China recently agreed to make yuan flexible by ending its peg to the dollar. This move was welcomed by several nations, including India.

However, certain precious metals also gained from this move. Some of the major gainers were platinum and palladium. With the auto sector in China witnessing a major surge, platinum and palladium will be in huge demand in China now. To add to that the yuan's link to dollar has ended. This means the metals will be cheaper in Chinese market and the demand will be soaring.

Overall, cheaper costs to manufacture cars and a probable decline in car prices will increase automobile demand. This, in turn, will increase the demand for palladium and the metal's price.

Palladium producers Stillwater Mining(SWC), North American Palladium and Platinum Group Metals(PLG) are poised to benefit from the increase in palladium prices.

China surpassed the US to become the world's largest automobile market in 2009. During the first five months of 2009, production in the domestic auto sector zoomed 56% from a year earlier. Since the auto industry accounts for nearly half of the world's palladium and platinum demand, an uptrend in China's automobile production will benefit palladium.

Palladium and platinum are used in catalytic converter applications in automobiles. Palladium has been substituting for platinum as product differentiation is insignificant. However, price spreads between the two metals is quite substantial. Currently, palladium and platinum for spot delivery are trading around $484 an ounce and $1,586 an ounce on the New York Mercantile Exchange.

Palladium deficit is expected to elevate during 2010 because of China's demand, thereby supporting higher palladium prices. Stillwater Mining, North American Palladium and Platinum Group Metals are set to rally from the metal's outlook and may outperform gold and silver stocks even on a risk-adjusted basis for 2010.

The People's Bank of China indicated on June 19 it's abandoning the 6.83 yuan peg to the dollar adopted during the global crisis to shield exporters.