Palladium Likely to go Bullish in 2012 due to Increased Demand and Decreased Supply

Looks like palladium prices may rise in 2012 - a claim that seems to be supported by both higher industrial demand for the metal as well as lower total supplies.

According to CPM Group's "Platinum Group Metals Yearbook 2012" released on Tuesday, the surplus of palladium is expected to shrink down 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. They also mentioned that stronger fundamentals could support prices and encourage investor demand. Looks like this may be a good time to load up on some palladium huh?

SUPPLY

The total palladium supply in 2012 has been reported as falling 0.7% from 2011 levels, to 8.55 million ounces and this year's mine supply is forecasted to drop 1.7% down to 6.8 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. Also, these two largest producers cutting output should more than offset increases reported from Canada, which is believed to be up 7.2%, and Zimbabwe, up 2.2%, along with an expected 3.5% increase in scrap supply from auto catalysts.

It is the slowdown in South African output that 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, as well as labor strikes, which has been severely pinching output.

Russian government palladium inventory levels remain a mystery, said the CPM Group, as they are a state secret. Although there was speculation in 2011 that government inventories were depleted, there has still been no verification of that.

The CPM Group says, "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."

DEMAND

On the demand side, palladium fabrication is seen up 5.6% from 2011 levels, rising to 8.49 million ounces, said the CPM Group, with strong demand primarily originating 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."

Auto demand for palladium in 2012 has increased an impressive 8.5% to 5.3 million ounces, with the U.S. market being the top demand-driver for palladium - 95% of the U.S. light-duty vehicles are gasoline-powered engines that use the metal. Even further, auto sales have been picking up in the U.S. and CPM Group states that less-stringent lending and low interest rates have been one of the main drivers of vehicle demand here. Another strong source of demand comes from the emerging markets, which now accounts for 49% of the global auto market. Japan is also beginning to rebound and recover from last year’s twin natural disasters.

Use in electronics (yes, did you know that palladium is used 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 nearly as much as it was in the 1990s, the big increase in the total number of electronic units being produced has offset the lower amount of metal used in each product. The increasing number of automobiles featuring electronics further serves to augment demand as well.

As mentioned earlier, jewelry has not enjoyed the same gains in palladium demand and this is due to higher prices in general. Demand there has fallen 4.5% to 470,000 ounces in 2012, but at least it's still shy of the 7.1% drop experienced in 2011.

Per CPM Group, "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."

And before you fall asleep, a quick summary of the other sectors' increases in demand include dental use up 0.1% to 783,000 ounces in 2012 and chemical & petroleum refining use rising 3% to 471,000 ounces.

NOW WHAT?

So there you have it. A rather lengthy and dry summary of a lot of technical numbers coming out of CPM Group. SO what does this all mean for you? Again, I'm not your personal financial advisor, but let's just say that I'm going to put a call over to Leland National Gold to order up some palladium products without the ridiculous markups that most other companies charge...

Be safe, be wealthy and above all else, be happy.

- Mitch

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