Platinum is up 85% and Going Higher | Shree Kargutkar and Jimmy Connor

Key Concepts

• Platinum Group Metals (PGMs): A group of six precious metals that tend to coexist in the Earth's crust and are often mined together. These include platinum, palladium, rhodium, and ruthenium.
• Autocatalysts: Devices used in vehicles to reduce harmful emissions. Platinum and palladium are crucial components in catalytic converters for internal combustion engine and hybrid vehicles.
• Industrial Uses: Applications of platinum and palladium beyond automotive, including glass making, chemical manufacturing, petrochemical refining, and high-end electronic components like capacitors and IoT devices.
• Supply Inelasticity: The characteristic of a supply that is not easily or quickly increased in response to rising demand.
• Deficit: A situation where demand for a commodity exceeds its supply.
• Substitution: The ability to replace one material with another. In the context of PGMs, automakers may shift between platinum and palladium in catalytic converters based on price and availability.
• Above-Ground Stockpiles: Existing reserves of a metal held by governments, institutions, or private entities, which can be used to meet demand during supply shortages.
• ETN (Exchange Traded Note): A type of unsecured debt security that is listed on a stock exchange.

Platinum and Palladium Market Overview

This discussion provides an in-depth analysis of the platinum and palladium markets, focusing on their recent price movements, demand drivers, supply dynamics, and future outlook. Shri, a Senior Portfolio Manager at Sprout Asset Management, shares his expertise on these Platinum Group Metals (PGMs).

Understanding Platinum Group Metals (PGMs)

PGMs are a group of metals that naturally occur together and are often extracted from the same mines. The primary PGMs discussed are platinum and palladium, with mentions of rhodium and ruthenium as part of this complex.

Platinum: Demand Drivers and Supply Dynamics

• Price Performance: Platinum has seen a significant price increase, up approximately 80% year-to-date, trading around $1,700 per ounce.
• Demand Drivers:
  • Autocatalysts: This is the largest source of demand, accounting for about 40% of the total. Platinum is essential for catalytic converters in hybrid and internal combustion engine vehicles to meet emission standards.
  • Industrial Uses: Approximately 40% of demand comes from various industrial applications, including glass making, chemical manufacturing, and petrochemical refining.
  • Jewelry and Investment: The remaining demand comes from jewelry and investment vehicles like ETFs and bars.
• Supply Dynamics:
  • Total Supply: Approximately 7 million ounces annually, comprising about 5.5 million ounces from mining and 1.5 million ounces from recycling (e.g., from scrapped vehicles).
  • Mining Output: While new mines like Ivanhoe's Ivan Plat operation are expected to come online, older mines in South Africa are winding down, leading to a net stagnation or slight decrease in overall mine output.
  • Deficit: Demand for platinum consistently outstrips supply, resulting in a deficit of about 1 million ounces per year. This deficit has been persistent for the past few years and is expected to continue.
• Key Argument: The market is increasingly recognizing that platinum demand is significantly exceeding its highly inelastic supply, with limited substitution options.

Palladium: Demand Drivers and Supply Dynamics

• Price Performance: Palladium has also experienced substantial price appreciation, up over 60% year-to-date, trading around $1,500 per ounce. A significant portion of this move has occurred in recent months.
• Demand Drivers:
  • Autocatalysts: Palladium is heavily reliant on the automotive sector, with approximately 85% of its demand coming from this industry. It is primarily used in gasoline-powered vehicles.
• Supply Dynamics:
  • Origin: 40% of global palladium supply originates from South Africa.
  • Deficit: While not as deep as platinum's deficit, palladium is also in a deficit situation, which is not expected to resolve into a surplus for at least the next couple of years.
• Historical Context: Palladium prices saw a dramatic surge from $600 to over $3,000 per ounce between 2016 and a few years later, driven by a growing deficit and investor recognition.
• Key Argument: The price surge in palladium is partly due to the market's realization of its current tight supply situation, which was previously underestimated.

Interplay Between Platinum and Palladium

• Substitution: Platinum and palladium can be substituted for each other to some extent in autocatalysts. Historically, when palladium became very expensive, automakers shifted towards using more platinum. This shift has contributed to the growing deficit in platinum.
• Current Situation: Both metals are now in deficit. The increasing demand for platinum due to substitution away from palladium, coupled with its own robust demand, exacerbates its deficit.

Factors Influencing Demand: EVs vs. Traditional Cars

• EV Slowdown: The anticipated rapid ramp-up of Electric Vehicles (EVs) has not materialized as expected in some regions, particularly North America. EV uptake has slowed down, although it has been strong in China due to government initiatives.
• Resurgence of Traditional and Hybrid Cars: Stricter emission standards in Europe and China for gasoline and diesel-powered cars (e.g., China's set seven standards for 2026) necessitate higher loadings of platinum and palladium in their catalytic converters.
• Hybrid Vehicle Growth: Automakers are increasingly recognizing the viability of hybrid vehicles as a more efficient alternative to a full pivot to EVs. Hybrids, like traditional cars, still require catalytic converters, thus sustaining demand for platinum and palladium.
• Personal Preference: The speaker notes a personal preference for hybrid vehicles over EVs due to concerns about cold-weather performance and charging infrastructure, suggesting this sentiment might be shared by other consumers.

Future Price Outlook and Supply Concerns

• Deficits and Price Re-rating: Persistent deficits in both platinum and palladium are expected to drive further price appreciation.
• Platinum's Critical Stockpiles: Above-ground stockpiles for platinum are insufficient to cover deficits for more than 3-4 years. This could lead to a scenario where car manufacturing is hampered by a lack of platinum.
• "Spectacular" Price Response: Shri anticipates a significant re-rating of platinum prices due to its small market size (7 million ounces annually). When investors recognize the supply-demand imbalance, the price response tends to be dramatic. Platinum has already moved from under $900 to $1,700.
• Deficit Persistence: The deficit in platinum is expected to persist at least until the end of the decade.

Mining Complexities

• No Pure PGM Mines: There are no known pure platinum or palladium mines. These metals are typically found together in PGM mines, with platinum often being the dominant element in South African mines.
• PGMs as By-products: In other parts of the world, PGMs are often mined as a credit alongside nickel and copper deposits, rather than being the primary output.
• Montana Example: A palladium-dominant mine in Montana is mentioned as a rare exception.

Investment Opportunities and Resources

• Sprout Asset Management: Sprout offers the SPR Physical Platinum and Palladium ETN (SPPP), which provides investors with exposure to both physical platinum and palladium in a single wrapper. This product trades on US exchanges.
• Information Resources:
  • Sprout.com: Provides insights and timely content on market shifts and price actions.
  • World Platinum Investment Council (WPIC): Offers valuable data and statistics.
  • Johnson Matthey: Another reliable source for information on platinum.

Conclusion

The discussion highlights a strong fundamental case for both platinum and palladium, driven by persistent supply deficits and robust demand, particularly from the automotive sector. While the transition to EVs has slowed, stricter emission standards and the growing popularity of hybrid vehicles are sustaining and even increasing the demand for these PGMs. The limited supply response and dwindling stockpiles suggest a significant potential for further price appreciation in the coming years, with platinum being particularly poised for a substantial re-rating. Investors looking to gain exposure to these metals can consider products like the SPPP ETN.