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To remark that the platinum group metals (PGMs) are having a moment would be an understatement. The three better-known PGMs -– platinum, palladium, and rhodium — are all up this year, after posting stellar returns in 2019.
Palladium, the most-feted PGM right now, is up 30% year-to-date (YTD), continuing a parabolic rise that began in January 2016. Back then, the metal was trading around $500/oz. By January 2019, its price had reached $1,400/oz. Now, palladium can be purchased for no less than $2,500 /oz in the spot market.
Rhodium has already climbed more than 55% YTD, and that’s nothing. Its current price of $9,400 /oz is 1,000% higher than three years ago, when it was trading at $855 /oz. This brings rhodium just shy of its all-time peak of $10,000 /oz reached in 2008.
As for platinum, its spot price of $1,015 /oz is 27% higher than this time last year. While that may seem paltry in comparison to its peers, that 27% one-year gain is a big jump for a metal whose price is just 5% above where it was three years ago.
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YTD
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1-YEAR
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2-YEAR
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3-YEAR
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Palladium
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29%
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85%
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130%
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230%
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Rhodium
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55%
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280%
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456%
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1000%
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Platinum
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3%
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27%
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0%
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5%
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Market Dislocation
The soaring prices of these PGMs reflect an ongoing market dislocation, particularly in the case of palladium and rhodium. Demand for the latter two has been growing in response to tightening emissions legislation in China and Europe, the world’s largest and third-largest automobile markets. It is estimated that the Chinese car market will require 30% more palladium this year due to the new emissions standards that came into force on January 1, 2020.
Meanwhile, there are supply constraints because PGMs happen to be among the least abundant of the earth’s elements. The palladium market, for instance, has been in deficit for almost a decade. The 10-million or so ounces of palladium produced annually are not sufficient to meet current annual demand. Suki Cooper, an analyst at Standard Chartered, is projecting a deficit of 700,000 ounces this year and in 2021. Any supply dislocations or mine closures will only increase that shortfall and put upward pressure on the metal’s price.
As it is, the futures market for palladium is currently in backwardation. That means, contracts for near-term delivery are priced higher than for later delivery dates. Backwardation typically reflects fears of a lack of ready supply. Lease rates have also spiked, suggesting that manufacturers are scrambling for supply. There has also been anecdotal evidence of stockpiling in China, the biggest buyer in the automotive sector.
Issues with Substitution
Platinum is now 60% cheaper than palladium, a remarkable reversal of their historical price relationship. With platinum trading at such a deep discount, it is little wonder that some investors decided to go long the commodity last year, in anticipation of a manufacturing substitution out of palladium and into platinum. But, there are no signs of that happening yet, and it’s unclear when such a switch might happen.
The reality is that, while platinum carries similar characteristics to palladium, the two metals are not easily interchangeable.
For starters, platinum is used primarily in catalytic converters for diesel-powered engines, whereas palladium is used in catalytic converters for gasoline-powered cars. Second, gasoline has a lower temperature burn than diesel, which makes platinum less effective than palladium in those conditions. More technological advances are needed before platinum can match the performance of existing palladium-based autocatalysts, according to Johnson Matthey Plc, which makes the devices.
Furthermore, as explained by metals analyst Johann Wiebe who is cited in MarketWatch, substitution would require new certifications, which can take up to two years in addition to being costly. “It is rather expensive to certify new formulations for vehicle models and they have to be compliant, otherwise you won’t be able to sell the car,” says Wiebe.
Nikos Kavalis, another metals expert also cited in the aforementioned MarketWatch article, raises the point that original equipment manufacturers (OEMs) “will be wary to make such dramatic changes to their after-treatment systems and risk failing regulatory compliance for a saving which, while significant, is only a small part of their overall costs.”
Given these barriers, it could be a while before we see a significant wave of manufacturers switching from palladium to platinum. That, of course, leaves room for palladium prices to keep trending up (albeit with some ups and downs in between) until these certifications start coming in or until the supply picture ameliorates.
The majority of the world’s rhodium supplies are also used in autos for catalytic converters. Since there is no substitute for rhodium, the metal’s price can also go higher.
Platinum, as noted in previous MRP reports on this subject, is tied to diesel vehicles so the fundamentals are not in its favor. As demand for gasoline, hybrid, and electric vehicles rise, diesel will continue to lose market share which is negative for platinum. That could change if the price of palladium becomes so prohibitive that it makes sense for OEMs to invest in autocatalyst reformulations and recertifications that will warrant a switch from palladium to platinum. Until then, palladium and rhodium should continue to outperform platinum.
Winners and Losers
PGM miners are big winners here, especially those that focus on palladium. While Russia’s Norilsk (NILSY) benefits as the world’s biggest palladium producer, the rally is also good news for South Africa’s palladium miners including Impala Platinum Holdings (IMPUY) and Sibanye-Gold (SBGL). While SGBL might technically produce more gold then palladium, thanks to its South African projects, it’s the company’s palladium-focused assets that have seen the most growth recently. As for IMPUY, the company recently acquired North American Palladium (formerly PALDF), the only pure-play palladium miner. Anglo American Platinum (ANGPY) is also significant palladium producer.
Several of these miners have already doubled in price and market value over the past two years supported by the metal’s gains. This article on Seeking Alpha takes a look at the top performing miners in this space over the past year.
The losers in this story are carmakers, since they now have to pay more for the metals used in their catalytic converters.
Previously published reports on this topic include:
Nelly Nyambi
Managing Director, Research
McAlinden Research Partners
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