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(Kitco News) - Palladium prices may rise in 2012, supported by higher industrial demand for the metal and lower total supplies, said a New York–based consultancy.

The surplus of palladium is expected to shrink to 51,990 ounces in 2012 as use of the white metal in auto demand should drive use and reduced mine output should limit production, said the CPM Group in its Platinum Group Metals Yearbook 2012 released Tuesday. Stronger fundamentals could support prices and encourage investor demand, they said.

SUPPLY

Total palladium supply in 2012 is seen falling 0.7% from 2011 levels, to 8.55 million ounces. South African mine supply is expected to dip 3% to 2.56 million ounces, while Russian mine supply is seen down 2.5% to 2.64 million ounces. With the two largest producers cutting output, it will more than offset increases from Canada, seen up 7.2%, and Zimbabwe, up 2.2%, along with an expected 3.5% increase in scrap supply from auto catalysts, CPM Group said.

The firm said the slowdown in South African output will be the main drag on palladium supply in 2012. The country has seen an increase in government-imposed mine safety stoppages, known as Section 54 stoppages, and labor strikes, which has pinched output.

Russian government palladium inventory levels remain a mystery, CPM Group said, as they are a state secret. Although there was speculation in 2011 that government inventories were depleted, CPM Group doesn’t believe it.

“It actually seems that the Russian government continues to hold palladium in inventories, but has no intention of selling or exporting these stocks of palladium. In 2011 and early 2012, market observers began positing that state stocks would be depleted in 2013 or 2014. Such statements have been common in the market for at least a decade, however,” CPM Group said.

In 2011, total supply was 8.21 million ounces, with mine output at 6.88 million ounces and scrap at 1.73 million. Last year, output rose from a ramp-up in production at Canadian and Zimbabwean mines, but that capacity has been optimized, the firm said, so their production won’t be enough this year to offset falling Russian and South African production. Mine supply in 2012 is forecast down 1.7%, to 6.8 million ounces.

FABRICATION DEMAND

Palladium fabrication is seen up 5.6% from 2011 levels, rising to 8.49 million ounces, CPM Group said, with strong demand coming primarily from the auto catalyst sector.

“In addition to healthy demand in some of the major gasoline engine markets, there also is ongoing tightening of emissions standards and increasing use of palladium in diesel auto catalysts that is expected to help boost demand for the metal. Palladium fabrication demand is forecast to rise in all sectors of the palladium market during 2012, except for jewelry,” they said.

Auto demand for palladium in 2012 is seen at 5.3 million ounces, up 8.5%. The U.S. market is the top demand-driver for palladium, as 95% of the U.S. light-duty vehicles are gasoline-powered engines that use the metal. Auto sales have been picking up in the U.S., with CPM Group noting that less-stringent lending and low interest rates have been one of the main drivers of vehicle demand there. Another strong source of demand comes from the emerging markets, which now accounts for 49% of the global auto market. Japan is also seen rebounding after last year’s twin natural disasters.

Use in electronics is seen up 3.4%, to 1.24 million ounces, as more spending on information technology will boost palladium’s use in semiconductors. Although palladium is not used as extensively as it was in the 1990s, the big increase in the number of electronic units being produced has offset the lower amount of metal used in each product.

CPM Group noted not only is palladium used in a vehicle’s auto catalysts, automobiles are featuring more electronics, thus boosting use of the metal. Global spending by businesses and governments on computer hardware is seen growing this year, but not as strong as it was in 2011. Spending on personal electronics is also expected to rise.

Jewelry demand has been hit hard because of higher prices and is expected to fall again this year. Demand is seen down 4.5%, to 470,000 ounces 2012, on the heels of a 7.1% drop in 2011. Palladium is usually alloyed with other metals such as platinum, but has not attained a large share of the jewelry market on its own.

“Palladium jewelry is mostly consumed in the second- and third-tier cities, where consumers have limited disposable incomes and are more sensitive to prices. During 2011, higher palladium prices dampened consumer appetite for jewelry made with the metal,” CPM Group said.

The firm said higher prices, little marketing growth for the metal and soft consumer demand could weigh on jewelry use.

After declining in 2011, dental use is seen up marginally in 2012, up 0.1% to 783,000 ounces. Precious metals use in dentistry is hurting because of substitutions for non-precious alloy compositions, CPM Group said. There is a limit to substitution because of precious metals strength and durability. Prices are relatively weaker versus 2011, so that should help improve use slightly.

Chemical and petroleum refining sector use is seen rising 3% to 471,000 ounces. This rise is slightly lower than gains seen in the past two years as demand is expected to be weighed down by European economic worries.

Investment demand fell in 2011 on worries about global economic growth, but that may rebound on hopes of better industrial demand.

By Debbie Carlson of Kitco News dcarlson@kitco.com

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