Increased demand from investors and steady depletion of Russian state stockpiles are likely to bring the palladium market into balance in 2010.
According to UK investment bank Barclays, despite an expected increase in supply, strong growth in investment demand, coupled with the possible exhaustion of Russian state supplies has the potential to balance the market in 2010, and even drive it into deficit.
Perhaps more importantly, if Russian state stocks are close to depletion or released slower than historical levels, a more constructive fundamental base is likely to emerge longer term.
Analysts pointed to data showing the palladium market to be in surplus the past nine years by 500,000 oz to 2 million oz. Without Russian stockpiles, the market would likely have been in deficit in three of the last five years.
Stock releases were of 700,000 oz to 1.49 million oz since 2005, while UK metals research firm GFMS estimates stock releases in the range of 900,000 oz to 1.55 million oz over the same period.
Since 2000, stock releases are estimated to have exceeded 10 million oz, according to GFMS estimates. Palladium shipments from Russia to Switzerland picked up at the start of 2010, but have slowed since and are down by 7% for the year to April.
Though the size of Russian state stockpiles has never been openly disclosed, state stockpile releases have kept the market well-supplied.
In 2008, the world's largest palladium producer, Norilsk Nickel, estimated there was one to five years of additional supply from the state stocks.
But Norilsk in March said it did not expect any palladium supplies from Russian state stocks between 2011-2015 and believed stocks had fallen to relatively low levels and therefore, would have limited impact on the market in 2010.
Barclays analysts believe visible palladium stocks are becoming even more visible, and noted that, while physical palladium holdings in PGM exchange-traded products can be drawn down on investor redemptions, investor interest for now appears robust, with short-term adverse price movements having a limited impact on investor appetite.