Can Palladium Make a Comeback?

Most raw materials have jumped in price over the past few years, but palladium has fallen sharply and is now languishing at below $200 an ounce, says Emanuel Balarie of Wisdom Financial on Gold-eagle.com. So is the metal, used in industries ranging from electrical components to surgical instruments, worth a look?

The primary industrial application for palladium is in the automobile sector, where, like platinum, it is used in catalytic converters. With platinum vastly more expensive at more than $900 an ounce, car makers should switch back to palladium to produce catalytic converters.

This process appears to be beginning demand for platinum from US car-makers slid 10% last year, while palladium demand jumped by 20%. Chinese demand for palladium jewellery as a substitute for the more expensive platinum has also risen, says Canada's Scotiabank.

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Nevertheless, a sustained upswing could still be years away. A technology allowing palladium to be used in catalysts for diesel motors (as platinum is now) may not be marketable for a few years, says FAZ.net, but the key problem for palladium is a supply overhang that, according to Johnson Matthey, is 15% of annual demand.

And this won't be eroded quickly, as mine output is expanding. Supply is set to expand by about 7% in 2006 and 2007, while the respective figures for demand are 10% and 9%. Johnson Matthey forecasts an average price of $180 next year.

Don't count on palladium catching up with other commodities any time soon.