Aspiration versus reality: What lies in store for platinum group metals over the next decade?

The rise in electric vehicle (EV) market share in the car industry may be accelerating as witnessed in the wave of announcements from Volvo, Volkswagen, General Motors, Ford, Nissan, Toyota, Honda, and a host of Chinese auto makers.

But there always has been, and always will be, a tremendous mountain of marketing hype by auto makers and others about the march to EVs and fuel cells.

When I wrote World Guide To Battery-Powered Road Transportation in 1979, many people and companies involved in EV research and development, including many auto companies, projected half a million EVs on the road by 1988. The world reached that level in 2014. The California government wanted 10% of the vehicles sold in California to be “Zero Emission Vehicles” by 1988, subtly ignoring that the state got its electricity from state coal-fired power plants back then. Fuel cell vehicles have been 10 years from massive production and platinum requirements since the 1960s, when GM and other auto companies were working on prototypes.

I may suffer from undue skepticism borne out of decades worth of unfulfilled manufacturer promises, but as the retired director of GM’s 1960s fuel cell program said when he bought the prototype fuel cell van from his former company in the 2000s: ‘When an auto company says it will introduce a technology in five years, that means it is interested in commercializing the technology, but when it says it will introduce the technology in 10 years, that means it may someday move in that direction.’

Politicians around the world further muddy the future vision with wildly unrealistic pronouncements and ‘aspirational’ policy guidelines suggesting a much more rapid transition to electric propulsion than possible.

And then there are hydrogen engines and liquid organic hydrogen carriers, technologies that could blow away EVs, HEVs (hybrid EVs), and gasoline and diesel vehicles in a decade or two.

Many mainstream business articles and commentaries increasingly are accepting the auto industry’s transition to EVs as a foregone conclusion and that the transition will come fast — faster than had been considered likely even a year ago.

There is the smell of a quasi-religious belief in the coming EV revolution. I take a more cautious approach, partly because I have seen technophilic belief in so many technologies that never were commercialized. I get worried when people are so excited about how EVs or some other emerging technology is going to revolutionize the way we live that they forget to consider facts or do basic arithmetic projections based on reality. That is where some of the commentary about the rapid introduction of EVs in the next few years rests: It fails to take into consideration reality.

To be sure, there may be an acceleration of the introduction of EVs underway at present. The question is: Will this be as ill-conceived and short-lived as the EU push to subsidize diesel fuel and vehicles in the late 1990s, which was predicated on the wrong belief that diesel fuel was environmentally preferable to gasoline.

It would be hard to over-state the critical importance future auto propulsion technology will have on the PGM industry, which makes forecasting what will happen to the industry so challenging. If market share of EVs increases rapidly, the three major PGMs by value (platinum, palladium, and rhodium) will lose their major markets, which would render an almost fatal blow to the PGM mining industry. If, however, the transition to EVs or whatever motive power technology becomes dominant is slower, these three PGMs could see sharp price increases over the coming decade.

Even if EVs or some other technology supplant traditional automobiles entirely, or almost entirely, the outlook for platinum prices still looks promising over the next 10 years. The cliff is somewhere beyond 2030, it seems.

However, as future trends in auto propulsion technology become clearer as the current decade progresses, financial markets will price future demand trends into prices in advance of the actual demand developments.

For now and the next few years, this is in the future. Platinum prices should be expected to rise, perhaps sharply, while palladium and rhodium prices appear destined to remain high. This is because the shorter term trends in the auto industry are positive for platinum, palladium, and rhodium demand. The overall number of vehicles being built continues to rise in the long run, despite periodic declines due to recessions in 2008 and again in 2020. Emission standards are tightening, leading to higher per vehicle loadings of PGMs.

The record high palladium and rhodium prices over the past several years meanwhile is leading to a shift away from palladium back to using more platinum. More vehicles using more platinum means more total demand for this metal.

This increase in demand comes at a time when PGM producers continue to struggle with plans for future production. This may combine with increased platinum use in auto catalysts to push prices sharply higher in the middle and later parts of the current decade. Or not: If EVs gain market share faster than seemed likely even recently, this scenario could be upset or sharply abbreviated. Demand for all three major PGMs could decline sharply and sooner than otherwise might be expected.

The PGM mining industry needs to position itself for either auto demand contingency: One with a rapid shift to EVs or some other technology, or one in which demand for PGMs for use in auto catalysts remains important, and the largest use of these metals, for at least several decades.

This comes after years of persistent over-production and surpluses in platinum and palladium. The South African PGM mining sector has promoted the view that the platinum market was persistently in a deficit, but it did that by adding estimates of investment demand in with fabrication demand in the calculations comparing fabrication demand to total supply. Commodities analysts generally exclude investment demand from these calculations for several reasons. Platinum, or gold or silver, bought for investment purposes remains in ‘platinum form.’ That is, it is in fungible, refined form as bars, sponge (powdered metal), or coins that can be sold back into the market at a moment’s notice. It is not used in fabricated products where its identity as refined platinum is masked by the greater value of the manufactured product.

Furthermore, investors prefer to invest in commodities that have a fundamental deficit, one caused by manufacturers needing or wanting more platinum, in this instance, than is being refined from mine output and secondary scrap recovery. Adding investment demand into one’s calculations may make a market balance look tighter than it is for investment marketing purposes, but that tends not to fool most sophisticated investors. It tends to put them off a market, instead, as they see it as a ‘promoted’ market.

For reasons we need not delve into here, platinum, gold, and silver promotional agencies and their support companies have added investment demand to their guesses of fabrication demand since the 1990s.

Worse, many mining executives seemed to believe the results, thinking that the platinum market was running massive long-term deficits. They could not understand why platinum prices were so weak in the face of purported massive structural deficits. Stripping out investment demand, one sees long-term persistent surpluses, which perfectly explain the weak platinum prices of the past decade.

The current generation of PGM mining executives seem to have a more granular understanding of platinum market realities, and they now are wrestling with the realities of the market. Unfortunately, their long-term plans need to account for the enormous uncertainty about how fast EVs will take market share, and consequently how much or how little platinum, palladium, and rhodium the global auto market will need in five, 10, 20, 30 years.

In sum, the future of auto propulsion technology and which one wins, hangs over long-term capital allocation decisions in the PGM industry, making such calculations so much more difficult.

On top of all of this auto market uncertainty, the PGM mining industry faces a host of other issues. There is of course an enormous list of social, governmental, environmental, and political issues facing it.

There are critical issues about how to interface with the investment market. Investors own millions of ounces of platinum already. They could become price insensitive ‘competitors’ for miners should they decide to sell. Or, they could be the saviors of the miners, buying even more. Until now at least, the South African, Russian, and North American PGM mining industry has not demonstrated a profound understanding of the motives and methods of platinum investors. Doing so would be crucial to helping financing market intermediaries fashion attractive platinum investment instruments and strategies that can compete in financial markets that increasing are driven by artificial intelligence (AI) and indexed investing along with monetary accommodation.

Other demand sectors, including jewelry, chemical catalysts, petroleum-refining catalysts, electronics, metallurgical applications, glass manufacturing equipment, and a host of other manufacturing applications, also need attention from platinum suppliers.

—Jeffrey Christian is the managing partner of CPM Group, a commodities research and management, consulting and financial advisory firm in New York. He founded the company in 1986, spinning off the Commodities Research Group from Goldman Sachs & Co., and its commodities trading arm, J. Aron & Company. Christian is an expert on precious metal markets.