The Inelastic Demand for Platinum

Podcast Transcript

Ed Coyne: Hello, and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott Asset Management. Today, I'm pleased to welcome back one of Sprott's managing partners and senior portfolio managers, Shree Kargutkar. Shree, thank you for joining us on Sprott Radio.

Shree Kargutkar: Thanks, Ed, for having me again.

Ed Coyne: We’ll dive into everything, particularly platinum, which has had quite a move this year. Before we dive into that, tell us a bit about yourself and some of the work you're doing now at Sprott.

Shree Kargutkar: Thanks, Ed. My work at Sprott is largely focused on all sorts of precious metals: gold, silver, platinum, and palladium. Over the past several years, I've also started to look more deeply into some of these metals that are considered to be "critical," which would involve things like copper, nickel, and cobalt, as well as lithium and some of these rare earths, which are becoming increasingly topical these days.

These are all the different kinds of commodities that I've been paying close attention to over the many years. These commodities and the supply-demand picture that they present tend to drive our investment decisions, which are largely focused on equity. I am responsible for co-managing many of our products on the actively managed equity side of things. These include precious metal mandates as well as critical metal mandates.

When I analyze the supply-demand trends, it helps us make educated decisions in terms of which equities to favor and go from there. We also try to pay close attention to what's happening geopolitically because, as we all know, the world is not safe and calm. We have to make sure that we allocate investor dollars to regions where the risk-reward tends to be more in our favor. We try to steer clear of areas undergoing lots of, I guess, transition, be it from a geopolitical standpoint or just not the best places to operate safely.

Ed Coyne: I think it's interesting that you brought up critical materials as an extension of your work because platinum and palladium are both precious metals. They've certainly, for a long time, been a critical material. You could argue maybe before that term was even coined, they were the original critical materials when you think about how they've been used. Talk about that a little bit because we've seen this tremendous price move, particularly in platinum.

It seems like palladium is trying to catch up now. What's driving that move right now? Is the world woken up to the idea that "Hey, maybe we're not all going to have electric cars," or what's driving this move today in the market?

Shree Kargutkar: I think the move behind platinum is best explained by the market's recognition that there is not enough platinum coming out of the ground being recycled back into new supply to meet the existing demands. We're currently entering the third year of a structural deficit for platinum. The above-ground stockpiles, typically used to bridge the gap between supply and demand, are starting to exhaust themselves.

The market has recognized this, and it has repriced platinum from $900 to circa $1,300 as we speak right now. I think platinum has a much bigger upside because this is a very small market. The most important thing I can tell you about platinum is that the demand for it is quite price inelastic in that platinum is critical, and there are very few substitutes. Palladium is one of them, but it's not always a perfect substitute for all the different applications that platinum is currently used for.

Ed Coyne: If I heard this correctly, I also heard that when you try to substitute palladium for platinum, you need more of it to get it to do the same things platinum can do. Is that correct, or am I misled on that one?

Shree Kargutkar: Depending on what application I've looked into, the palladium to platinum ratio can be slightly different. It also depends on the end user and how they're formulating the actual catalyst that's going in there. The automakers have become pretty good at balancing the amount of platinum or palladium going into the catalyst to ensure that they can still meet the minimum standards going into place.

Emission standards have been changing. They have become increasingly more stringent over the years and decades. This is a good thing because clean air is something everyone can support. The way to get cleaner air and exhaust is by introducing higher emission standards, which have essentially been part of why there has been more palladium going into the catalytic converter and more platinum. In terms of the actual ratios, I think that is a bit of a moving target based on what I've studied.

Ed Coyne: You also mentioned a moment ago that you see a potential further rise in platinum prices. You don't have to go back that far in time to look at what happened with palladium. If I have my numbers correctly, from 2016 to 2021, it went from $600 or $700 to over $3,000. These things move so quickly. How do you try to capture that? Are you seeing a potential similar setup right now based on your experience with platinum?

Shree Kargutkar: I think so. I alluded to this before when I said there's a reasonable level of price inelasticity for the end users of platinum and palladium. If Palladium said it was at $600 and your car needed the palladium to go on the road, then you didn't care if it was $600 or $1,000 or $2,000 or $3,000. To build a car, you needed to inject palladium into the catalytic converter.

At the end of the day, it was only a few hundred dollars worth of money to put a $50,000 car, a $100,000 car, on the road. The same things can be said for platinum as well. The end users are quite inelastic in terms of the price that they're willing to pay because both platinum and palladium, and we're talking more about platinum. I think platinum is in the same situation you described between 2016 and 2021, whereby the above-ground stockpiles have been depleted, the supply was not keeping up, and still is not.

We're currently in a scenario where platinum's structural deficits translate to higher and higher metal prices. In terms of where the price of platinum can go, if you go back 20 years, we're talking about platinum again in 2025. Twenty or twenty-five years ago, platinum regularly traded at a big premium to the price of gold. Platinum is rarer than gold. It is much more difficult to get out of the ground than gold. Platinum used to be more expensive than gold.

It is not out of the realm of possibility that we could be talking about a significantly higher price for platinum. Perhaps there could even come a point where platinum prices, once again, are trading at a premium to the price of gold. Gold right now is circa $3,300.

Ed Coyne: Obviously, we love gold at Sprott. Gold is money, but it doesn't have many other uses like platinum. That seems to make a lot of sense to me. When talking about extraction and pulling things out of the ground, how should someone think about the physical part of the market versus the miners? Is there an opportunity to look at miners specifically mining this, or is it part of a bigger mine ecosystem, and platinum is just part of it? Or do we see actual platinum mines out there?

Shree Coyne: That's a great question, Ed. I can tell you platinum usually comes together with other platinum group metals. This includes palladium, rhodium, and sometimes, a little gold comes out. When mining for platinum or palladium, a soup of different metals presents itself. Typically, what's been happening is that many of these mines are in areas that are not the best position from a geopolitical perspective.

They're not the safest, or if they are in a reasonable jurisdiction, as one might perceive, they don't have the access to sound infrastructure necessary to continue producing the metals at a sustainable rate or even expand these mines. Case in point: South Africa produces 70% to 75% of platinum annually. This is mine production; it's dominant in the production of platinum, but South Africa has been dealing with several different problems.

They have great difficulty maintaining their electricity supply, which is important because many of these mines are a mile or a mile and a half deep, where things get really hot, and ventilation becomes extremely important. These mines often use extremely antiquated mining methods focused on human power rather than technological innovations, which are now present in many parts of the world.

These kinds of issues, capital-starved mines, and poor access to electricity make it quite difficult for South Africa as a jurisdiction to increase its production easily, should the prices rise to a level that makes sense. On the other hand, you have places like Russia, which were not considered a great jurisdiction in terms of being able to do business for Western countries, and this was before 2022. Then the Ukrainian invasion by Russia happened.

The Russian production of platinum and palladium that's been coming out is now largely ending up in the Chinese hands because it's become more difficult for Western sources to source their platinum and palladium from Russian sources. Those are the two dominant suppliers of platinum and palladium in the world, and between them, they account for nearly 80% and 90% of platinum and palladium. It is a very difficult picture regarding being able to invest in these companies and invest in these countries to secure the supply of platinum and palladium today.

Ed Coyne: As long as the demand stays where it is or goes higher, it feels like that supply-demand imbalance is probably here to stay for the foreseeable future. Is that fair to say?

Shree Kargutkar: It's certainly fair to say, as far as platinum is concerned, because even if the demand does not increase, supply is certainly not increasing. The supply has been consistent for many, many years now, and demand has been consistent, but what's been happening is that the demand is far outstripping the current supply of platinum. Demand doesn't have to grow. Supply is not growing. As a result, the prices of platinum have to adjust to a level where maybe, at some point in time, you can bring on mines that don't produce platinum and palladium out of South Africa and out of Russia, and perhaps incentivize production out of other friendlier places like the U.S. or Canada.

Ed Coyne: Then lastly, on the mining side, how's the health of that industry as it relates to this? Any new discoveries, and if there are discoveries, what's the realistic timeframe from the time of discovery to the time of extraction? What does that look like? How's its health, and how long does it take to get a new mine online?

Shree Kargutkar: It's safe to say that virtually no major company is out there trying to discover platinum and palladium today.

Ed Coyne: Interesting.

Shree Kargutkar: It is such a small market, and it is so difficult to bring on a mine that is mining for platinum and palladium outside of Russia or South Africa. The health of the industry itself, I would say, is quite precarious because at today's platinum prices and today's palladium prices, there are very few miners, even in South Africa, where you have access to cheap labor. You're still not able to make money at today's metal prices.

We are currently in the process of seeing some of these old, tired mines slowly get decommissioned. As a result, there is even a threat that some of the supplies for platinum and palladium will come off the market. Now, to offset that, Ivanhoe, which has a division called Ivanplats, is currently building out a new mine in South Africa, which will only replace some of the lost production that is happening, but not add to the production, and significantly change the supply side of the equation right now.

Ed Coyne: Since nothing material is going to change this dynamic, it seems that the supply chain deficit is here to stay, at least for the foreseeable future.

Shree Kargutkar: That's correct. Barring any major technological changes, you will need less palladium and less platinum in the future.

Ed Coyne: Is there any other tech out there outside of driving an electric car, which, at one point, by 2030, we are all going to drive electric vehicles, that's clearly not going to happen. Is there anything else that can replace this kind of equation from a tech standpoint, where we don't need as much platinum or palladium?

Shree Kargutkar: The biggest worry for platinum and palladium over the past few years has been the erosion of the market share of internal combustion engines because, as we all know, electric vehicles don't use a lot of platinum and palladium. They don't have exhaust gases that come out of it. What the world is now starting to come to grips with is the reality that it's very difficult to scale up Battery Electric Vehicles significantly and have them take on the type of market share that some people were thinking was going to be the case, both presently as well as over the next few years.

While the number of BEVs, the Battery Electric Vehicles, continues to increase, the market share that they're taking is not happening as quickly as many forecasters have predicted. It is a combination of BEVs being too expensive, also having some range anxiety issues, especially for people on our side of the world, especially for people who live in northern climates, where the lithium cars don't provide the same type of range when the weather gets cold.

As a result, we've seen that internal combustion engine cars certainly stick around, and the production of those cars is not declining at any meaningful level. As we discussed earlier, the emission standards are tightening, which means that the platinum and palladium going into each vehicle, even if the engines are smaller, is going up and up. The demand is there; the supply is not keeping up.

As far as the technology goes, for the next five or six years, it isn't easy to contemplate a world where people are suddenly not making internal combustion engines anymore. You may see a change in the mix. Maybe instead of pure ICE engines, you'll see a bigger uptake of hybrids. That's certainly happening. For instance, we're starting to see companies like Honda take a stronger look towards having hybrids as the bigger portion of their overall sales. Again, there is still an internal combustion engine; it will still include platinum and palladium. The answer to your question is no, there's nothing that I see over the short term that's going to take away from platinum and palladium demand.

Ed Coyne: We talked about the industrial application, which is the primary driver; we touched on jewelry, and so forth. What about general investor demand? Are you seeing more people see it as a pure investment, like we've seen gold and silver over the years?

Shree Kargutkar: The demand for investment is quite interesting. As far as platinum, in particular, we have seen an uptake in investor interest in platinum for two reasons. Number one, the price of platinum is absurdly low. You can buy platinum physically cheaper today than it costs an average miner to make that ounce of metal.

Ed Coyne: Wow.

Shree Kargutkar: There's that aspect. You can buy something for less than it costs to make it, so that's an attractive demand. Then there is another subset of investors looking at it more from a perspective of supply and demand. The clear takeaway from the supply-demand analysis is that there is not enough supply of platinum. As a result, investors have started to take matters into their own hands. They recognize that there is not enough of this shiny white metal around, so they're choosing to hoard a little bit of it. We have seen an increase in the investment allocation for platinum in particular over the past few years.

Ed Coyne: If I'm an investor saying, "Gee, I want to participate in this," without knowing someone's financial portfolio and stuff, we're not making recommendations here, but how would you have someone view platinum now? Would it be in the commodity space? Would it be in the alternative asset space? Where would it live in an investor's portfolio in your view?

Shree Kargutkar: Platinum is a unique metal with both an industrial and precious side. Like I said before, generally speaking, platinum has traded at a premium to the price of gold because it's more challenging to get out of the ground and process it, and because it is rarer than gold. Typically, we see platinum as a bigger luxury than gold. How do investors get exposure to it? They can choose to buy the metal. Certain suppliers will sell you the physical metal. They can certainly look to invest in certain ETFs that hold the metal.

Ed Coyne: Before we sign off, I always throw it out there. Did I miss something? Any other questions, topics, or points you'd want to leave the listeners with that they should be paying attention to that maybe we didn't address?

Shree Kargutkar: The only thing that I can point to, which we didn't hit on, is that I'm starting to see some anecdotes of platinum jewelry becoming more and more prevalent in places like China and India today. Some of it, perhaps, has to do with gold trading at the current levels. Perhaps it has to do with the level of exclusivity that comes with having a platinum chain or a platinum ring. That's a bit of an X factor in terms of what can happen on the demand side of the equation, so far as platinum is concerned.

I would be paying close attention to what's happening on the jewelry front. I don't have enough data right now to say that this trend has legs, but should it turn into a trend with legs, then we're going to be talking about even bigger deficits for platinum. We didn't touch on that, but it's definitely worth mentioning.

Ed Coyne: Excellent. That's a good point to leave us with. Shree, it's always a treat to see you and talk to you. I appreciate you making the time today to join us on Sprott Radio.

Shree Kargutkar: Anytime, Ed. Thank you so much for having me.

Ed Coyne: Great. Thank you. Once again, my name is Ed Coyne. Thank you all for listening to Sprott Radio.