* Ratio of palladium to platinum hits lowest since April '04
* China auto sector strength reflected
* Palladium outperformance to continue
By Amanda Cooper
LONDON, Sept 16 (Reuters) - Palladium is putting on its biggest show of outperformance against platinum in over six years, in a clear reflection of China's dominance in the global auto sector that is only likely to strengthen from here.
The price of palladium, mainly used in auto catalysts to reduce vehicle emissions, has risen more than 35 percent this year to top $570 per ounce, driven in part by the proliferation of exchange-traded funds backed by physical metal that has sparked unprecedented demand for the platinum group metals.
Both platinum and palladium are used in vehicle catalysts in varying quantities. Catalysts in diesel engines tend to take a higher loading of platinum, while palladium is more abundant in catalysts for gasoline engines.
China, a largely gasoline vehicle market, now ranks as the world's largest and fastest-growing, and palladium simply mirrors that dominance over sister metal platinum, which depends more on the flagging European market for sustenance.
"Right now, China has become the engine for the world economy. Palladium's outperformance over platinum just reflects it," Commerzbank analyst Eugen Weinberg said.
Billionaire investor George Soros told Reuters China had replaced the U.S. consumer as the engine of world growth.
"All together, until the crash, the U.S. consumer was the motor of the world economy. Now, it's the Chinese economy that has become the motor," Soros said.
RATIO SHRINKS
The platinum/palladium ratio -- the number of ounces of palladium needed to buy one ounce of platinum -- has fallen to its lowest level in over six years, reflecting palladium's outperformance relative to platinum.
This ratio declined to 2.88 this week, from a peak of 5.52 in February 2009, marking its lowest reading since April 2004.
Less-stringent vehicle emissions legislation in China also favours sales of gasoline-powered cars, while Europe imposes ever-tighter controls on climate-warming emissions that results in more use of diesel vehicles.
Aside from that, auto sales have been declining year-on-year in Europe as a number of government incentives to boost consumer spending during the financial crisis expire.
"The European car market is suffering from a hangover of government incentive schemes in 2009 and probably some fallout from the sovereign debt crisis in July," said Matthew Turner, a precious metals analyst for Mitsubishi.
"This ratio depends on where (platinum and palladium) compete and they do compete in auto catalysts," he said, adding: "The ratio can continue to shrink if the trends are the same and they do look like they're going to continue."
Registrations of new cars in 27 member states of the European Union declined for the third consecutive month in June by 6.9 percent, with 1.341 million units registered, according to figures from the European Automobile Manufacturers' Association.
In the same month, total Chinese auto sales were up 48.2 percent at 1.04 million vehicles.
Platinum has not only been eclipsed by palladium this year.
Gold, which hit record highs this week, has gained more than 15 percent so far this year, while platinum is up almost 9 percent, trading around $1,598 an ounce.
This beats the 0.5 percent year-to-date gain in the Standard & Poor's 500 for example, but pales against the 58-percent rise in the platinum price in 2009.
Platinum has benefitted hugely from investment through ETFs, one of the largest of which was launched in the United States in the last twelve months.
Although more ETFs are widely expected to come to market in coming years, that explosion in demand for platinum is unlikely to repeat itself to the same extent.
Also, a concern for both metals is the robustness of the global auto sector, despite China's growing power in that industry, especially in an environment where investors and companies alike are cautious about the outlook for growth.
Investors have also piled into the U.S. futures markets, where open interest for both metals has grown sharply in recent weeks, adding to the potential for a bigger sell-off in the event of a failure to perform.
"While we like both metals over the medium term, fundamentals in neither platinum nor palladium justify current investor interest, which makes us question the staying power of this interest," wrote UBS analyst Edel Tully this week.
(Reporting by Amanda Cooper; Editing by Veronica Brown)