The platinum market is expected to continue in a supply deficit in 2008, HSBC metals analyst Victor Flores said on Sunday, with the actual size of the shortfall likely to be determined by whether prices remain at current or higher levels, what the higher prices mean for jewellery demand, the extent to which automakers react to supply concerns in South Africa and demand from exchange-traded funds (ETFs).

Based on various scenarios and price levels, Flores forecasts the platinum market could show a deficit of between 500 000 oz and two-million ounces in 2008, although the latter figure is "at the high end" of predictions.

Recent electricity-related supply disruptions in the world's main platinum producer, South Africa, were largely to blame for the expected deficit growth.

However, a decline in jewellery demand, as a result of spiking prices, may partially offset the lower production from South African producers, Flores said.

Platinum's primary industrial use is in emissions-reducing autocatalysts, and, while there did not appear to be significant scope for car manufacturers to increase their subsitution of platinum's cheaper sister, palladium, upside potential existed in the chance that one or more manufacturers may decide that supply concerns in South Africa justified a significant purchase of the metal to guarantee future supply.

Unlike jewellery demand for platinum, which declined as prices rose, there was less "elasticity" in industrial demand for the metal, as car companies had to meet emission control standards, which were becoming stricter.

"If, as we believe, the car companies actually have adequate stocks of platinum and palladium, then we might expect to see them not increase their demand a great deal this year, and we would see them come in at levels perhaps slightly higher than last year.

"If, on the other hand, we were to see one or more of the car companies get very worried about the availability of supply, given the situation in South Africa, they started to buy metal up, as we saw one of the auto companies do seven or eight years ago," given the already tight market, this would have a significant effect on the fundamentals for platinum in the short term, Flores said, in a presentation at the Prospectors and Developers Association of Canada's annual convention, under way this week in Toronto.

ETFS 'POTENTIALLY DESTABILISING'

The behaviour of investors in ETFs would also be a key variable this year, Flores said.

Over the last few months, as platinum and palladium prices rose and concerns emerged over supply from South African mines, ETF products began to attract investors "rapidly".

"We could easily see that, given where current prices are, you could add another 300 000 oz to 350 000 oz to demand this year.

"And that would, once again, start to throw the market out of kilter."

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