Sept. 30 (Bloomberg) -- OAO GMK Norilsk Nickel, the world's largest palladium producer, expects Russian stockpiles of the metal to decrease as production levels off next year and demand rises for an alternative to more expensive gold and platinum.

``We don't expect a drastic change in output,'' Anton Berlin, head of Norilsk's market analysis and development section, said yesterday in an interview in Kyoto.

Norilsk's palladium production is affected by nickel demand and prices because the company makes the precious metal as a byproduct from nickel smelting, Berlin said. Norilsk is also the world's biggest producer of nickel, which is used to make stainless steel.

The Moscow-based company said in February its palladium production would reach 3.02-3.07 million ounces this year.

Palladium stockpiles in Russia have been falling for ``quite a while'' because Norilsk has been selling the metal to meet requirements from overseas end-users, Berlin said.

``There is an end to stockpiles,'' Berlin said, declining to give the volume of inventories. ``It cannot be infinite.''

Norilsk sells palladium through supply contracts with Japanese trading companies and bullion houses, Berlin said. There are no problems in renewing contracts to Japan next year, he said.

Japanese makers of jewelry, electronic components and car catalysts are increasingly considering substituting palladium for gold and platinum, Berlin said.

``Price differential is huge,'' Berlin said. ``It gives a lot of opportunities.''

Palladium for immediate delivery traded at $212.50 an ounce at 12:09 p.m. in Tokyo. Prices surged to a record $1,125 an ounce in January 2001 as Russia failed to renew supply contracts with Japanese companies, leading to a disruption in shipments.

Gold for immediate delivery traded at $902.54 an ounce while platinum was at $1,083 an ounce.

To contact the reporter on this story: Aya Takada in Tokyo atakada2@bloomberg.net

Last Updated: September 29, 2008 23:46 EDT