Published Date: 2021-03-02 | Source: INCE|Connect | Author: Werner Fourie | Rand Swiss | Private Broking
Many investors are asking themselves, is there still time to buy into this parabolic run?
Today, we'll look at three reasons why Platinum Group Metal (PGM) prices might still move higher.
Reason #1: The market remains in deficit.
Global commodity prices like platinum, palladium and rhodium are set through the complex interplay of free market forces.
The equations that need to balance are the intersection of the supply and demand curves. The elusive point known to economists as "equilibrium".
If the world needs more platinum than people can produce, the price of the metal must rise.
Conversely if there is too much supply (and not enough need for the commodity) then prices will fall.
"Right now, due to the COVID-19 driven disruption, the PGM markets are in a unique situation. "
Supply was crushed last year as mines shut down, refineries operated at a fraction of the normal output and metal recycling disappeared as scrap collection ceased. Overall, the global supply of platinum fell around 20%.
That should force the price higher, right?
But wait. There is still the demand side of the picture to consider.
Historically, the demand for PGMs was largely based on the auto-industry. Their use in the autocatalytic converters, a nifty little device which limits exhaust emissions, was widespread. If you looked at global new vehicle sales, you'd have a more or less reliable way to gauge platinum demand.
But as shelter-in-place orders swept the globe, demand for new vehicles slumped. Johnson Matthey estimates autocatalyst demand plunged by 22% as diesel car production in Europe fell steeply. They also point to the lower demand from Chinese jewellery manufacturers which slumped a 20-year low.
"The saving grace, however, seems to be Japan's insatiable appetite for physical platinum as an investment."
The lower yen price of platinum, which hit a 17-year low of ¥2500 per gram, prompted a surge in demand from both ETF investors and investors buying platinum bars. The buying frenzy was so pronounced, physical bars saw all-time record volumes going through in March 2020.
At the end of last year, autocatalytic converters accounted for around 32% of global demand, jewellery made up around 23% while investment demand accounted for around 13%.
To show just how attractive the direct metal investment has become, consider the fact that in 2018 it only accounted for about 1% of the demand for global ounces.
The surge in physical investment was the reason the market stayed in deficit. By all indications, as the vaccine rollout progresses and the world slowly returns to normal, industrial and automotive demand should recover to pre-pandemic levels at some point this year.
Now, it is also expected supply will increase thanks to a refining backlog at Anglo American Platinum's converter plant, but longer-term, if the investment appetite holds, while industrial and auto-manufacturing demand ramps up, the deficit will grow quickly, and prices will escalate.
We know there has been an under investment in the mining and exploration of new platinum deposits as new shafts and operations have been put on hold. If the mining companies aren't exploring and developing new projects, supply will eventually be curtailed.
"And as we've seen with Bitcoin, GameStop and so many others meteoric price rises, often higher prices are the exact catalyst to spark greater investment demand."
Longer-term supply should remain constrained, while the longer-term demand picture remains compelling. Overall, higher prices seem likely.
Reason #2: Industrial demand is robust.
I said, historically platinum demand came from the auto-industry. But we've seen the rising importance of the metal's other industrial applications. In 2020, industrial usage in the petrochemical, petroleum refining and glass industries was resilient. Industrial application accounted for 2.2 million ounces (or around 32%) of the demand last year.
And it seems the practical applications for platinum are only growing.
Platinum-cured silicone mixtures are used in a range of personal care products from lipsticks and shampoos to contact lenses.
Additionally, the use of silicones in medical elastomers is one that is showing robust growth. Platinum cured silicones are shown to have various wound healing properties, miraculously sticking to dry skin, while not sticking to (and damaging) a wet wound. They are also air and moisture permeable which improves the healing process.
Furthermore platinum catalysts are used to make petrochemical feed stocks, the basic raw materials for the manufacture of plastics, synthetic rubber and polyester fibres used to produce clothes and blankets.
PGMs are even used in the production of 'It's Fresh!' - an established and unrivalled ethylene-removal technology created for the fresh produce industry by Freshness Food Technologies.
It helps to keep fruit fresher for longer, thanks to a discreet high-tech palladium containing sheet placed in the bottom of packaging. This sheet removes (or absorbs) ethylene - the gas emitted by produce in the ripening process.
As technology advances, the diverse range of applications of platinum bode well for future demand.
Reason #3: The automotive industry isn't dead - yet.
Now the big concern for any platinum (or PGM) based investment is the rise of the electric vehicle. As we move away from fossil fuels and we see a wider spread adoption of battery powered vehicles, there is a feeling that a third of platinum demand will evaporate overnight.
Firstly, autocatalytic converters are not the only use for platinum in vehicles. Platinum-cured silicones are used to coat and protect automotive air bags from their explosive systems. Thanks to the platinum treatment, these air bags remain stable and can be kept folded and packed for long durations without deteriorating. The air bags even contain an initiator sensor, which uses a fine platinum wire coated with explosive material to facilitate release of the air bag.
"Secondly, platinum acts as an effective and durable catalyst in hydrogen-powered fuel cell electric vehicles (FCEVs)."
All FCEVs use a type of fuel cell known as the Polymer Electrolyte Membrane (PEM). This low-temperature, quick-start cell runs off pure hydrogen and uses platinum and palladium at its heart, with the FCEV itself emitting only water from its tailpipe. Currently, Tesla's battery powered EV's look centre stage but there is massive progress in hybrid hydrogen-powered fuel cell technology as well. It may not only find its way into the automotive sector, as platinum-based fuel cells are proving to be more cost-effective, cleaner and more reliable than alternatives such as diesel generators.
Finally, it's likely we will see a more gradual adoption of pure EVs rather than the "hockey stick" adoption you see with lower priced items like tablets, PCs and software applications. And while diesel and petrol cars are still rolling on the world's motorways, tighter emission regulation will likely boost the need for PGM catalytic products.
If you missed the article yesterday where we discussed the pros and cons of investing via direct ETFs versus becoming a shareholder in one of the mining companies. Read the article here.
The good news is whether you're planning to invest in the physical metal, via ETFs, mining stock or would even like to bet against platinum prices via linear derivatives or option hedges, Rand Swiss has you covered.
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