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Palladium Prices Set to Rally

Stocks in this article: PALL SWC

NEW YORK ( TheStreet) -- Palladium prices are set to rally this year on the back of a supply shortfall, low inventories and reviving world auto demand.

Some analysts estimate the prices to soar to $675 per ounce this year from the current $515. We expect an upgrade in the 2010 target prices for palladium in light of palladium producers' forecast of a widening demand supply gap for 2010.

Derek Engelbrecht, marketing group executive of Impala Platinum, estimated a deficit of 810,000 ounces during 2010 and anticipates palladium prices to double over the next five years.

In 2009, the deficit for palladium was only 12,000 ounces compared to a deficit 650,000 ounces in 2008, attributable to weaker demand, especially from the automobile sector which recorded a 14% drop in demand for the metal.

However, in the first four months of 2010, U.S. automobile sales are up 16.7% from a year earlier, further accelerating the demand for palladium. Meanwhile, automobile sales in China zoomed 77% in the first quarter of 2010, compared to past year sales. The auto sector drives nearly half of the global demand for palladium, while investment demand, electronics and dental applications, and jewelry account for the balance.

ETFS Physical Palladium Shares ETF (PALL), launched on January 08, 2010, outperformed other precious metal ETFs . Analysts at RBS estimated the worldwide capital inflows into palladium ETFs at 28% of palladium consumption during the quarter.

For 2010, palladium producers anticipate the deficit to increase further, surfacing from the depletion in Russian stockpiles, even as the demand for industrial use, investment and as a hedge against inflation enhances.

Stillwater Mining (SWC), announced mid-April that a consensus appears to be forming about the tightening outlook for palladium supply. Chairman and CEO Frank McAllister said, "A fundamental palladium market deficit potentially lies directly ahead, which will leave incremental palladium supply reliant on existing stocks, recycling supply, ... and still will fall short of meeting demand."

Neville Nicholau, CEO of Anglo Platinum said, "Palladium may be in deficit for most of the next decade as Russia depletes inventories, and uses for the metal increase."

On Monday, Stillwater reported net income of $13.4 million, or $0.14 per dilute share, for the first quarter of 2010, exceeding the $0.11 per share consensus estimate as per analysts polled by Bloomberg. The company attributed its outstanding performance to higher palladium and platinum prices during the quarter.

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