South Africa's Anglo Platinum Ltd. (AMS.JO), the world's largest producer of platinum, won't be supplying metal to a planned exchange-traded fund because of concerns it will exacerbate an already tight supply situation and inflate prices.

Angloplat, majority owned by mining giant Anglo American Plc, accounts for about 40 % of global platinum production.

The concerns about price volatility are shared by other producers, including industry number two Impala Platinum Holdings Ltd. (IMPUY).

"We are opposed to the start up of an (platinum) ETF and feel that other producers will be too," said Trevor Raymond, senior investor relations manager at Angloplat.

"It takes physical metal away from metal demand...which pushes up prices and limits offtake for jewelry."

Zurich Cantonal Bank this week said it would launch palladium, platinum and silver ETFs, with trading on the SWX Swiss Exchange setto start May 10.

The bank expects within the first 12 months to trade 200,000 ounces of palladium, 70,000 ounces of platinum and 20 million ounces of silver.

ETFs are similar to stocks, but track the price of gold or silver.

The metal to back ETF shares is put into storage, which creates physical demand, but unlike with popular gold ETFs already trading, supplies of platinum are very tight and demand is strong for use of the metal in auto catalytic converters that offer cleaner exhaust, and for jewelry.

The physical market is tiny in comparison to the vast quantities of platinum absorbed by the autocatalyst and jewellery sectors, with between 5,000 and 10,000 ounces traded in London a day, according to Bob Gilmour, investor relations manager at Impala Platinum.

The jewellery market is very price sensitive and is the main area that suffers a drop off in demand when prices rise.

Angloplat's Raymond said the company view of the market is that it will be tight or show a slight deficit in the short term.

Implats sees a balanced market this year, with not a lot of metal readily available, said Bob Gilmour.

The metal already is trading at a five-month high, with expectations it will rise further before the launch of the ETF next month.

The platinum market's vulnerability has been highlighted in recent months. In November the metal jumped 17% over a two-day period to a record high of $1,402.50/oz as talk of a platinum ETF built.

Prices receded, taking back all the gains, in the following days as the prospect of an ETF waned.

Since then unexpected disruptions in platinum supplies in South Africa, the world's greatest source of the metal, have helped propel prices higher.

World number three Lonmin PLC (LMI.LN) is looking at ramping up production in the second half of the year to make up for lost output at its Number 1 smelter, where repairs are progressing despite two announced delays.

"At this point in time there's no liquidity in the platinum market. An ETF needs to be backed up by the physical metal, which means it will need to draw in supplies of metal and that could push prices significantly higher," Gilmour said.

Gilmour said that with much of the platinum produced under contract, an ETF could buy on the spot market, although that would offer only small amounts of the metal unless the bank has been buying for some time.

The reaction by producers had been widely anticipated by the platinum market. Analysts said that the biggest problem with launching the ETF is the relatively tight platinum market.

Platinum producers have offtake agreements covering 90% or more of their seven million ounces of annual production, leaving very little behind for the spot market.

"From the producer's view point it makes sense (to oppose the ETF) because if you have got a tight market with no inventories and you're removing further metal away, that would add to upward pressure on prices," said Michael Widmer, London-based analyst at Calyon.

But he noted that there are ways of getting metal while avoiding dealingwith producers. Zurich Cantonal bank could "potentially go through an intermediary like another bank and try to get around the producer issue," Widmer added.