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(Kitco News) - The global palladium market swung from a deficit to an oversupply situation last year largely due to net disinvestment, but is expected to return to a deficit in 2012, said Johnson Matthey in its “Platinum 2012” report issued Monday.

The report, widely followed by those in the platinum group metals business, listed a 2011 surplus of 1.26 million ounces after a 530,000-ounce deficit in 2010.

Johnson Matthey factors in investment demand—or disinvestment—when calculating supply/demand figures. And that was the primary factor fuelling the turnabout in the supply/demand balance last year, said Tim Murray, general manager for precious metals marketing with Johnson Matthey.

“There was disinvestment 565,000 (ounces) against 2010, when we had nearly 1.1 million go into investment,” Murray said. “So if you actually do the math, the surplus effectively is caused by the disinvestment number in palladium....The ETFs had a large swing of just over 1.6 million ounces, basically, from positive to negative.”

ETF shares trade like a stock but track the price of a commodity. Metal is put into storage to back ETF shares, meaning physical demand, but conversely metal is sold back into market when investors redeem their shares.

Autocatalyst and industrial demand for palladium rose, and Russia continued to sell palladium from government-controlled inventories, the report said.

Gross demand for palladium fell by 13% last year to 8.45 million ounces, Johnson Matthey said.

Combined supplies of palladium from primary producers and Russian state stockpiles remained almost flat at 7.36 million ounces in 2011.Substantial quantities” of palladium were sold from Russian state stocks again, but the volume of shipments, put at 775,000 ounces, was the lowest in several years, Johnson Matthey said. This year-on-year decline in Russian sales largely offset growth in primary output from North America and Zimbabwe, Johnson Matthey said. In South Africa, palladium supplies to the market fell as producers added to stocks, while primary output from Russia was largely flat.

The market got another 2.35 million ounces of palladium from recycling in the autocatalyst, electrical and jewelry sectors, an increase of 495,000 ounces. Recovery from end-of-life vehicles soared by 26% to 1.66 million ounces as highly-loaded gasoline car catalysts were returned for recycling, particularly in North America. Palladium-jewelry recycling more than doubled as a result of returns from unsold retailer stocks and old consumer jewelry.

Johnson Matthey forecasts the palladium market to swing back into deficit this year. Johnson Matthey looks for the market to trade between $620 and $800 per ounce and average at $715 in the next six months.

“We expect that there will be one further year of sales from Russian state stocks in 2012, albeit at a much reduced level than previously, which will represent the bulk of the remaining government-controlled inventories,” Johnson Matthey said. “Gross demand for palladium in autocatalysts is expected to rise in line with higher gasoline vehicle output and greater use of the metal in light-duty diesel emissions control systems, resulting in a modest increase in overall gross demand and pushing the market into a deficit.”

Johnson Matthey anticipates roughly 250,000 ounces of sales from Russian stockpiles this year, Murray said.

“Obviously, that is well off the 775,000 we saw last year. We expect this to be winding down,” he said. “All indications are we’re getting to the point where state stocks are going to be depleted. If that is the case, you are looking at a looming deficit situation for palladium.”

Autocatalyst, Other Industrial Demand Up But ETF Demand Falls

Palladium purchases rose last year in the core autocatalyst and industrial markets, which accounted for 94% of the gross demand of 8.45 million ounces, Johnson Matthey said. The 13% decline in all palladium demand was primarily due to the investment sector switching from “extremely high net demand” in 2010 to liquidation of palladium holdings

“Deep liquidations in exchange-traded funds, especially in the final quarter of the year when prices were falling, left physical investment demand in starkly negative territory by the year-end,” Johnson Matthey said.

Gross demand for palladium in autocatalysts reached record levels in 2011 of 6.03 million ounces. Higher vehicle output in all regions but Japan, plus greater use of palladium in light-duty diesel autocatalysts, spurred demand for palladium in emissions control.

“Gross auto catalyst demand was up by almost 500,000 ounces in palladium and was led basically by growth in emerging markets, led by China,” Murray said. “Also, there was more substitution (to palladium from platinum) in the light-duty diesel market in Europe, which has traditionally been a platinum-dominated sector. Then, there was recovery in North America.”

Demand for palladium in catalyst grew despite the massive earthquake in Japan that disrupted auto production there, particularly in the second quarter, Murray pointed out.

Palladium buying for other industrial applications increased marginally in 2011 to 2.48 million ounces. Recovering demand in the chemical industry in China led to new orders for palladium process catalyst charges. In the electrical sector, purchasing of palladium softened as competition from cheaper alternatives eroded palladium’s market share.

Purchasing of palladium by the global jewelry industry declined once again in 2011, Jonson Matthey said. Palladium continued to suffer from a lack of positioning in the key Chinese market. In Europe and North America, demand responded to price increases; palladium traded on average 39% higher than in 2010, leading manufacturers to offer lower weight and lower fineness alloys to meet retail price points.

By Allen Sykora of Kitco News; asykora@kitco.com

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