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.

The year-to-date increase in palladium is about 26%, in comparison to 8%, 5% and 15% gains witnessed for gold, silver and platinum, respectively.

Palladium Producers

Palladium mines are rare and are mostly concentrated in Russia and South Africa. Norilisk Nickel is the largest PGM producer in Russia with mines in northern Siberia and on the Kola Peninsula. These mines yield over 2.7 million ounces, or 42% of annual global palladium production. The company owns 51.3% of Stillwater Mining's common shares.

Anglo Platinum, the largest PGM producer in South Africa, produces more than one million ounces, or 16% of the world's annual palladium production. In addition to seven mines in South Africa, the company has operations in Canada, Russia, Brazil, and China. The company has more than 220 million ounces of reserves, comprising of platinum, palladium, rhodium, and gold.

Other major South African producers include Impala Platinum, Lonmin Platinum, Aquarius Platinum, and Northam Platinum.

In the U.S., Stillwater mining company is the only primary producer of palladium with an annual production of 0.45 million ounces, or 7% of annualized global production. The company owns the Stillwater and East Boulder Mines in south-central Montana, the only primary PGM mine. Small quantities of the metals are also recovered as byproducts of copper refining by companies in Texas and Utah.

In 2009, the net import reliance of the U.S. for palladium, as a percentage of consumption was 47%, as estimated by the USGS. During 2005-08, net import reliance for the metal was between 73% and 84%. During this period, Russia and South Africa accounted for 46% and 21%, respectively, of the country's palladium imports.

North American Palladium ( PAL) is Canada's only primary producer of palladium accounting for less than 1% of the world's palladium production.

Palladium Demand-Supply Gap

Between 2003 and 2006, palladium has been in surplus because of a supply overhang. In 2006, palladium registered the highest surplus of 1.5 million ounces, as supply outstripped demand on the back of Russian palladium stockpiles.

However, in 2008, gross deficit of the metal reached 650,000 ounces, as the Russian palladium inventory depleted, a severe power crisis and flooding in a major mine disrupted production in South Africa, while demand from the automobile sector increased.

In 2009, world palladium mine supply declined by only 1% to 6.31 million ounces, with South Africa accounting for 2.48 million ounces.

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