Palladium demand grew by 480,000 oz in 2005 to a five-year high of 7.04 million oz, primarily due to increased purchases by Chinese jewellery manufacturers. As in 2004, mine production was supplemented by substantial year-end sales of Russian metal from stocks and, at 8.39 million oz, total mine supplies of palladium exceeded demand by 1.35 million oz.

Demand for palladium from the Chinese jewellery trade jumped by 71 per cent in 2005 to 1.2 million oz. The low cost of financing palladium, and the higher profit margins available compared with platinum, enabled manufacturers and retailers to establish and maintain large inventories of palladium jewellery. In contrast, purchases of palladium for autocatalysts increased by less than 1 per cent to 3.8 million oz in 2005, as average catalyst loadings continued to decline.

MIXED PROSPECTS FOR DEMAND THIS YEAR

After rising strongly for the last three years, demand for palladium could flatten out in 2006. Autocatalyst demand prospects are positive, as OEMs in the USA and Asia are increasingly replacing platinum with palladium in autocatalysts for gasoline engines. The outlook for jewellery demand is less certain. Although retail sales in China may well strengthen, the large inventories of palladium jewellery built up in 2005 could stifle any growth in purchases of metal by manufacturers. With South African mine output expanding, and Russia continuing to sell state stocks, another surplus in supply in 2006 is likely.

PALLADIUM PRICE COULD PASS $400 BUT DOWNSIDE RISK REMAINS

The liquidity in the palladium market capped the price at or just above $200 for the first nine months of 2005, before fund buying in the fourth quarter pushed the price to $297. If speculative buying continues, Johnson Matthey forecasts that palladium could trade as high as $420 over the next six months, but that in the event of a major fund sell-off the price could drop to as low as $260.