Palladium Futures Index (PALLADIUM)

[Pro-Life]

Palladium's Two-Year High Linked to Investment Demand, ETFs

14 April 2010, 8:49 p.m. EST
By John Dourekas
Of Kitco News

http://www.kitco.com/reports/KitcoNews20100412JB.html

Montreal (Kitco News) -- With palladium prices at two-year highs, many industry experts say that the rise of the metal -- primarily used in cars -- is not solely due to the auto sector recovery but also because of impressive investment demand.

ETFS Physical Palladium Shares (Ticker: PALL) have created additional investment demand and in turn are removing significant amounts of physical palladium from the supply chain, the industry officials said.

George Topping, Managing Director of Base Metals Research for Thomas Weisel Partners, said that during the past two years the demand for investment has grown and there has been a tremendous interest in palladium.

"With Exchange Traded Funds (ETFs), it makes it even easier to invest - they are a sudden and unexpected source of demand. It doesn’t give time for the industry to respond, so there is a good potential for prices to spike, " Topping said.

Palladium, currently sitting at $545 an ounce (as of press time) could possibly hit highs of $700, said Topping.

Quoting figures from Johnson Matthey, Topping said that investment demand for palladium was 260,000 ounces in 2007; 420,000 in 2008 and 635,000 ounces in 2009.

Rik Visagie, a mining analyst for Octagon Capital, said the ETFs have stepped in and taken half a million ounces of palladium off the market. “We picked palladium to outperform both platinum and gold in the intermediate term,” Visagie said.

William Biggar, the President and CEO for North American Palladium, also sees ETFs as being an important thrust behind palladium’s rise. “I think ETFs can be quite a dramatic factor going forward – it was a dramatic factor for gold," Biggar said. "We are seeing a similar trend emerging with palladium; people want access to it and they want to invest in ETFs."

In its annual report released last week, Stillwater Mining Company - the only U.S. producer of palladium and platinum- indicated that new palladium ETFs have increased retail demand for PGMs. Stillwater Mining is also the largest primary producer of platinum group metals (PGMS) outside of South Africa and Russia. The firm’s annual report highlights the fact that palladium remains a scarce commodity with very limited prospects for supply growth and one whose production problems are still present.

“South African production, key to global supply, faces impending severe operating and growth constraints,” the Stillwater report said. It also said that Russian state inventories of palladium that historically overhung the market now appear to be fully depleted.

Biggar said in terms of where palladium is positioned right now, "the fundamentals have never looked better. If you look at the supply side , palladium is a very rare precious metal – there are only about 6 million ounces produced annually. If you look at where the 6 million come from – it is nearly 50% from Russia.”

Palladium, primarily mined in Russia and South Africa, is diminishing in supply, said Visagie of Octagon Capital. “The Russian stockpiles are no longer there - palladium on the consumption side has been living off the stockpile for 20 years," he said. "Plus you have the substitution side - as platinum becomes more expensive there is a great impetus to cut down the cost and try to use palladium."

Topping , of Thomas Weisel Partners , said that the Russian supply will continue to decline. “Production in Russia fell from 3.66 million ounces to 3.56 million ounces from 2008 to 2009, " he said. In 2007 they were at 4.5 million ounces – so Russia has seen a decline in production.”

Palladium, along with platinum and rhodium, is primarily used to manufacture automobile catalytic converters, which filter out carbon monoxide and particulate emissions. Prices of all three metals prices began a steady climb last week as automakers reported improving sales and the Labor Department said 162,000 jobs were created in March.

--By John Dourekas of Kitco News, [e-mail]
(Daniela Cambone contributed to this report)