Russian Stocks, Chinese Demand Keys for Palladium

"Russian state stockpiles are dwindling, possibly depleted."

Johnson Matthey says any shipments of Russian state stocks—or lack of them—plus demand from China may be the key drivers for palladium prices in 2011.

A number of analysts have suggested in recent months that state stockpiles in Russia are dwindling and have perhaps even been depleted. The government does not publicly disclose the data.

In its Platinum 2010 Interim Review issued Tuesday, specialist chemicals and metals group Johnson Matthey said its 2011 forecasts assume that the remainder of the palladium shipped into Switzerland from Russian state stocks in 2007 and 2008 will have been priced and sold in 2010.

"It is unclear whether any Russian state stocks remain to be sold in 2011," Johnson Matthey said.

If not, this would mean a tighter market, particularly if demand remains strong in China.

"If no shipments of Russian state stocks of palladium take place in 2011, the palladium market could be substantially in deficit," Johnson Matthey said. "Equally, the demand outlook for palladium is so strongly weighted towards Chinese economic and industrial growth that any softening of that growth could reduce the demand, moving the market closer to balance."

With the economic slowdown in the West but booming growth in China, the latter has become the world's largest automobile market. Furthermore, the Chinese mainly use gasoline-powered cars, which can use less expensive palladium rather than platinum for auto catalytic converters.

For 2010, Johnson Matthey characterized the palladium market as close to balance, with a small supply/demand surplus of 45,000 ounces.

Johnson Matthey described the fundamental outlook for palladium over the next 12 months as "positive," forecasting an average price of $710 per ounce over the next six months and a peak of $850.

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