The results of Thomson Reuters GFMS' Platinum & Palladium Survey 2013 are in, and the news looks good for palladium investors. According to the precious metals consultancy, palladium recorded its highest deficit in 11 years in 2012. Specifically, supply of the metal fell to 8.19 million ounces, a 4-percent decline, while usage grew 5 percent, hitting 9.32 million ounces. That created a 1.12-million ounce gap between supply and demand, a sizeable increase over 2011′s 279,000-ounce deficit. Residual deficit for the year (calculated by taking Russian stockpile sales and ETF demand into account) came in at 1.16 million ounces, down from a residual surplus of 1.05 million ounces in 2011. The lack of supply was largely the result of lower output from South Africa and Russia, the two biggest producers of palladium in 2012, as per the US Geological Survey. Strikes brought South Africa's production down by 10 percent while Russia put out 3 percent less palladium than it did in 2011, according to Bloomberg's report on the GFMS survey. A "slight reduction" in autocatalyst recycling, caused by scrap collectors holding inventory in anticipation of better pricing, also contributed to the decrease in supply. About two-thirds of demand was driven by the need for palladium for autcatalysts, a Kitco article on the survey notes. This type of demand rose 9 percent on the back of increased vehicle sales and as a result of palladium's growing use as a substitute for platinum in diesel applications. The end of Russian stockpiles? Russia delivered 400,000 ounces of palladium from its stockpiles in 2012, a 50-percent drop from the 800,000 ounces it put out in 2011, and GFMS believes that downward trend is likely to continue.
The country's palladium stockpiles are a "state secret," according to William Tankard, mining research director at GFMS. However, he explained in the presentation accompanying the release of the survey that GFMS believes "Russian sales from historical inventory halved last year, and speculate[s] that 2013 could well mark the end of this source of metal."2013 outlook Commenting on GFMS' 2013 outlook for palladium, Tankard said, "[s]upply will remain constrained and demand will benefit from ongoing strength in the automotive sector." The "key outstanding bear factor" will be investor sentiment toward above-ground stocks, which sit at about 10 million ounces. Based on those factors, GFMS expects palladium to average about $725 per ounce and to see a deficit of between 800,000 to 900,000 ounces in 2013, Bloomberg's report notes. Other analysts concur GFMS is not the only entity predicting a palladium deficit for 2013. As Palladium Investing News reported in January, Ross Norman, owner of Sharps Pixley, predicts that there will be a 450,000-ounce shortfall, while Barclays Capital expects consumption to exceed production by 511,000 ounces. Deutsche Bank's forecast of a 900,000-ounce deficit falls closest in line with that of GFMS. Similarly, Rick Rule, chairman of Sprott US Holdings, recently used $280 million to buy equal amounts of platinum and palladium through the Sprott Physical Platinum and Palladium Trust (ARCA:SPPP). He told The Metals Report in a recent interview that though he expects "a lot of [price] volatility," investors should "understand that the supply-and-demand thesis for platinum and palladium is compelling and simple: The price must rise because the industry does not earn its cost of capital, and the price can rise due to the incredible utility the metals deliver." As with GFMS, these predictions largely rest on expectations of Russian stockpile depletion and continued unrest in South Africa. Palladium closed at $694 per ounce in New York on Monday.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. Related reading: Russian Data Supports Palladium Supply Concerns The Palladium Market Without Russia Analysts Bullish on Palladium Johnson Matthey's Palladium Deficit Forecast Sparks Rally Palladium Likely to Remain in Deficit Next Year, GFMS Says from Palladium Investing News