HSBC Securities (USA) analysts James Steel and Howard Wen forecast the palladium market "will move back into a substantial deficit of 544,000 ounces in 2012, following a significant surplus of 1.255moz in 2011, according to our supply/demand model."
"For 2012, we forecast palladium's deficit will widen to 930,000oz," they predicted. "A swing back to a deficit would support our view that prices are likely to rally from current levels."
Meanwhile, HSBC lowered its palladium forecast this year from U.S. $785/oz to $655/oz. For 2013, HSBC lowered its forecast from $825/oz to $750/oz. For 2014m, HSBC cut its forecast from $835/oz to $800/oz. The long-term forecast is unchanged at $850/oz.
The analysts anticipate a wide $500-$700/oz trading range for the rest of this year.
Based on low PGM prices, published data, and planned producer cutbacks in South Africa, HSBC expects declines in palladium output this year and next year. "Meanwhile, output from Russia, the largest producer, is likely to decline further, based on falling ore grades," said the analysts.
HSBC estimates auto industry demand for palladium will be 6.15 million ounces this year, a 128,000-ounce increase from its previous forecast. Palladium demand is forecast to increase to 6.3 million ounces next year, a 100,000-ounce reduction from HSBC's prior forecast.
"Our forecast of a greater increase in demand for palladium versus platinum this year and next year is based on more optimistic auto production forecasts for the US, and moderate but still positive forecasts for China and other emerging-market regions," said the analysts. "These regions are dominated by gasoline-fueled vehicles, which rely primarily on palladium-heavy autocatalysts and use proportionately far more palladium than diesel vehicles do."
HSBC also predict palladium recycled from the auto industry will total 1.7 million this year, representing a 100,000 increase from HSBC's previous forecast of 1.6 million ounces. Combined electrical, electronic, and chemical demand for palladium is forecast at 1.38 million ounces, down 140,000 ounces from HSBC's previous forecast of 1.52 million ounces.
For 2012, HSBC forecasts total palladium ETF demand will be 400,000 ounces, unchanged from its previous forecast. "For 2013, we forecast palladium ETF demand will increase by 100,000oz to c500,000oz."
The level of Russian palladium stockpiles is a crucial unknown in the market. However, HSBC is maintaining its 2012 forecast of Russian stockpile sales for export at 300,000 ounces.
"Based in part on Norilsk Nickel's guidance, we forecast Russian palladium production at 2.63 million ounces for this year, a reduction of 20,000 ounces from our previous forecast. This would mark a decline of 75,000oz from 2011," said the analysts.
For 2013, HSBC forecasts a decline of Russian palladium production of 2.49 million ounces, a 1,000-ounce reduction from its previous forecast.