Why demand for platinum and palladium is at risk from proposed US tariffs?

The demand for precious metals like platinum and palladium is expected to decline if the proposed tariffs by President Donald Trump on US auto imports lead to a decrease in vehicle sales, according to a Reuters report.

This potential decrease in demand is due to the fact that automakers would likely reduce their production if car sales are negatively impacted by the tariffs, which in turn would lower their need for these precious metals.

The tariffs could raise the prices of imported cars, making them less attractive to American consumers and potentially leading to a decrease in sales. 

This decrease in sales could then have a ripple effect on the entire automotive supply chain, including the demand for precious metals like platinum and palladium.

Analysts are closely monitoring the situation, as any significant decline in the demand for these precious metals could impact their prices and the companies that mine and produce them. 

At the beginning of this month, Trump announced that automobile tariffs could be implemented as early as April 2. 

Cost of imports will rise

If this happens, the cost of importing cars into the US would increase, and the demand for cars exported to the US could decrease.

The automotive industry is a major consumer of platinum and palladium, and any disruption in this sector could have far-reaching consequences for the precious metals market as well.

The impact is anticipated to extend to platinum group metals (PGMs), which include platinum, palladium, and rhodium. These metals are utilised in the exhaust systems of gas, diesel, and hybrid vehicles.

Zain Vawda, market analyst at MarketPulse by OANDA, said that tariffs typically fuel inflation and keep interest rates higher, which could slow economic growth and weaken demand for platinum and palladium.

The proposed tariffs are still under consideration, and their ultimate impact on the automotive industry and the demand for precious metals remains to be seen. 

Demand risks

However, analysts are warning that there is a significant risk of a decline in demand if the tariffs are implemented, and this could have a negative impact on the precious metals market.

The automotive industry plays a substantial role in the demand for platinum and palladium, accounting for approximately 40% of the global platinum consumption and a significant 80% of the global palladium offtake. 

This significant demand is primarily driven by the use of these precious metals in catalytic converters, which are essential components in vehicle exhaust systems for reducing harmful emissions.

Palladium, in particular, is predominantly used in gasoline-powered vehicles, while platinum finds application in both gasoline and diesel engines. 

The increasing stringency of emission regulations worldwide and the growing adoption of stricter emission control technologies have further fueled the demand for these precious metals in the automotive sector.

If tariffs on US auto imports are imposed, Vawda anticipates that global platinum demand will fall by 1% (around 102,000 ounces) and palladium demand will fall by 4% (364,000 ounces) this year.

Dependent on imports

The US auto industry relies heavily on imports of parts and fully assembled vehicles, especially from Canada and Mexico.

Barclays estimates that Mexico supplies up to 40% of the components used in US vehicles, while Canada contributes over 20%. 

Additionally, German auto giant Volkswagen manufactures approximately 75% of its North American vehicles in Mexico.

Metals Focus’ Director of PGM Research, Wilma Swarts, has indicated that PGM demand could fall by around 150,000 ounces this year. 

This decrease is contingent upon tariffs leading to a reduction in US vehicle sales of up to one million units, with 90% of that reduction impacting internal combustion engine and hybrid vehicles.

Spot platinum and spot palladium fell over 2% on February 19, the day after Trump announced his auto tariff plans.

They have since dropped approximately 5% and 7%, respectively.

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