Previous posts quantified the impact PGM (Platinum Group Metal) prices have on the cash value of scrapped autocatalysts. Our strategy to maximise the cash value for scrap autocatalysts is based in part on taking a view on the future prices of Pt, Pd (and to a lesser extent, Rh).
In this November 2015 post, we considered a scenario where Pt, Pd and Rh prices may remain depressed in the medium term, say 1 to 3 years, and rally strongly thereafter. This scenario is based on an interpretation of the fundamentals of the PGM market, briefly outlined below, and does not constitute advice in any way.
Firstly, a snapshot of PGM prices since the global financial crisis to provide some context for the prices of platinum, palladium and rhodium, in the graph below. From this plot it is clear that platinum and rhodium have had particularly difficult time, while palladium has fared somewhat better although still not spectacularly.
The current low prices of platinum, palladium and rhodium align with the ongoing negative sentiment towards metals generally, owing largely to the slow-down in China. Offloading of longer term PGM investment inventory has exacerbated the decline, with large quantities coming to the market in a relatively short time. Virtually every traded metal has seen a substantial price decrease in the last six months or so, with not many analysts bold enough to call the bottom just yet.
The platinum price in particular has not been helped by the recent rise of diesel-skepticism. Bearing in mind that Pt dominates in diesel engine autocatalysts, as palladium does in petrol / gasoline engines, the price of Pt has dropped about 8% and that of Pd increased about 11% since the VW emission rigging fiasco a few weeks back. The obvious correlation (though not necessarily the cause) is a perception that as a consequence consumers will in future favour gasoline over diesel engines.
How long this will remain in the market’s memory remains to be seen, though it does tie in with a longer-term niggle about certain diesel engine emissions (particulates and nitrogen oxides) which has some punters speculating on the eventual decline of diesel power.
However, for the emission that matters most in the calculus of the bureaucrats, i.e. CO2, diesel engines emit significantly less than their petrol counterparts. As such, and considering legislated CO2 emission targets in many countries, diesel power is unlikely to go away any time soon. It is not inconceivable then that in the not too distant future diesel-engine autocatalysts will require additional platinum (+Pd +Rh) to adequately convert emissions, bumping prices up commensurately.
Another demand-side price driver is jewellery, which some analysts predict will pick up substantially particularly in Asia. This, electronics & other ‘industrial use’ aspects, as well as PGMs as a vehicle for investment will be considered in a later post.
On the supply-side, there are numerous major factors which are difficult to overcome likely to influence future production of PGMs. These relate specifically to primary production from mining operations, as opposed to secondary production from recycling.
By a very long way the largest primary platinum producer is South Africa (about 80%), while Russia just edges South Africa out in primary palladium production (around 45% & 40% respectively). Other primary producers trail some way behind, including Zimbabwe, Canada and a handful of minor producers.
In South Africa, mine production challenges include labour unrest & lack of mechanization, energy (electricity) and water supply limitations, increasing mine age, depth and cost of mining, and possibly decreasing PGM grades. These issues are likely to remain in the medium to long term, and even with the South African Rand plunging against the dollar, mined Pt production has been steadily declining over the last decade or so, despite a more recent up-tick. So much so that many analysts foresee a substantial platinum supply deficit in the coming years.
Russia comes with its own baggage, with sanctions related to the Crimean annexation cited as one of the reasons for palladium’s relatively good price performance recently. Further uncertainty over its palladium stockpile status and production capacity have similarly contributed.
While there will always be mitigating factors, taken as a whole it is not inconceivable then that current PGM prices may remain depressed in the short to medium term. Once the realities of supply constraints kick in, particularly if they coincide with the (perception of) improvement in the global economy a few years down the line, upward pressure on PGM price could be significant.
Time will tell.