LONDON -- The launch of exchange-traded funds (ETFs) in platinum is set to upset a fragile market balance and prices, already supported by strong industrial demand, are bound to hit new record highs, analysts say.
Prices jumped this week after London-based ETF Securities and Zurich Cantonal Bank announced plans to launch ETFs, with platinum hitting a five-month high of $1,329 an ounce on Friday, moving closer to last year's record peak of $1,395.
ETFs are listed on stock exchanges and offer investors exposure in the underlying commodity without taking physical delivery. Sponsors of such funds buy a matching amount of the commodity and keep it in bank vaults.
"Inventories have been largely drawn down on the market and that means that you don't have a lot of stocks that you could simply shift to the ETFs," said Michael Widmer, director of metals research at Calyon Corporate and Investment bank.
"The ETFs would add some extra demand which hasn't been there. That means prices will remain well supported and can go up further. We might set a new record high."
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Analysts said the platinum market might close the current year in deficit for the ninth year in a row, with the ETFs dashing hopes of a balanced market in 2007.
The market ended 2006 with a deficit of 20,000 ounces as demand of 7.02 million ounces outweighed supply of 7.0 million.
The Zurich platinum fund expects volume of 70,000 ounces in its first year and ETF Securities hopes to accumulate 76,000.
Should similar products be launched on other exchanges, the volumes tied up by ETFs would become significant, said David Holmes, director of precious metals sales at Dresdner Kleinwort Investment Bank.
DWINDLING STOCKS
World stocks have been falling because of strong demand from the autocatalyst sector, which uses platinum to clean vehicle exhaust fumes. Stricter emission norms have also been boosting consumption.
Switzerland is the clearing centre of the over-the-counter platinum and palladium market and UBS Investment Bank said it believed most of the world's stocks of platinum were held there. At the end of February, Swiss stocks were estimated at 865,000 ounces.
"We do not believe there are substantial stocks of platinum outside of Switzerland," John Reade, head of metals strategy at UBS, said recently.
He said each 100,000 ounces of investment in ETFs might lift platinum price by $40 an ounce.
Platinum demand for autocatalysts jumped to 4.38 million ounces in 2006, up nearly 15 percent from the previous year, while consumption in the chemicals and electronics sectors rose by 12 percent to 770,000 ounces.
"The risk to the platinum market from an ETF is that skyrocketing prices will push industrial users to find alternatives," said John Meyer, analyst at Numis Securities.
Even if platinum prices then fell, consumers might find it hard to switch back to the metal, he said.
Platinum is the best suited metal for diesel autocatalysts. Technologies have been developed to use palladium, but they are not yet popular. Jewellers have also been shifting to palladium.
OPPOSITION
Leading platinum producers, distributors and market players worry that the market impact of ETFs might damage long-term demand.
"It's definitely not good news," said Bob Gilmour, manager of investor relations at miner Implats , adding Implats had little metal for the spot market as most of its platinum was supplied through long-term deals.
South Africa's Anglo Platinum Ltd , the world's largest platinum producer, and Implats, the second-biggest, account for about 70 percent of world platinum supply.
Trevor Raymond, senior manager at Anglo Platinum, said the company would not supply metal directly to the funds.
"In principle, we are opposed to ETFs because of the upward impact on price and the damage to long-term growth of demand for the metal," he said.
"Platinum prices have done well over the last eight years. Pure demand-supply fundamentals have been driving the market and producers would like to keep it that way," said Jon Bergtheil, global metals strategist at J.P. Morgan.
"What they don't want to see is platinum running up to $1,600 an ounce and then collapsing to $900."
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