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Johnson Matthey: Palladium Shifts To Large Supply Deficit In 2012

By Allen Sykora of Kitco News
Monday May 13, 2013 6:00 AM

(Kitco News) - The global palladium market swung to a supply deficit of 1.07 million ounces in 2012 from a surplus of 1.19 million in 2011 due to the combination of lower supplies, record demand for the metal in automotive catalysts and a substantial swing to net investment from disinvestment the year before, Johnson Matthey said Monday.

The company anticipates another supply deficit in 2013, with a further decline in sales from Russian state stockpiles. The report said palladium has “the strongest fundamental outlook” of all of the platinum group metals.

Palladium mine supply fell by 11% in 2012 to 6.55 million ounces, the lowest level since 2002, the company said in its Platinum 2013 report. Recycling of palladium from end-of-life auto catalysts fell slightly to 1.66 million ounces, with all forms of recycling combined down slightly to 2.28 million. Meanwhile, gross demand for palladium rose by 16% to 9.90 million ounces in 2012, Johnson Matthey said.

The decline in supplies was partly due to output disruptions in South Africa that also curtailed platinum production. More significantly, sales from Russian state stockpiles are estimated to have fallen by roughly two-thirds to 250,000 ounces, Johnson Matthey said.

This came as demand for palladium by the auto industry hit a record high for the second year in a row.

“Last year, we had for the second (straight) year record demand from the auto industry for palladium due to the growth of gasoline vehicle production all around the world except for Europe,” said Jeremy Coombes, general manager for marketing and publications with Johnson Matthey. Gasoline-powered vehicles can use palladium rather than more-expensive platinum.

“The North American market was really moving ahead,” Coombes said. “The Japanese production recovered from the tsunami in 2011. Chinese production is going up and Indian production is up.”

Further, the swing into a deficit was accentuated by a huge shift in investor attitudes, Coombes explained.  Palladium was being accumulated for investment purposes, a turnaround from the year before when an exodus meant metal was being released back into the market.

“There was a swing in investment demand from a negative 565,000 ounces in 2011 to a positive in 2012 of 470,000 ounces,” he said.

Johnson Matthey anticipates some of the same trends continuing in 2013, such as strong use by the auto industry and less supply from Russia.

“So indications are that palladium would remain undersupplied,” Coombes said. “If that’s the case, then I think investors would continue to be positive towards it.”

Johnson Matthey looks for palladium to average $740 an ounce over the next six months, with a projected high of $830 and low of $635.

Sales from Russian state stockpiles helped keep the palladium market in a surplus in years past. However, Johnson Matthey said it believes these state reserves are “almost completely depleted.” The exact level of Russian state stockpiles is a closely guarded secret.

“However, what has been gleaned in the last few years supports a growing consensus -- which we share -- that sales from stocks in 2013 will be less than half of the 2012 level, which was itself sharply down on previous years,” Johnson Matthey said in its report.

Supplies Decline; Auto-Catalyst Demand Hits Record High

Russian newly mined supply declined by 3% to 2.63 million ounces, while sales from state stocks fell to 250,000 ounces from 775,000 in 2011 and 1 million in 2010, Johnson Matthey said. South African palladium supply, affected by strikes and other stoppages, slid last year by 9% to 2.33 million ounces.

Meanwhile, purchases for auto-catalyst manufacturing increased by 7.5% to a new high of 6.62 million ounces, propelled by recovering car output in Japan after the natural disasters in 2011, further growth in China, and a boom in new registrations in North America as consumer confidence and economic activity continued to improve. The level of palladium demand was up nearly two-thirds from the depressed total of 4.05 million in the recession year of 2009, Johnson Matthey said.

Other forms of industrial demand for palladium collectively weakened by 4% to 2.37 million ounces. “The metal was less intensively used for chip capacitors, its main electrical application, due to thrifting and to competition from base metal alternatives. Demand for palladium process catalysts improved with the expansion of capacity in Asia for making chemical intermediates for polyesters and plastics,” Johnson Matthey said.

Lower consumption in China led to a 12% decline in global palladium-jewelry demand to 445,000 ounces, the report said. “Anaemic consumer demand for palladium jewelry in China has resulted in fewer manufacturers and retailers producing it or carrying stock,” Johnson Matthey said. Demand for palladium jewelry was steady in most other regions and slightly higher in Europe, supported by its use in wedding rings for men.

The shift in physical investment in palladium during 2012 amounted to a net change of more than 1 million ounces. “This was due primarily to a return to net investment in the ETF (exchange-traded-fund) market following heavy profit-taking the previous year, notably by investors in the two largest funds based in London and New York,” Johnson Matthey said. Further, a new platinum/palladium trust was launched late in the year, resulting in further demand.

By Allen Sykora of Kitco News asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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