Authored by John Ciampaglia, CFA, CEO Sprott Asset Management
This is Part 1 in our series focused on platinum. Part 1 serves as a primer on platinum, and in Part 2 we explore the unique supply-demand fundamentals that support our bullish outlook.
When comparing spot prices for platinum and palladium, it’s easy to assume that vastly different storylines have shaped the performance of these two metals. Over the past six months, platinum’s price has continued its multi-year decline, falling below $800 ($791 as of Friday, August 24) – close to its lowest level in a decade. Palladium’s fate, by contrast, has seen far more luster, as it surpassed $1,000 in price for the first time late last year. In recent weeks, a surging U.S. dollar on the back of trade-war fears has pushed all metals lower.
Platinum, as shown below, is trading well under the 1.0 platinum-to-gold ratio that is considered the historical norm, and which we have not seen since 2015. The current ratio of 0.66:1.0 means platinum is currently a bargain: an ounce of platinum is selling at 66% the price of an ounce of gold. Platinum is also severely undervalued relative to its white gold “cousin” palladium given that it has historically traded at 2-4 times the cost of palladium.
Figure 1: Platinum vs. Gold and Palladium Prices Since 2000
Source: Bloomberg. XPT (black line/shaded blue) represents platinum; XAU (gold line) represents gold; XPD (dark blue line) represents palladium.
Platinum (Pt) and palladium (Pd) are primarily used as industrial metals but also have a strong correlation to the “precious” metals gold and silver. Both are much rarer than gold and represent tinier markets. Recent world production of platinum and palladium has averaged about 175 and 200 tonnes per year, respectively, while gold production tallies approximately 3,000 tonnes per year.
Also known as “white gold” or the “bright white metals,” platinum and palladium are members of the Platinum Group Metals (PGM) and typically co-occur in ore deposits (the group also includes ruthenium, rhodium, osmium and iridium). Their shared chemical origins give platinum and palladium similar characteristics, such as being relatively inert and having high melting points – appealing features for use as catalysts in industrial and automotive applications. Platinum is denser and stronger than palladium, and has historically commanded a higher premium; it’s also the preferred choice for jewelry, driving additional demand. South Africa is the world’s largest producer of both metals, with its storied Bushveld Igneous Complex (BIC) responsible for 75% of the world’s platinum output and 50% of its palladium. Russia is the second largest platinum-producing country but surpasses South Africa in palladium. Zimbabwe, Canada and the U.S. round out the top-five homes to the PGM.
The primary driver of demand for both metals is the automotive industry. Platinum and palladium are key elements in the manufacturing of catalytic converters which help reduce toxic emissions from automotive exhaust. Rising car production (especially in emerging economies) and tightening emissions standards worldwide has fueled steady growth in the use of catalytic converters.
Historically, platinum has been the much more expensive metal. However, over the past decade demand for lower cost palladium as an alternative has soared and platinum demand has fallen.
Although palladium has been the bigger beneficiary of auto sector momentum and trends in recent years, our view is that this dynamic may be changing in favor of platinum.
Auto manufacturers use precious metals in catalytic converters because PGMs catalyze these high-temperature reactions without being consumed or chemically altered. Because they do not degrade easily, the platinum and palladium within catalytic converters can often be salvaged when a car has reached the end of its road. Over the past decade, as technology has improved, auto manufacturers discovered that gas-powered vehicles didn’t require platinum’s higher temperature stability to effect this chemical change. Instead, lower cost palladium worked just as well for their needs.
As a result of its price discount, palladium became the primary metal in this essential auto part, driving demand and ultimately price gains. Today the automotive sector accounts for 75% of palladium demand with its use surpassing 8.39 million oz. in 2017. With an 801k oz deficit in 2017, palladium ironically finds itself trading at a premium to platinum.
Diesel vehicles typically use platinum-based autocatalysts since the metal performs better than palladium in this application. But due to increased restrictions on diesel vehicles in Europe and Japan, there has been a reduction in the market share of diesel vehicles in the past five years. The scandal around manipulated diesel vehicle emissions, known as dieselgate, in particular, has been strongly linked to a reduction in the purchase of new diesel vehicles in Europe. This has negatively impacted platinum’s demand from the automotive sector.
The typical car contains a mere three to seven grams of palladium or platinum. Assuming the midpoint of five grams, an average car, which sells for $40,000 in the U.S., only carries a mere $160 worth of palladium or approximately $140 worth of platinum at current prices. Automakers are therefore relatively insensitive to the price of either platinum or palladium.
What auto-makers genuinely care about, however, is the surety of supply of either of these metals.
Platinum’s future looks very promising in many of the other industries in which it’s used, including glassmaking, jewelry, petrochemical, fertilizer manufacturing and fuel cells.
While palladium can often work interchangeably with platinum in the auto sector, it’s not always the case for other industrial uses. In the electronics, chemical and glass sectors, the needs for the metal become more complex, so these sectors are unable to substitute platinum with other metals. Platinum’s industrial demand, which is expected to rise 3% in 2018, is driven by the growth in the glass sector. Platinum has become indispensable for the manufacturing of high-performance glass used in television sets, phones and other types of smart glass as well as optical fibers. The glass sector currently accounts for 17% of platinum’s industrial use and this demand appears poised for a continued rise.
Platinum also has a fairly robust demand within the jewelry sector. The World Platinum Investment Council evaluated this dynamic over the past 15 years, determining that platinum was trading primarily as a precious metal with an industrial premium from 2002 to 2005. Platinum was then redefined as an industrial metal with a precious floor in the eight years that followed. In 2013, another shift occurred, in which platinum began trading as a precious metal with an industrial discount, as it stands now.
Platinum’s use as a precious metal in jewelry is on the rise, particularly in India. Demand in the country increased by 16% last year, albeit from a low base. Uptake of platinum for jewelry making in regions like India is helping buffer the loss of demand from traditional platinum jewelry buyers in China and Japan.
Platinum (but not palladium) is also used to catalyze the electricity-producing conversion of hydrogen and oxygen into water in hydrogen-based fuel cells, increasingly used in electrical vehicles. While fuel-cell makers will look to reduce the amount they use in each cell over time to reduce cost, the minimum amount of platinum required in fuel cell electric vehicles (FCEV) is still multiples higher than in internal combustion engine (ICE) automobiles.
The number of fuel-cell vehicles operating is expected to see rapid growth with a million FCEVs on the road in China alone by 2030. This equates to over 7 million traditional vehicles as a result of higher platinum usage in FCEV vs. ICE autos.
Due to the largely interchangeable use of platinum or palladium in non-diesel ICE cars, palladium took over much of the auto demand. Palladium, however, could soon become a victim of its own success since it has reached a price point that far surpasses platinum. Thomson Reuters estimates that palladium could average above $1,000 for the year, for the first time.2
How dramatic of a shift is that in price? A decade ago, it wasn’t unusual to see an ounce of palladium trade at a $1,000 discount to platinum. As Andrew Hecht wrote, “Industry had become addicted to palladium because of its lower price and comparative value compared to platinum over past years.”
But, as we’ve discussed, all things equal, platinum and palladium perform interchangeably within non-diesel ICE autocatalysts. Historically, palladium’s virtue was its lower price. It’s just a question of whether the price of palladium has reached a point that would encourage manufacturers to switch back to the preferred metal, platinum. There are indications that this shift has begun.
Unlike the previous cycle, which was driven by thrifting platinum with palladium, this cycle will be driven by the availability of the metal as palladium deficits continue to linger.
In part 2, Portfolio Manager Shree Kargutkar takes a deeper look at the supply dynamics that support our bullish outlook.
Figure 3: Platinum Supply vs. Demand (2013-2018e)
Source: World Platinum Council.
Sprott Physical Platinum and Palladium Trust (SPPP) is a closed-end trust that invests in unencumbered and fully-allocated Good Delivery physical platinum and palladium bullion. The goal of SPPP is to provide a secure, convenient and exchange-traded investment alternative for investors who want to hold physical platinum and palladium. The Trust offers a number of compelling advantages over traditional exchange-traded platinum and palladium funds.
|1||Johnson Matthey: PGM Market Report May 2018.|
|2||Thomson Reuters: GFMS Platinum Group Metals Survey 2018.|
This content is intended solely for the use of Sprott Asset Management USA, Inc. for use with investors and interested parties. Investments, commentary and statements are unique and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this presentation are those of the presenter and may vary widely from opinions of other Sprott affiliated Portfolio Managers or investment professionals.
This content may not be reproduced in any form, or referred to in any other publication, without acknowledgment that it was produced by Sprott Asset Management LP and a reference to sprott.com. The opinions, estimates and projections (“information”) contained within this content are solely those of Sprott Asset Management LP (“SAM LP”) and are subject to change without notice. SAM LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. SAM LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. SAM LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, SAM LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.
SAM LP is the investment manager to the Sprott Physical Bullion Trusts (the “Trusts”). Important information about the Trusts, including the investment objectives and strategies, purchase options, applicable management fees, and expenses, is contained in the prospectus. Please read the document carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Trusts.
The risks associated with investing in a Trust depend on the securities and assets in which the Trust invests, based upon the Trust’s particular objectives. There is no assurance that any Trust will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Trust will be returned to you. The Trusts are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Trust’s prospectus before investing.
The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada or the United States should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action.
You are now leaving sprottus.com and entering a linked website.Continue
You are now leaving Sprott.com and entering a linked website. Sprott has partnered with ALPS in offering Sprott ETFs. For fact sheets, marketing materials, prospectuses, performance, expense information and other details about the ETFs, you will be directed to the ALPS/Sprott website at SprottETFs.com.Continue to Sprott Exchange Traded Funds
You are now leaving Sprott.com and entering a linked website. Sprott Asset Management is a sub-advisor for several mutual funds on behalf of Ninepoint Partners. For details on these funds, you will be directed to the Ninepoint Partners website at ninepoint.com.Continue to Ninepoint Partners