The Case for Palladium


"The international market is expected to tighten enormously within two years."

When it comes to precious metals, palladium may give investors more bang for their buck than its flashier cousins.

The often-forgotten white metal is expected to outstrip gains of both gold and silver again this year, thanks to concerns over supply disruptions and surging car sales in fast-growing Asian countries.

"I expect [sales] to heat up again," said Patricia Mohr, a commodity markets specialist at Bank of Nova Scotia. Growth will come from China's smaller cities, many of which are home to at least 10 million people, Ms. Mohr said. Because car ownership stands at 42 per 1,000 people in China and 14 per 1,000 in India compared with 782 per 1,000 in the United States, there is room to grow in Asia.

Russia has been the largest producer of palladium and has kept up with demand because of a state-owned stockpile. But its inventories are dwindling and could be depleted within two years, and "then the market is really going to tighten enormously internationally," Ms. Mohr predicted.

Rising labor and electricity costs in South Africa, the world's second-largest palladium producer and the largest platinum producer, are also sparking concerns about supply. The country could face a major power shortage over the next five years that may trigger rolling blackouts, RBC Dominion Securities analyst Leon Esterhuizen wrote in recent report.

South Africa's recent move to launch a state-owned mining company has also raised concerns about plans to nationalize the industry. "I personally don't think it [nationalization] will happen, but it is all contributing to supply uncertainty," said Haywood Securities analyst Chris Thompson, who is also more bullish on palladium than platinum this year.

"If you want to play this space, you need to look to companies that produce the metals as primary products, and there are not many," he said.

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