Bleak economic prospects and a stronger dollar could over the next six months send prices of precious metal palladium to near 12-year lows $125 an ounce, an industry report showed on Tuesday.
The world's top platinum refiner Johnson Matthey estimated in an interim review that the palladium market would be in surplus by 320,000 ounces this year compared with a surplus of 1.655 million in 2007.
It expects prices to range between $125 and $300 an ounce over the six month period. Levels at $125 would be the lowest since early 1997.
Matthey said the outlook for palladium used to make autocatalysts was positive in some applications, but deteriorating economic prospects could hit prices.
"However, should economic conditions stabilise or improve, palladium's strengthening fundamentals could see it trade as high as $300 within the same period," it said.
"The palladium price responded to movements in currencies and prices of other precious metals in the first three quarters of 2008."
The spot palladium price touched $590 an ounce in March, the highest since July 2001. On Tuesday it was around $210 an ounce.
A strengthening U.S. currency makes metals priced in dollars more expensive for holders of other currencies. Precious metals, especially gold have in the recent financial market crisis been used by investors as an alternative currency.
The dollar has been rising since August as markets started to factor in the realisation that economic slowdown would not be confined to the United States.
CHALLENGES
Johnson Matthey expects palladium supplies to fall by 12.5 percent to 7.51 million ounces in 2008 and sees demand rising 3.8 percent to 7.19 million ounces.
"Palladium sales from South Africa will decline to 2.525 million ounces, reflecting the challenges in the mining sector there this year," the refiner said.
Power problems in South Africa, the world's largest producer of palladium, have hit production this year.
"Russian supplies of palladium from primary production are forecast to slip slightly, to below 3 million ounces .... sales of palladium from Russian state stocks are expected to fall from 1.49 million ounces in 2007 to 800,000 ounces this year."
The company expects car makers to buy 4.58 million ounces of palladium in 2008, 30,000 ounces more than last year.
"Declining North American vehicle production will cut 350,000 ounces from demand," it said.
"However, this will be offset by rising production in China, Russia and South America and increasing use of palladium in diesel oxidation catalysts on cars in Europe."
New global demand for palladium jewellery globally is forecast to rise by 55,000 oz to 780,000 oz in 2008, reversing two years of declines.
"A reduction in recycling of old stock in China and good interest from manufacturers and retailers in the second half of the year will help boost demand there," Johnson Matthey said.
"Demand will also rise in Europe and in North America as interest in palladium jewellery continues to grow."
Johnson Matthey expects physical investment demand for palladium to rise to 470,000 ounces this year from 260,000 ounces last year.
(Reporting by Pratima Desai; editing by Editing by Peter Blackburn)
