Platinum and palladium recorded the second consecutive year of positive returns, rising +20.5% and 97.2% respectively, in 2010. Recovery in the auto sector and robust investment demand for precious metals were key reasons for the impressive performance. PGMs remained firm in the first 2 weeks in 2011 with platinum rising to 1833, the highest level since July 2008, and palladium to 825.1, a level not seen since March 2011. PGM prices should continue to perform well this year as driven by strong African rand and supply shortage in the palladium market.

We are more bullish on palladium than platinum as the demand/supply outlook for the former is tighter. While there lacks information on Russia's palladium stock sales, the consensus view is that Russian stocks have almost depleted. Over the past few years, sales from Russian state stockpiles reached were 0.9-1M oz, the 3rd-largest contributor to world supply after mine output from South Africa and Russia. If Russia continues to draw a similar amount from stockpiles this year, the palladium market will be at small surplus. If Russia has indeed exhausted state inventories of the metal, the market will definitely be in deficit. In any case, strong production growth in gasoline-fuelled light vehicle will drive the metal to deficit in the medium-term.

According to the China Association of Automobile Manufacturers, China's vehicle sales may grow +10% to +15% this year after surging +32% to 18.06M units in 2010. Robust growth in Chinese auto demand will be driven higher per capita GDP and increase in passenger car density from the low base. In the US, recovery in the auto market as macroeconomic outlook improves will also benefit palladium.

Johnson Matthey said in an interim report that platinum will be in surplus by 290 000 oz in 2010 while the market had anticipated a deficit year due to EU incentive schemes and low mine supply. We expect platinum to remain in surplus in 2011 as increase in vehicle production will be offset by lower jewelry demand and greater level of recycling. That said, platinum price will be supported by higher import costs and appreciation in rand.

We currently retain our price forecasts for platinum and palladium but further upgrades cannot be ruled out should global economy recover faster than previously expected or sovereign crisis in the Eurozone worsen and spur investment demand for precious metals including PGMs.