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Johnson Matthey GM market research Tom Kendall said platinum demand was forecast to rise by 5% to a record 7,02-million ounces in 2006, with supply in virtual balance at just under 5%.

The new supply high of seven-million ounces was due mainly to South African expansion.

#x201C;If you put supply and demand together, with demand up by just over 5% and supply up by just under 5%, the market, as a whole, is more or less in balance, #x201D; said Kendall.

#x201C;Even though there was a slight deficit of 20 000 oz, that is pretty much a market in balance when you are talking about seven-million ounces overall, on the back of several years of deficits. #x201D; Johnson Matthey forecast that platinum would trade at between $980/oz and R1 200/oz for the next six months.

While emission legislation and growing sales of diesel vehicles continued to drive platinum consumption higher, rising and volatile platinum prices had put another dent in global jewellery demand, which had shrunk for the fourth consecutive year, Kendall said in delivering Johnson Matthey's Platinum 2006 Interim Review in Johannesburg.

While the average increase in the platinum price from the years 2002 to 2006 had been 211%, sales of platinum into the jewellery sector had lowered by a far more modest 38%.

The autocatalyst sector and, within it, diesel vehicles in particular had been the main driver of demand, with electronics, petroleum refining and chemicals also playing strengthened roles.

Kendall said autocatalyst demand would continue to be driven mainly by the continued increase in the sale of diesel-driven vehicles.

A tightening of emission legislation in places like India, China and elsewhere in Asia would also contribute to demand growth.

Conversely, the trend to exit platinum where possible in gasoline-vehicle catalysts would persist. On the supply side, the very beneficial price environment and an increasing freeing up of exploration opportunities had encouraged new entrants.

#x201C;Overall, the picture is very supportive of market growth, #x201D; Kendall said.

The level of revenues miners were generating was giving them great ability to invest in expanding output.

New entrants were also finding the present favourable for raising funds for projects.

Kendall foresaw strong autocatalyst demand continuing to absorb the increased upcoming supply.

The price elasticity of the jewellery market would continue to give up demand when the price was spiking and soak up supply when the price lowered.

The industry was certainly not looking for more absorption from an exchange-traded fund (ETF), which would be viewed as being disruptive to the platinum market by both producers and consumers.

#x201C;But that is not to say that it can't happen, because ETFs were being considered for all kinds of commodities, #x201D; he said.

In contrast, palladium supplies would exceed supply by 1,63-million ounces in 2006.

Growing output of palladium from South Africa and significant sales expected from Russian state stocks would increase palladium supply by 1% to 8,48-million ounces, a market surplus that was being absorbed by investment funds.

While autocatalyst demand would rise by 27 000 oz to 4,14-million ounces in the autocatalyst market, palladium jewellery demand would fall 310 00 oz to 1,12-million ounces.

Surplus notwithstanding, Johnson Matthey did not expect palladium to trade below $260/oz and put the high end of the price range at $380/oz. #x201C;There is still very significant investor interest in palladium, giving support to the price, #x201D; Kendall said.

There had been quite a build up of above-ground palladium stocks and there was a belief that a significant amount of that was controlled by the investment market.

On the autocatalyst front, there remained a direct correlation between gasoline-vehicle production and palladium consumption.

The substitution of platinum for cheaper palladium was continuing, accelerating in the US where there was intense pressure to reduce costs.

In Japan, the switch from platinum to palladium had arrived much later than elsewhere, but was now gaining ground as a result of the persisting price differential between the two metals.

This year had seen the first significant use of palladium as a catalyst in diesel trucks, primarily in Europe, but also in North America.

#x201C;That will generate further palladium growth, #x201D; Kendall forecast.

One caveat was that recycling of spent autocatalysts was increasing #x201C;very strongly #x201D;.

Recycling was up 28% in 2006 to just over 800 000 oz, there was an expectation of a similar, if not greater, rate of growth in 2007.

In palladium jewellery, China could return to growth in 2007 as the volumes of 95%-pure palladium jewellery declined and 99%-pure palladium jewellery rose.

#x201C;One thing that would give the market quite a boost would be for palladium to be listed for sale on the Shanghai Gold Exchange, in the same way as gold and platinum, but we don't think that is likely to happen in the near future, #x201D; Kendall said.

Kendall said that there were two systems in place in the light-duty diesel-vehicle sector, one platinum based and the other based on the use of an oxide solution. Only Peugeot had opted for the oxide-solution approach, while most of the other vehicle manufacturers had shown a clear preference for platinum-catalysed filters.

Then, in the heavy-duty diesel-truck sector, tightened emission legislation saw engine suppliers and truck manufactures chosing between the platinum-based diesel particulate filter (DPF) system and the urea-based selective catalytic reduction (SCR) system. By and large, the North American truck industry chose the platinum-based DPF, while their European counterparts opted for the alternative SCR, which made use of urea and a base-metal catalyst.

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