Cash for Clunkers Could Be a Boon for Palladium

Aug. 3.09 | About: North American (PAL)

On CNBC Friday we spoke about North American Palladium (NYSEMKT:PAL) as a play on the cash for clunkers program. At the same time the U.S. government was doing some juicing of its own, it was revealed that members of our beloved Red Sox had “unwittingly” used performance enhancing drugs.

The cash for clunkers program has been a remarkable success. In less than a week the program actually ran out of money after dealers sold over 200,000 cars. Politicians know a popular program when they see it and by Friday afternoon had approved another $2 billion for the program. Anecdotal dealer reports have suggested even customers without a clunker are returning to the showrooms. For every customer that trades in a clunker there has been at least one more customer who simply buys a new car.

A quick “back of the envelope” calculation indicates that if a total of $3 billion is allocated toward the program then 600,000 clunkers will be turned in for 600,000 new cars. Adding the new buyers drawn to the showroom at a ratio of 1 to 1 implies the cash for clunkers program could generate 1.2 million new car sales. This should bring the year total of new car sales above the 10 million cars.

Moreover there is evidence of a structural change in the economy that can be seen in the GDP numbers. For the first quarter of 2009, auto manufacturing reduced GDP by 1.69%. However, in Q2 09, auto manufacturing added 0.2% to GDP.

As automakers ramp up production they will need more catalytic converters which can be manufactured with palladium. This was the “catalyst” for our purchase of North American Palladium (PAL). Currently, the company’s palladium mine is closed due to low palladium prices. However, an increase in auto manufacturing could change its status as palladium prices rise.

On Monday, auto manufacturers release sales data for July. The focus will certainly be on the last week when the cash for clunkers program formally began. Furthermore, it is likely that the market will look through any weakness in July as new money is approved for the program.

Disclosure: Long PAL