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Industrial vs Precious metals
A healthier looking global economy, (US GDP at 3.1% q/q and China GDP at 6.9% q/q) has bode well for demand and demand sentiment around industrial metal prices although not as well for the precious metals platinum and gold. However the other platinum group (and precious) metal, palladium, has been one of the best performing metals in 2017, having gained more than 50% (year on year).
Interestingly enough at least 67% of demand for palladium is from the automotive industry while only 40% demand for platinum comes from the motor industry. Palladium is primarily used to help reduce emissions in petrol/gasoline vehicles, while platinum is used primarily to reduce emissions in diesel vehicles. Since automakers have been caught (and admitted) to cheating on emissions tests for their diesel engine vehicles, a lot of US and European supply and demand has been absorbed by petroleum powered vehicles, benefitting palladium more so than platinum in the automotive industry.
Recent catalysts for growth
An improving global economy has seen relatively robust new vehicle sales this year. The US and China are the two biggest motor vehicle markets in the world. In the US, September saw Total vehicle sales of 18.7million which is the best monthly sales figure since July 2005. The strong September figure is said to have been boosted by the impact of Hurricane Harvey and the need for replacement vehicles, a trend which is expected to extend into the October sales figures. China also had a strong September with its best sales figures for the year at more than 2.7million vehicles sold. Global auto sales are up around 5% for the year so far.
Furthering the case for palladium is that the world’s largest producer thereof, MMC Norilsk Nickel, expects record consumption of nearly 11million ounces in2017 and forecasts a deficit of nearly 1million ounces this year.
Platinum or Palladium?
At the time of writing the spot price of palladium is trading above $1000/oz, roughly $60/oz higher than the price of platinum. If the expectation is for palladium to continue to trade above platinum for a prolonged period of time, then the argument for substituting palladium in gasoline vehicles for platinum technologies becomes more relevant.
The Electric Vehicle effect
The question on everyone’s minds is the fate of internal combustion engine (ICE) vehicles with the emergence of electric vehicles (EV). Platinum Group Metals don’t find place in the current form of batteries used in EVs. The common metals used vary slightly depending on the exact type of battery used, but in general, they are Lithium, Nickel, Cobalt, Manganese and Zinc. While the price of these industrial base metals are expected to see demand increase exponentially over the next few decades along with the move to cleaner and greener EVs, Platinum Group Metals (PGMs) are still beneficiaries of a very dominant diesel and gasoline vehicle market at present.
According to the International Energy Agency (IEA), EVs currently account for 0.2% of light passenger cars on the road. However it should be considered that sales in electric cars jumped a massive 60% last year and sales growth is expected to remain strong going forward. The Bloomberg New Energy Finance team (BNEF) has estimated that by 2021 light passenger vehicles will account for around 5% of new sales across Europe and around 4% of news sales in the US and China. BNEF also believe that the cost of Electric vehicles will fall significantly enough by between years 2025 and 2029 to see the real exponential increase in EV sales. By 2040 it is estimated that EVs will account for 54% of all light passenger vehicle sales globally. If the BNEF numbers are correct then robust demand for platinum and perhaps more so palladium in the passenger auto industry has somewhere between 8 and 13 years left.
There are a number of palladium producers to consider if you think the future for PGMs remains healthy. As mentioned earlier, Norilsk Nickel is the largest producer of palladium in the world, as well as the largest Nickel producer in the world (which supports both the demand for EVs and ICEs), while Anglo American Platinum is the largest PGM producer in the world. However our preference within this sector is the number three PGM producer, Sibanye-Stillwater.
Sibanye Stillwater is formed from the recent acquisition of Stillwater (US Listed) by the formerly named, Sibanye Gold. The size and cost of Sibanye’s acquisition of Stillwater put the company into loss making territory in the first half of the financial year. The deal was funded via a rights and bond issue which has furthered a share price decline in the near term. Stillwater is primarily a palladium producer with its main assets in the US. The acquisition was completed in May 2017 when the price of palladium was trading just above the $700/oz mark. The current price of palladium has moved to around $1000, while the group’s all in sustaining costs for the metal are reported to be $622/oz, leaving very attractive margins for the business. An investment in the Sibanye does however warrant consideration of the South African assets which include gold mining operations operating on very thin and in some instances loss making tmargins as well as a disruptive labour market particularly along the group’s large platinum belt operations. Sibanye is under CEO, Neil Froneman, is a well-managed business which should see a much stronger second half to the financial year with the non-reocurring acquisition costs now out of the way. If you believe in the future of platinum group metals over the next few years, this is certainly one to watch.