The Platinum Proposition – Will it regain #1?

Over the last 10 years platinum has disappointed investors.   What drove the platinum doldrums, notably goes back to the Volksswagon Emission scandal, where diesel engines were seen as a greater polluter, driving diesel engined car and truck demand lower.  As platinum is used in catalytic converters in these vehicles the price slowly meandered lower from an all time high in 2008 of $2300/oz to the current price of $1130 per ounce.  But the fundamentals are starting to change with investors beginning to see the potential in this metal again.  Last week platinum prices rose a whopping 8% is this a trend that will continue in 2023?

Platinum Uses

Platinum is used predominantly as an industrial metal, with 50% of its use in catalytic converters. In the 2010 decade palladium, a cheaper more available and easier to refine metal, was used as a replacement for platinum in catalytic converters, as the price of platinum at the time had climbed north of $2000/oz. The replacement of palladium in the catalytic converters saw the price of palladium rise from under $500 to $3400/oz in March 2022.  Platinum’s other uses are in laboratory equipment, electrical contacts and electrodes, dentistry equipment and jewellery, but the big growing trend use of platinum is in Hydrogen cells, where platinum is used as a catalyst to split water atoms to hydrogen.

Price and suply deficit for 2023 ANZ and World Platinum Council

In a March 2023, 2 reports came out. ANZ economists reitereated these price growth forecasts, stating that due to a supply shortage, the platinum market will be in a 145koz deficit in 2023. ANZ states “Auto catalyst demand is likely to grow by 5% YoY. Constrained supply and robust demand could shift the market into deficit by 145 koz. A tighter market should encourage stronger investor activity.” 

The World Platinum Investment Council believes a 776koz surplus in 2022 will turn into a 556koz deficit in 2023.  This 1.3Moz change is said to ‘reflects total supply remaining close to the weak level in 2022, up only 3% to 7,428 koz (+201 koz), and strong demand growth of 24% to 7,985 koz (+1,534 koz).’

Whats is driving the demand and prices?

We’ve indetified 4 areas that investors should closely watch to see if these trends will continue to change

  • Firstly precious metal pricing
  • Secondly catalytic converter substitution of palladium for platinum
  • Thirdly South African Mine concentration supply risk
  • And finally the Green Kahuna of the Hydrogen Economy

We discuss each of these below;

Precious Metal Pricing

As platinum’s use is mainly for industrial purposes, the metal has not seen the recent flight to safety price rises that both gold and silver have had.  But you don’t need to go back too far when platinum was seen as a source of wealth above that of gold, with its use in jewellery in the 2000s as better than gold.  In fact, credit cards and flight reward points still use the ‘Platinum Card’ or ‘Platinum Membership’ as the preferred status to gold despite being nearly half the price.  Platinum is a rarer metal than gold, with estimates that in the earths composition gold is at 4 parts per billion and platinum is at 5 part per billion.  However that’s within the earths composition, the history in mining of platinum so far has produced 30 times less platinum to gold.  So with the price of gold currently hitting near all time highs of $2000/oz and platinum still down at $1130/oz there appears to be a lot of room for platinum price growth. 

According the World Platinum Investment Council ‘Platinum remains under-owned but also still undervalued compared to gold and its one-to-one substitute palladium’

Technically, Crescat Capital’s Tavin Costa says it well…

Catalytic Converter Replacement

Platinum is used predominantly as an industrial metal, with 50% of its use in catalytic converters. In the 2010-decade, palladium, a cheaper, more available and easier to refine metal was used as a replacement for platinum in catalytic converters, as the price of platinum at the time had climbed north of $2000/oz. This saw palladium prices rise from $350/oz, when platinum was at its all-time high of $2300/oz in 2008 to $3400/oz in March 2022 when platinum was priced at only $900/oz.  Car production lines are slow to change between metals and new processes and equipment need to be implemented to allow for substitution. This has been a slow process, but this trend has started to reverse and catalytic converter manufacturers are beginning to transform their lines back to platinum, the much cheaper metal which is helping to drive platinum prices back up and palladium prices back down.  

South Africa Mine Concentration

75% of platinum is produced in Africa, so any disruption in that market can lead to deficits. This is exactly what drove the price to the all time high in the 2000s and in 2023, power disruptions affecting platinum production may see history repeat. In Dr David Davis, an independent precious metals consultant associated with the platinum mining industry for the past 45 years, calculates that the global mine supply of platinum will fall by 500,000 ounces – to 1 million ounces in South Africa, due to these power shortages predicted between 2023 and 2027.  With such a large concentration of production in one country, the risks associated with concentration should be observed by investors as possible supply disruptions could assist in a short squeeze of the market. Consider then that most of the remaining production comes from the decidedly unstable countries of Russia and Zimbabwe!

Source: List of countries by platinum production - Wikipedia

Green Kahuna

The Paris Agreement set 2050 CO2 reduction targets, limiting warming to 1.5-2°C.  Platinum has been identified as a key metal to help with this transition, due to its use as the catalyst to split water molecules into hydrogen.  In fact, replacing a diesel engine with a hydrogen engine would increase platinum used in a car from 5g to 50g.  So watch this space, as countries and large corporations accelerating both investment and use of platinum is likely to drive demand.  In their recent report, Metals Focus estimated that by 2040 this use of platinum could drive it to 35% of global demand.

Platinum Disappointment to change in 2023?

So, will these trends in use and price drive platinum – a rarer, useful metal that was once more expensive than gold - back to where it was in 2008?

With continuous technological changes and the green energy revolution only just beginning, perhaps platinum might be gearing up to restore its precious metals crown.