New Best Friends Platinum and Hydrogen
Host Ed Coyne is joined by Shree Kargutkar for a timely update on platinum, including its role in hydrogen fuel cell technology.
Ed Coyne: Hello and welcome to Sprott Radio. I am your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. With me today, we have one of our long-standing guests who has done webcasts and podcasts with us, Shree Kargutkar, CFA, and a Managing Partner and Portfolio Manager at Sprott Asset Management. I asked Shree to join us today to talk predominantly about platinum and touch on palladium. Shree, thank you for joining us today on Sprott Radio.
Shree Kargutkar: It is a pleasure to be here. Thanks for having me again.
Ed Coyne: Shree, I like to think that platinum and palladium have become a forgotten metal in the short term as the world has turned to the energy transition market. You cannot go anywhere these days without hearing comments about battery technology. I thought it would be a good time to revisit platinum and palladium and talk about what is driving its demand, what the market's thinking, what's Wall Street thinking, and where the future is for platinum and palladium in this landscape of a gradual shift to the electrification of the automotive industry. Has platinum and palladium become a dinosaur, or is it still relevant in today's economy?
Shree Kargutkar: Sounds good. The fact that ICE-powered cars are still rising in numbers in terms of their manufacturing output every year tells me that platinum and palladium are not completely out of the boat.
Ed Coyne: I do not think most of our listeners fully appreciate the role platinum and palladium play in the automotive industry. From a percent standpoint, what percent of platinum and palladium's demand comes from the auto industry?
Shree Kargutkar: Palladium's easy. Almost 85%, give or take, of the total demand for palladium is derived from the automotive industry. As it relates to platinum, it is a bit of a moving target because there have been years where platinum and its uses in the automotive industry have declined. For example, There have been periods when platinum's use in the automotive industry has been on an ascent like it is right now. Closer to 40% to 45% of platinum’s demand comes from the automotive industry today.
Ed Coyne: Why does that fluctuate? Are those two metals interchangeable for catalytic converters, or what is the reason behind that?
Shree Kargutkar: The short answer is yes. Platinum and palladium are reasonably substituted for each other, especially when you are talking about gasoline-powered engines, for example. As it relates to diesel engines, platinum is much more difficult to substitute. However, you can have a combination of platinum and palladium in the catalytic converters used for diesel-powered cars. Back in the 1990s, there was a huge run-up in the price of platinum.
That is when we started to see substitutions from platinum toward palladium as far as the catalytic converters are concerned. The substitution at that time was quite sticky because it lasted a very long time. Even in recent years, the amount of palladium being produced was not enough to meet all the demand from the automotive industry, and we were seeing some of the physical metal getting taken out of the ETFs, for example, just to meet the excess demand.
It did not lead to meaningful substitution levels away from palladium into platinum until the last couple of years. Part of it was automakers realizing that "the supply-demand picture for palladium is not in our favor." Part of it also had to do with palladium trading as high as $3,000 per ounce when platinum, the usually more expensive counterpart, was trading closer to $1,000.
Ed Coyne: You mentioned pulling the physical metals out of some of the ETFs in the past. What about recycling? What role does recycling play in consuming these metals and, ultimately, in the demand for the metal itself?
Shree Kargutkar: Recycling plays a very important role because when you are talking about internal combustion engines and cars powered by internal combustion engines, they have a finite lifespan. After 10, 15, 20 years, these cars end up being recycled, and the catalytic converters attached to the cars are also recycled. The amount of metal that comes from recycling has always been an important supply component of the overall picture for platinum and palladium.
With platinum, for example, we get about 1.2 million ounces of the metal being supplied through the recycling market and entering the supply side of the metal every year. With palladium, recycling accounts for about 2.6 million ounces of the overall supply pie. The importance of recycling cannot be overstated. We are seeing some important shifts underway because the platinum-palladium supply chain has become unpredictable.
That has meant that used car prices have also crept up, and because used car prices have crept up, the number of cars that are being recycled has also started to be under pressure. The whole automotive machine, if I were to put it this way, of new cars being made and old cars being recycled, there has been a giant wrench that has been thrown in as a result of the COVID pandemic and some of the supply shortages on the semi-conductor chip side. It is improving, but it has not completely gotten better yet.
Ed Coyne: Interestingly, there seems to be a bit of a disconnect. Year to date, it is negative. Platinum and palladium are both showing negative performance in large numbers. Yet supply is not readily available, and demand is increasing. Why do you think there is a disconnect right now? Why is Wall Street not necessarily caring? What are your thoughts?
Shree Kargutkar: I have noticed a couple of things. First, the investment demand was negative because ETFs have been in outflows on a global scale for the past year and a half. That seems to have stopped. There are some levels of inflows coming into platinum and palladium. Investors are realizing, "Hey, we should at least stop redeeming and try and get a better feel for what the supply-demand picture looks like for these two metals."
Second, these two metals are so rare and produced in such small quantities that it is exceptionally difficult for a large investor to enter the market. I am talking about someone with assets in the tens if not hundreds of billions of dollars to come in and take a position, which is meaningful enough because we are talking about an instance for platinum where the total combined supply coming out from mines as well as recycling is around 7 million ounces per year.
Regarding palladium, we are talking about a metal where the combined supply chain recycling and mine production is circa 10 million ounces annually. These are not large markets, but when investors become more confident that a serious investment return will be made here, it is very easy to make fairly large splashes to the upside. Now, I am talking about the prices of these metals because to take a substantial position, which can meaningfully sway the market, the position sizes don't get very big. A few hundred million dollars can make massive changes to what the prevailing metal prices can result in.
Ed Coyne: You mentioned the rarity and the limited quantity. Has the industry ever sought to find a replacement for these metals? It seems like they have looked in the past and not been successful. Even as we go into battery technology, is there a replacement metal that can do the same job? Also, as the industry slowly over decades probably moves to electrification, where do you see platinum and palladium's role as the market evolves?
Shree Kargutkar: PGMs, and I am now talking about platinum-group metals. They generally have similar qualities in that it is reasonably difficult to get them to react to other metals. That makes them excellent catalysts for various reactions. For example, when we are talking about a catalytic converter, the catalyst is a PGM metal.
You could have platinum in the catalytic converter; you could have palladium in there; you could even have rhodium in there. I am not a chemistry expert, but the bottom line is that very few elements can catalyze without reacting at high temperatures. That is something that makes platinum and palladium so unique.
We have not seen some third, fourth, or fifth party, or metal, enter the picture as a "Look at me. I can do the same thing for cheaper." We are very much stuck to the PGM metal group for use as a catalyst as far as being able to catalyze a reaction at high temperatures.
Platinum is also used in several industrial applications, many of which are quite important for producing electric cars. Second, platinum is also very important, at least right now, for its ability to catalyze the reaction that converts hydrogen into water, making it almost impossible to separate out from a car that uses hydrogen fuel cells.
Ed Coyne: When you talk about hydrogen, that seems to be a growing part of the market. Most investors do not connect the dots between platinum and hydrogen. What is going on with the hydrogen economy, and how is platinum being married to that economy?
Shree Kargutkar: The hydrogen economy is very nascent at the moment. Many experts, different companies and enterprises are out there hoping to make hydrogen into a much bigger component of the green economy. That is where the whole hydrogen economy comes in. Today, in 2023, the rise of EVs is there, and everyone knows it. We are not at a point where we're seeing that big inflection for hydrogen fuel cell cars just yet.
Platinum is quite important because usually, what happens when you mix hydrogen with oxygen is water. Still, you get a huge, huge amount of energy being released at the same time. Think back to the Hindenburg, those classic images we have all seen, the videos we have seen of what happens when hydrogen mixes with oxygen. The results are explosive. Obviously, we do not want that to happen when driving a car around, for example, so what needs to be done?
It would help if you had that reaction occur in a more contained manner, but we need to have that reaction happen to produce energy. That is where platinum and palladium, elements that can maintain their chemical properties, can be catalysts in a reaction and don't themselves react with the reacting elements. That is what platinum is good for. Platinum can catalyze the reaction with hydrogen and oxygen coming together to make water and create enough energy for a hydrogen fuel cell-powered car or a bus.
Ed Coyne: It sounds to me, and correct me if I am wrong, that the investment demand looks pretty attractive down the road or longer term as more investors pay attention to this. It is undeniable that we can't move forward without platinum playing a role.
Shree Kargutkar: I will put it this way for platinum. We are currently in a deficit. There are just under 4 million ounces of platinum above ground, depending on whose research you consume. We are chewing through anywhere between 250,000 and 1 million ounces per year 1. That does not leave too much time before the above-ground stockpiles are exhausted for platinum. Then, what do you do? We are not bringing on any new platinum mines capable of producing platinum, palladium and other elements at prices similar to what some existing mines are capable of doing.
The supply-demand picture is such that demand continues to rise, but supply is not. We just touched on the hydrogen economy, and the thing that I did not touch on is the ramifications of what this thing can do if the hydrogen economy were to take off for platinum because while you're using one or two grams of platinum for every internal combustion engine car, for a fuel cell vehicle, you use somewhere between 30 and 60 grams of platinum per vehicle.
Ed Coyne: So more?
Shree Kargutkar: Yes. You do not need hydrogen fuel cell-powered cars to be the dominant type of automobile out there. You just need a small fraction, 2%, 3%, or 4% of the existing pie chart. If that were fuel cell-powered cars, we would be talking about hydrogen trading at multiples where it is right now because there just is not enough of this metal.
Ed Coyne: Let us finish with going back to investments. How would you suggest an investor try to participate in the supply-demand disconnect, the price or performance right now? How could someone participate in that in some way, shape, or form? What would you suggest for someone who wants to be involved with this space from an investment standpoint?
Shree Kargutkar: Generally speaking, it is reasonably difficult to be wrong on a commodity when there is less of it being made versus how much is being used. Platinum has multiple uses. It is very useful in the automotive industry, and its use is growing. That cannot be overstated. More importantly, there are other industrial users of platinum, which are increasing the demand for the metal.
Almost three-quarters of the metal comes out of South Africa, and they cannot even generate enough electricity to feed the mines. That is a problem. The supply of platinum is unlikely to grow much in the future, but the demand does not know about the supply. It does not care. The demand for the metal is growing. The supply-demand outlook is quite positive for platinum for the first time in almost a decade.
To come back to your question, Ed, it is reasonably good to be getting positioned in a metal or in a commodity where there is more being demanded and less being supplied, and the commodity is in a deficit that is not likely to close for a meaningful amount of period in the next few years. You could do worse than invest in a commodity that there is not enough of. Obviously, when there is a supply-demand imbalance, there's one thing that may likely change, and that is the price.
Ed Coyne: You certainly covered a lot of waterfront today. I always encourage our listeners to go to our website at sprott.com and read some of the more recent write-ups and comments you have made about that space. Shree, it is always a treat to have you on Sprott Radio. Thank you all for listening to Sprott Radio. Once again, I am your host, Ed Coyne.
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