Despite a strong start to the year, the palladium market is expected to remain in deficit by around ten per cent in 2013, while the platinum market is expected to move from deficit to a small one per cent surplus, according to a report by ETF Securities.

With over 80 per cent of the world’s supply of platinum mined in South Africa, supply disruptions and political hurdles in the country can have a big impact on the price. The extensive use of platinum and palladium in vehicle catalytic converters also makes their demand particularly sensitive to economic, industrial and market conditions at a global level.

Social tensions in South Africa reduced platinum group metal production in 2012 by 13 per cent, the firm said. While the 10 per cent deficit in the palladium market was driven by a combination of lower supply from South Africa and Russia and higher auto-catalyst demand from China and the US, the five per cent negative balance in the platinum market was largely a result of a sharp fall in South African production.

The research said that supply side issues in South Africa were likely to remain an important price driver in 2013. It also suggested that labour disruptions and production rationalisation as the sector struggles with spiralling costs and subdued demand due to the eurozone crisis, would also further tighten supply.

ETF predicts that in 2013 declining platinum consumption in Europe is also set to continue due to falling auto sales and demand drivers are likely to favour palladium, which is more exposed to the strong growth of the US and Chinese auto sectors.

The firm pointed out that while the demand for jewellery in Europe was unlikely to improve any time soon, most of the demand growth in the platinum market was likely to come from the Chinese jewellery sector.

"While both platinum and palladium registered a supply deficit in 2012, we remain more positive on palladium’s price prospects than platinum because of its more favourable demand outlook in 2013. Given palladium’s predominant use in gasoline cars, we expect it to benefit from continued improvement in auto sales in China and the US," said Nicholas Brooks, head of strategy at ETF Securities.