Episode #4 - Platinum and Palladium Explained
Host Ed Coyne is joined by Portfolio Manager Shree Kargutkar for an update on the PGM group metals: platinum and palladium. Topics include supply-demand dynamics, geopolitical challenges for miners and platinum's role in fuel cell electric vehicles (FCEVs).
Welcome to Season 1, Episode #4 of Sprott Gold Talk Radio. Today, we're going to have an overview on platinum and palladium. As a recap for those that have listened to the last few episodes, we spent most of our time on the two traditional precious metals, gold and silver, both from a physical standpoint and an equity standpoint. Given the current market environment, I thought it would be interesting to have on special guest, Shree Kargutkar, a portfolio manager at Sprott Asset Management, to talk specifically about platinum and palladium and give an overview on both metals.
Shree, thank you first and foremost for joining us today. Before we go into these questions, I think it would be helpful for the audience to hear a little about you as a person, how you found your way to Sprott and what your day-to-day looks like at Sprott when you're dealing with precious metals, specifically both platinum and palladium.
Thanks for having me on. I've been at Sprott since 2010. I started at Sprott as an intern analyst focusing on small-cap and growth stocks, and subsequently, my focus slowly shifted towards resources and precious metals in particular. My background is in psychology. As an undergrad, I have an MBA from the University of Toronto, and I've also completed my CFA charter. I tend to look at things from more of a numerical perspective rather than a geotechnical perspective. In 2012 Sprott started exploring the idea of launching a product that was focused on platinum and palladium. This was when I was asked to come in and start creating an internal knowledge base of platinum and palladium, and I've really been looking at these metals since then. Over the years, my focus has been a little bit broader. I am one of the members of the Sprott Gold Team, which includes John Hathaway, Doug Groh, Maria Smirnova, Jason Mayer and Justin Tolman. On a day-to-day basis, our job is primarily focused on active equity investing, where we try to uncover the most amount of alpha in the sector that we can.
I've been here for close to six years now and it's been great to have the interaction with you and get your insights. 2020 provided an interesting year for markets and metals alike and year-to-date, 2021 continues to support both platinum and palladium, with each metal up nicely. Over the last year or so, there's been a bit of a flip-flop. From an investment standpoint, in your view, what's really happening? Are we at the top of a market, or is this market really getting started, particularly as it relates to platinum?
2020 was a very interesting year in that we had a major economic shock caused by the COVID pandemic. This led to all sorts of disruptions in the logistics chain on the mining side, as well as the manufacturing side. Palladium has been in a deficit for almost as long as I have been following this particular metal. In 2020, automotive production took a slight dip. Mining production took a small dip as well. Because the overwhelming percentage of the demand for palladium comes from the automotive sector, we saw a dip in the overall trend for palladium that has corrected itself starting in the second half of 2020. In 2021, we have palladium knocking on the $3000/Oz door.
Platinum, on the other hand, did a little bit better in 2020 because it has seen an increasing level of investor interest. It is also considered to be a precious metal. The platinum supply was more disrupted in 2020 than the palladium supply because South Africa was severely impacted by COVID. Many of these mines had to be shut down for a protracted amount of time. As a result, the supply for platinum came off much more sharply than palladium supply did. For those reasons, we saw platinum do a little bit better in 2020. It is doing quite well in 2021. It seems to be breaking out into a nice upward trend.
I think it's very difficult to call tops and bottoms with any real degree of accuracy. In both metals, the supply-demand trends currently playing out for both metals are very favorable from the demand side of the equation and the supply side continues to be challenged. I don't see any particular reason why these metals could be topping out here. The trends that have been playing out over the past several quarters and years for both these metals are firmly in place and we'll probably continue to see these price trends persist for both platinum and palladium.
We often talk about investments from a demand standpoint and a reasoning standpoint, but the supply side often gets overlooked. Let's talk about recycling for a moment. I remember reading a year or so ago that people were literally taking mufflers off of cars for the metal. From a supply standpoint, how does recycling play a role in the overall price direction, and how should investors think about that?
Recycling is a very important component of the overall supply chain. Both platinum and palladium are exceedingly rare and quite difficult to separate into their respective individual elements. These metals occur in the Earth's crust as the PJM group metals, and depending on which geography you look at, it might have a little bit more palladium, or if you're looking at South African mines, they may have a little bit more platinum content.
These metals are scarce, difficult to mine and as a result, the recycling element is very important. In the case of platinum, the total amount of mined supply on any given year - and I'm not going to talk about 2020 because that was a disrupted year — but in a general year, we'll typically have about six million ounces of platinum coming out of mines and we have approximately two million ounces entering the supply chain as recycled platinum metal.
If you look at palladium in any given year, there are slightly over seven million ounces of supply that comes out of mines annually. Again, I'm not using 2020 for palladium as well. From a year-over-year perspective, we typically see north of three million ounces of supply enter through the recycling chain. The total amount of supply between mine supply of palladium and recycle supply of palladium is around 10 million ounces in most years. The total amount of supply of platinum available between mining and recycling is around eight to eight and a half million ounces every year.
To stay on the topic of supply, clearly it's coming from mines and companies that operate those mines. You mentioned how difficult it is to mine and the locations where these mines sit. From a jurisdiction standpoint, there's obviously risk associated with that. Let's talk about the mining stocks for a moment.
Certain regions in the world are a little bit better endowed than the others when it comes to a particular resource. When it comes to platinum and palladium, the two countries that stand out as the key sources of supply are South Africa and Russia. Neither of these are considered to be in the sweet spot of geopolitical risk when it comes to mining equity investments for different reasons.
South Africa has to deal with the fallout of apartheid and the continuing black empowerment initiatives occurring there, which have led to a lot of strife on the ground as it relates to how the workers are paid. For Russia, it's more of a question mark when it comes to the friendliness that particular country has towards the rest of the world and, in particular, the United States.
Almost 75% of the world's mined platinum comes out of South Africa, and around 75% of the mined palladium comes from South Africa and Russia, with the two almost splitting the share of the palladium. When it comes to individual companies operating these particular mines with the PGM focus, the majority of them are South African domiciled.
We have seen these equities really struggle all the way, perhaps until the end of 2017, 2018, because while palladium was doing well, platinum was not. As a result, the overall basket revenue, which is the combination of platinum and palladium and rhodium, was not doing too well. At the same time, these companies were facing a lot of labor strife due to the ongoing strike activities in South Africa. Since then, we have seen palladium take off, and we have also seen platinum find its footing. It has moved upwards of a thousand dollars per ounce now.
A metal that no one really talks about is rhodium. It has seen its price appreciate from just around $1000/Oz to close to $30,000/Oz right now. These three metals have helped change the fortunes of the South African mining equities. When it comes to mining equities and especially mining equities in jurisdictions like South Africa, the volatility that comes with it goes both ways. Right now, the trend is quite robust, but if we start to see any breakdowns in the price of platinum, palladium or rhodium, it's quite possible these equities may correct.
The other thing that investors are focused on now is the whole debate about inflation versus deflation. Whether it's the metals market, the general economy, the overall stock market, or the real estate market, it does seem like inflation is slowly working its way into the economy. Walk us through what that environment might look like for both metals from a pricing standpoint.
The one theme that keeps coming up when I speak with the CEOs of companies engaged in PGM production is just how overwhelming the demand for these metals is, particularly for palladium, and for platinum, in relation to the supply is available. As long as there are deficits in these metals, I think prices will continue to rise. And when it comes to palladium, for example, the automotive sector is scrambling to secure that metal.
The thing that strikes me is that the investor demand for palladium has been negative, but it's not because the investor demand has gone down for the palladium metal. It is because the metals traders have been raiding the ETFs that hold the metal to secure the supply for the automotive chain. That has been part of the reason why we have seen this parabolic move in palladium. Because of the scarcity of palladium and the increasing emission standards that we see worldwide, the automotive industry is starting to slowly substitute back towards platinum.
Regarding inflation or deflation, it is quite apparent for someone who is looking at it from a supply-demand perspective to look at these metals and say that the underlying trends are still robust; they're still solid. As a result, it's very difficult to say that the price movement will be anything but up and to the right for both of these metals.
We have the gold .vs silver conversation all the time. It sounds that you probably should be thinking about both metals when thinking about a PGM allocation. I always like to ask my guest to finish with one particular nugget from an investment standpoint. Love to hear that from you now, and then we will wrap up Episode #4.
The area that I'm particularly intrigued by is fuel cell applications. We have seen this term called hydrogen economy start to get used more and more. When it comes to the hydrogen economy, platinum has a vital role to play. The amount of platinum used in a single fuel cell vehicle tends to be between 15 to 30 times a typical loading of platinum in an internal combustion engine vehicle. Even if we see a small slice of the truck fleet or transport bus fleet transition to a fuel cell-powered format, we can see a massive change in the trajectory of demand for platinum as a result. If we start to see a move towards this fuel cell-powered concept in the coming years, which I think we will, we could be setting platinum up for a pretty spectacular trajectory.
In late March you wrote a special report in which you talked specifically about that, which I think is really interesting. Shree, thank you so much for joining us today. Hopefully, this was educational for our listeners to go outside the traditional storyline of gold and silver and dive deeper into platinum and palladium.
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