PGMs Prices Soar Amid Potential Supply Challenges Out of Russia

Post-COVID-19 auto market recovery key for PGMs demand

Platinum and palladium have a range of applications, but a primary end user for both is the automotive sector, which has faced pandemic, economic and supply chain issues since 2020. The industry began to recover in 2021, despite the lingering semiconductor shortage; however, recent events have hampered some recovery optimism.

“Up until mid-February, our expectation was that vehicle production would rebound during H2.22, as the semiconductor shortage unwinds,” a weekly report from Metals Focus notes.

A 10 percent uptick in internal combustion engine vehicles, paired with higher emissions standards, was expected to grow palladium demand by 700,000 oz this year, just 2 percent shy of 2019's pre-pandemic levels.

“Since (February 24), the slump in geopolitical stability and the rise in sanctions have cast mounting uncertainty on the automotive recovery,” the Metals Focus overview states. “Setting aside the ongoing challenges caused by the pandemic, there is a perpetuation of existing, as well as new, global supply chain challenges caused by the invasion that could weigh on demand.”

Part of the automotive recovery also relies on returning consumer demand, but with oil prices firmly stuck above US$110 per barrel, some consumers are likely to forego vehicle purchases.

WPIC director expects "aggressive" substitution in auto sector

As Trevor Raymond, director of the World Platinum Investment Council (WPIC), pointed out to the Investing News Network, palladium is now the autocatalyst metal of choice, but it wasn't always.

At one point platinum was the metal most commonly used in catalytic convertors to reduce emissions. Rising prices in 2008 and 2011 led to automotive manufacturers substituting platinum with palladium.

Now, with palladium prices 75 percent higher than platinum prices, Raymond anticipates “aggressive substitution of platinum for palladium.” The move bodes well for platinum producers, but could further stretch an already tight market, despite the 1.2 million oz surplus reported in 2021.

“Imports of platinum into China in 2021 exceeded China's identified demand by over 1.3 million oz, and effectively absorbed that entire surplus,” said Raymond, who went on to note that the surplus was the largest in WPIC history.

“Yet the market is extremely tight and there are shortages of physical metal in the spot market.”

Another factor that could lead to platinum supply constraints is increasing investment demand, which took a hit in 2021 when investors left platinum-backed exchange-traded funds (ETFs) for equities, a gamble that paid well.

“Secondly, any strength or any growth in platinum investment demand we believe is now far more relevant to price discovery than it has been in recent years," Raymond added. "We are forecasting about 50,000 oz into ETFs in 2022. If that changes, which it quite easily could by a few hundred thousand oz, that's quite a big deal."

Substitution coming, but will be tough to track

In a platinum quarterly report released on March 9, the WPIC forecasts modest 7 percent growth across the platinum space, which could further exacerbate the tight market, especially if Russian supply is boycotted.

The segment to watch in 2022 will be automotive demand, where emissions standards and production schedules will impact overall demand.

“For 2022, a rise in vehicle production, a bigger share of heavy-duty vehicles being fitted with platinum-loaded aftertreatment systems and continued substitution of platinum for palladium will see automotive demand increase 19 percent +509,000 oz, breaching the 3 million oz mark for the first time since 2018,” as per the WPIC.

For Raymond, substitution will play a large role in shaping platinum supply and demand, but will be hard to gauge.

“Why would the automakers confirm substitution?” he asked. “It doesn't solve the palladium shortage, but it does confirm platinum demand growth, and that would increase the platinum price (and) input cost into a vehicle. It would actually be silly for either them or other fabricators to talk about it.”

Raymond explained that in the early 2000s, rhodium was substituted out for palladium at a 5:1 ratio, saving automakers roughly US$20 per vehicle. At current rates and the 1:1 ratio, manufacturers could save US$200 per vehicle by making the switch to platinum.