% in 2008

While the Chinese tax will be lifted to 7.5% from the 5% (usual rate is 10%) where it has been since October 2015, the extension should keep vehicle-purchase prices in the world number one auto market chugging along says Moody's Investor Service in a note.

The tax cut stimulated sales, as indicated by a 14% year-on-year increase in combined passenger and commercial vehicle sales during the first 11 months of 2016, according to the China
Association of Automobile Manufacturers. The growth was driven by a 16% rise in passenger vehicles sales in the same period, which accounted for 87% of China’s combined passenger and commercial vehicle sales.

The ratings agency believes owing to the tax-break extension, auto sales growth in 2017 could be higher than its previous expectation of 2.7%, which reflected the expiration of the tax break:

However, the ratings agency does not expect growth in 2017 to be near the rapid pace of 2016 given the higher tax rate and "potential pull forward of demand to 2016 from 2017 because of the expectation that the tax break would expire.":

Buyers pay the vehicle-purchase tax, which is applied to vehicle prices before the 17% value-added tax. We believe that any change in the vehicle-purchase tax is particularly attractive to price-sensitive buyers.

The government previously cut the vehicle-purchase tax to 5% from 10% between 20 January 2009 and 31 December 2009. It later extended the tax-relief period to the end of 2010, but raised the rate to 7.5%. The 2009 tax cut stimulated year-over-year auto sales growth to 45.5% in 2009 and to 32.5% in 2010 from 6.6% in 2008, according to the China Association of Automobile Manufacturers.

In a vote of confidence for the PGM market South Africa’s Sibanye Gold (JSE:SGL) (NYSE:SBGL) announced earlier this month it is buying Stillwater Mining (NYSE:SWC), the only US platinum and palladium producer, in a cash deal worth $2.2 billion,