Platinum, the bear story

18 May 2015 by Jim Fickett.

There is always a simplified bull story and a simplified bear story circulating for any given asset. I've told platinum's bull story before and will tell it again soon, with updated numbers. But for now the bears are having it their way – platinum is down from a high of $1901 in 2011 to $1166 currently.

The first part of the bear story is that the market for diesel-powered vehicles may be shrinking. For gasoline engines, palladium, which is cheaper, is the primary catalyst; for diesel, only platinum will do. Automobile catalysts for cars and trucks with diesel engines is a major fraction of total platinum demand. Europe, which is the largest market for diesels, has been making noises about discouraging diesel-powered autos and encouraging gasoline power instead. This is, indeed, bad news for platinum demand. However it has been blown out of proportion.

According to the World Platinum Investment Council total European autocatalyst demand was, in 2014, about 18% of total platinum demand. 18% is substantial, and there is some real risk. If sentiment against diesel were to gather momentum, and all of Europe were to ban new diesel engines, this would hit the mining industry hard. If, in addition, it were to happen quickly, the blow would be doubled by recycling – old autocatalysts would continue to be scrapped and recycled at the same time that new ones would no longer be in demand (at least for Europe).

However there is no evidence at present that things are anywhere near that bad. It is not all of Europe that is currently beginning to discourage diesel, but rather one country, France, and one additional city, London:

  • From Reuters: “Late last year, Paris announced plans to ban diesel cars from the French capital by 2020 to cut air pollution, while London mayor Boris Johnson plans to double charges for diesel cars in congested areas.”
  • And from the Financial Times: “Last year Manuel Valls, the French prime minister, said the promotion of diesel cars had been a “mistake” and Anne Hidalgo, Paris mayor, said she would phase out diesel vehicles from the city by 2020. London has also discussed anti-diesel measures.”

For the near future the effect appears to be quite small. The highly respected commodity analyst team at Macquarie Bank tones down the fears:

The death of diesel engines in European cars has been exaggerated, Macquarie said …

Macquarie said that 53.1 percent of total EU sales were made up of diesel engines in 2013, a figure it expects to fall in 2014 at 52.8 percent.

“For platinum demand this is bearish, but should be kept in context – a 2-percent point decline in diesel share only reduces platinum demand by about 50,000 ounces, and will be offset if overall car sales in Europe rise by more than four percent, which we expect. More profound changes could happen in future,” it added in a report.

… we think [diesel's] market share decline will accelerate in 2015, though by no more than 2.0 percent points,” Macquarie said.

So diesel market share surely bears watching in coming years but, for now at least, no significant decline can be predicted with any certainty.

The second part of the bear story is that recycling has increased steadily, with the total percentage of platinum demand met from recycling more than doubling in the last 20 years. Here is a graph from the South Africa Chamber of Mines, based on data from Johnson Matthey:

Jewellery recycling comes and goes, depending on the economic cycle and platinum prices. What is really driving this trend of steadily increasing recycling is autocatalysts. As the general infrastructure for recycling continues to be strengthened, there is no reason why the trend of increasing recycling should not continue.

Again, however, one needs to put things in perspective. One often reads commentary suggesting that, since hulks of discarded automobiles contain a higher percentage of platinum than South African ore bodies, recycling is trivial and will become ubiquitous. However discarded cars and car parts are widely distributed and it is the infrastructure of getting all the used catalysts to a refiner that is the challenge, not the refining itself.

The USGS wrote in 2004:

The relatively low value of the metal content (about $19.00 in each converter), the low concentration of PGM's (less than 0.1 weight percent) and the difficult logistics of returning the material to a central recycling location are reasons why recycling of PGM catalysts in not yet economically viable in the United States.

Things have improved since then, but Johnson Matthey reported only 3 years ago that recycling of catalysts was still only at about 50%.

In fact, although the percentage of newly mined platinum in autocatalysts has steadily decreased, the absolute amount of newly mined platinum in autocatalysts has, economic cycles aside, been quite constant for many years. See the green line in the following graph – the gross demand for platinum in new autocatalysts less the amount recovered from recycling old autocatalysts, in millions of ounces:

I have also plotted the total amount of platinum produced from mines, in the blue line at the top of the graph. I'm inclined to think the significant dip in the last couple years is temporary. Production dropped strongly in 2014 due to mine strikes and, in the 2015 estimate, the drop is mainly due to decreased demand from investors, the lowest in eight years, unsurprising since very few investors actually buy things when the price is low.

It is nevertheless possible that the number of ounces of platinum produced annually by mines might have peaked.

What if the absolute amount of platinum needed from mines is now in a downtrend? Compare the blue line at the top of the graph and the red line, recycling, at the bottom. Even in the most pessimistic (for mining) scenarios, it will be a long time before they meet, cross, and mine supply needed goes to zero. So most of the world's platinum need will be filled by newly mined material for a long time yet, and the increase in recycling does not in any way weaken the main bull argument for platinum, which is simply this: mines must turn a profit, and cannot do so at current prices.