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Palladium to get no quick lift from Norilsk deal

By Clare Black

LONDON, Nov 22 (Reuters) - Plans by Russian palladium miner Norilsk Nickel to buy U.S. firm Stillwater Mining could benefit the metal's weary auto industry consumers but may come too late to halt them using alternatives, analysts said on Friday.

Prices for the precious metal, used mainly in the vehicle catalytic converter market, are at their lowest level for four years, as disgruntled consumers shunned palladium after years of supply disruption in Russia.

Consumers have already started switching to platinum which can also be used to clean car exhaust emissions and is more reliable in its supply.

Moscow-based Norilsk is the world's largest producer of palladium and nickel and acquiring Stillwater, a palladium and plantinum producer, would give it control of a large chunk of the market.

"U.S. consumers, mainly the auto companies, are nervous about Platinum Group Metals (PGMs) and palladium particularly, because of the price volatility and the fact that it is very much controlled by one large producer," Kevin Norrish, head of commodities research at Barclays Capital said.

At their peak in 2001, palladium prices soared to over $1,000 an ounce, while platinum hit a low of $403/oz.

But due to substitution, palladium now fetches barely $270/oz, while platinum is trading at around $600.

"By buying Stillwater and posting collateral, it gives them (Norilsk) a much more secure trading relationship with the U.S. customers. It should mean they (consumers) are a bit more secure about using palladium," Norrish said.

The two companies said on Wednesday that Norilsk was buying a 51 percent stake in Stillwater for $341 million, of which $100 million to be paid in cash and the rest by 876,000 troy ounces of palladium.

Although the metals prices showed little immediate change after the announcement, the move could spark a price war between platinum and palladium as they fight for market share.

That could mean lower prices for both in the long run.

"The stakes have been raised and the winners, probably ultimately, are the buyers who have been on the receiving end of this tiny PGM complex which has caused them so much grief and anguish," said Andy Smith, precious metals analyst with Mitsui Precious Metals.

Russian bureaucracy frequently halted supply for months at a time, sending prices rockeing and leaving consumers uncertain as to when metal would become available again.

Barclays' Norrish said if the deal was approved, it could have some positive repercussions for the beleaguered palladium market in the medium term.

"It may well be that if it does make the auto manufacturers a bit more secure, then it may slow down that process by which substitution has been occuring very rapidly," he said.

"In which case, you might expect palladium to have a sounder long-term profile and that should feed through into better long- term average prices."

REGULATORY OBSTACLES

Analysts said the potential purchase still had to hurdle regulatory barriers, amongst other obstacles.

"It would give Norilsk a very large share of the PGM market," Norrish said.

The Russian miner currently accounts for 40 percent of world palladium output, while Stillwater supplied five percent of global supply in 2000, according to its website.

The two companies said on Thursday the purchase would be subject to approval from U.S. antitrust authorities and Russia's Central Bank.

Analysts were unsure as to whether the European Union would also want to scrutinise the deal.

"There was an intimation they didn't think the European authorities were an issue. I honestly don't know, but they (EU) have stuck their oar in the PGM market before with Lonmin and Impala," Mitsui's Smith said.

In 1999, the EU blocked a proposed merger between the world's second biggest platinum producer Impala Platinum and Lonmin on antitrust concerns.

Although the companies' platinum interests are in South Africa, the court ruled that it was the place goods were sold, rather than where they were produced, that mattered.

Stillwater also still has to gain shareholder approval and amend its $250 million credit facility with a syndicate of lenders.