What is the outlook for platinum group metals (PGMs) in H2 2023, leading into 2024?
Platinum, palladium, and rhodium all benefited from a deficit market in 2023, the bulk impact of which will be felt in the second half of the year as automotive production picks up. PGM mine supply and recycling remain little changed on their suppressed 2022 levels, owing to load shedding (rolling blackouts required to balance the electricity grid) in South Africa and a lack of autocatalyst scrap, respectively. For platinum, we expect to see the price rally, climbing to peaks over US$1,100 by the end of the year. Unfortunately, palladium and rhodium’s deficits are largely overshadowed by imminent future-year surpluses. Having said that, we still expect the prices to uplift in the short term, climbing to quarterly averages just shy of US$1,400 and US$5,500 respectively in the final quarter of the year.
How have PGMs performed this year so far?
The first eight months of 2023 have been disappointing for the PGMs. This year to date, platinum is down 15%, palladium 29%, and rhodium 67%. All three metals have come under pressure so far this year.However, platinum has fared better than its sister metals, in part due to gold’s price gains, which have benefited platinum. It was also partly due to autocatalyst loading substitution displacing palladium, incentivized by platinum’s historically lower price relative to palladium.
As the rate of electrification ramps up, we will see greater demand for hydrogen fuel cells, electrolysis, and hydrogen storage, all of which will contribute to platinum demand
As well as being replaced by platinum in autocatalysts, palladium has three key drivers weighing on the price. Firstly, investor sentiment towards the metal is at an all-time low (net managed money positions are close to 1Moz short for the first time), owing to the electric vehicle (EV) market penetration weakening its demand outlook. Secondly, demand from automakers was significantly undermined at the start of the year, after they bought more than they consumed throughout much of 2022. Finally, a number of automakers are strategically destocking their inventories, following palladium’s worsening outlook and a shift in focus towards electrification. Rhodium was also hit by these same automotive drivers.
However, rhodium also weakened as Chinese glass manufacturers have been publicly destocking the metal, as they have managed to substitute rhodium for lower-priced platinum in their alloys, resulting in significant quantities of metal coming back to market.
The automotive industry is a core demand segment for platinum and palladium. How will the energy transition and EVs affect demand?
In the short term, we still see autocatalyst demand growing for all three metals, but this is starting to slow as production of EVs ramps up and they take market share from PGM-using internal combustion engine (ICE) vehicles. The price moves seen today are exacerbated by the investment community responding to future price expectations, as opposed to being purely fundamentally driven by industrial requirements.
Looking further ahead, however, electrification will have significant ramifications for ICE vehicle production and, consequently, PGM demand. Longer term, palladium and rhodium will be most affected, as autocatalyst demand makes up 83% and 92% of their total demand (in 2023) respectively. In contrast, just 39% of platinum’s total demand comes from autocatalytic offtake.
Additionally for platinum, as the rate of electrification ramps up, we will see greater demand for hydrogen fuel cells, electrolysis (clean hydrogen production), and hydrogen storage, all of which will contribute to platinum demand. So platinum, unlike the other two, is partially “hedged” against electrification and is forecast to rally, while palladium and rhodium come under further pressure.
The bulk of PGMs are mined in South Africa and Russia. How have geopolitical factors, such as the Russian invasion of Ukraine affected supply?
For Russia, the invasion of Ukraine initially led to a knee-jerk reaction in price over concerns of disrupted supply. For palladium, Russian mine supply accounts for 40% of the global mined production and this led to the price rising to US$3,442 (as at 7 March 2022), in the week following the invasion. Platinum, at the same time, rose to just US$1,183 (8 March 2022), but Russia only contributes 12% of global platinum mine supply. Since then, supply constraints have been minimal, with metal still able to materially flow into Western markets, despite the London Platinum & Palladium Market (LPPM) removing Russian produced bars from their good delivery list in April of last year.
However, self-sanctioning by key Western mining equipment suppliers presents a challenge to Nornickel’s development plans. The company has withdrawn its prior medium-term production outlook and, more recently, had cut its 2023 CapEx guidance by US$1B, as some investment projects are now unable to proceed.
South Africa, too, faces its own domestic problems, weighing on supply. The South African energy crisis worsened in the first half of this year, leading to greatest levels of load shedding the country has ever seen. Although the mines are part of an industrial-user group that faces load curtailment (reduced power consumption), rather than load shedding (rolling blackouts), the latter offers a good proxy into understanding the impact of electricity cuts on the mines. Additionally, ongoing high levels of load shedding have led to greater civil unrest, and is highly correlated with rising cable thefts, both of which have curbed South African mine supply so far this year. Quantifying the direct and indirect impact of load curtailment is challenging, but we estimate at least a PGM 150Koz impact on refined production in South Africa in the first six months of the year, currently adding to semi-finished inventory.
How do the recycling and scrap markets for platinum and palladium play into supply and pricing?
Recycled supply continues to become increasingly important to the PGM supply mix. In 2010, recycled supply made up 23% of total supply. This has grown to 28% in 2023 and will climb to one-third of total supply in the next five years. The falling palladium and rhodium prices will strain marginal mine supply, leading to a plateau-then-decline in primary supply, allowing recycled supply to pick up the shortfall. In fact, it is the fast growth of secondary supply for palladium and rhodium that causes the surplus market for these metals. This growth is due to historically high autocatalyst loadings being recycled and refined more quickly than the growth in autocatalyst demand. Ultimately, this is driving the surplus market that is damaging their future price outlook.
ESG is important to investors, what is the industry doing to ensure responsible sourcing of metals?
Environmental, social, and governance (ESG) is becoming increasingly important in the industry and the issue is being pushed by miners, refiners, legislators, and industry bodies, and pulled by investors, jewellery manufacturers, and industrial end users. Aside from the
International Council of Mining and Metals PGM that mining companies belong to, there are also several other initiatives focused on responsible raw material supply. The LPPM’s Responsible Sourcing Programme is the largest industry body-led initiative, and focuses on countering widespread human rights abuses, avoiding contributing to conflict, and upholding anti-money laundering standards.
Additionally, some miners have also made efforts to set up responsible sourcing mechanisms such as IRMA (The Initiative for Responsible Mining Assurance), which aims to promote responsible mining practices. Meanwhile, a number of industrial end users have implemented their own self-obligation requirements for raw material sourcing, in an attempt
to keep up with investors’ growing expectations in spite of policy not keeping pace. A similar story can be seen for jewellery companies (mainly Western brands), where consumer concern about supply chains has grown considerably.
