(Kitco News) - Platinum demand is likely to exceed its long-term growth trend, and a small world supply/demand deficit in 2011 is likely to increase in the next few years, the chief executive of one of the world’s largest platinum-group-metals producers said Tuesday.

“We are now forecasting, as our base case, a small deficit in platinum developing in 2011,” said Ian Farmer, chief executive officer of Lonmin Plc. “This deficit is expected to grow to 200,000 to 300,000 ounces per annum over the 2012-to-2014 period.

“If the global recovery gathers momentum, there is the possibility of demand increasing more than expected, which will result even larger deficits and higher prices than we currently anticipate.”

Lonmin is the world’s third-largest producer of PGMs. Farmer addressed the outlook for platinum at the BMO Capital Markets Global Metals and Mining Conference in Hollywood, Fla.
Platinum demand has grown by an average of 3% per year since 1990, Farmer reported.

“Since the significant demand contraction in 2008, there has been a fair recovery,” he said. “We now expect platinum demand to overshoot its long-term growth trend in the next few years, driven by a number of factors.”

The main industrial use for platinum group metals is catalytic converters for motor vehicles.

Farmer said the metals should benefit from pent-up U.S. consumer demand for motor vehicles after economic weakness in recent years, plus increased demand due to tightening diesel-vehicle legislation around the globe. Furthermore, new regulations for off-road diesel vehicles “will open up completely new markets for us” and mean an increased demand estimated at 400,000 or more ounces annually over the next three years, Farmer said.

“The continued rollout of emission legislation capturing new geographies and a greater range of engine types, to meet the world’s climate-change agenda, is unstoppable,” Farmer said.

China’s growth in auto sales is likely to slow to 10%-15% from some 20% in recent years. Still, the country has become the world’s largest auto market and its unit volume growth “remains significant by any measure,” Farmer said. Demand is also growing in other emerging markets such as Russia and China.

Farmer cited data from J.D. Power suggesting that global vehicle sales could be around 77 million units this year, up from 73 million and 59 million the last two years.

Palladium is getting an extra boost from the Chinese demand, Farmer said. The country tends to rely on smaller gasoline-powered vehicles that can use this metal.

Meanwhile, as China’s economy grows, a more affluent populace is increasing demand for PGM jewellery. Also, investment demand for platinum group metals remains strong, particularly through exchange-traded funds, Farmer said. And, he pointed out, investors have tended to maintain these holdings, with “almost no panic selling” at times when prices have dipped, such as last May.

On the supply side, Farmer said, a lack of prior investment, rising costs, a shortage of skilled workers and “challenging geography” have resulted in delays in bringing new output on line. There will be limited supply growth over the next two years as old operations wind down and new ones are still coming on line.

“It is estimated that in 2012, industry will be over a quarter million ounces below 2006 production levels,” Farmer said. “Nearly all new brownfield and greenfield projects require a revenue basket well above historical levels. Current calculations, based on December prices and exchange rates, indicate an incentive price basket of at least $1,850 to $2,000 per platinum ounce.”

Some new operations, deeper under the ground, may require even higher prices to be economically viable, the CEO added.

Farmer listed what he sees as the potential risks to improving demand.

“Deterioration in the European debt situation is still a possibility, with potentially negative consequences for PGM demand, particularly platinum,” Farmer said. “The other risk...is a slowdown in the very high growth rate in China, which due to its size and dominance in most commodity markets, would be felt globally. The risk of substitution (for PGMs) is always there, although PGMs have fought and won this battle many times.”

By Allen Sykora of Kitco News; asykora@kitco.com

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