War, Decarbonization Could Catalyze Platinum as Palladium Stays Elevated

High palladium prices spark substitution questions

With palladium prices elevated, the case for substitution with platinum in the auto sector is growing, as highlighted in a recent World Platinum Investment Council (WPIC) report.

“Security-of-supply concerns likely to override near-term market balances in the wake of Russia’s invasion of Ukraine and given Russia’s importance to the global supplies of mined palladium and, to a lesser extent, mined platinum,” the firm's first quarter overview states. “Concerns could increase platinum for palladium substitution efforts and potentially modify procurement and inventory management strategies.”

While palladium has seen massive price spikes, platinum has been less volatile, spending most of the year priced below US$1,050 per ounce.

“We've argued for three years now that the price gap between the two metals means that substitution makes huge economic sense,” Trevor Raymond, director of research at the WPIC, told the Investing News Network. While automakers are not forthcoming with exact numbers, the WPIC believes substitution will increase this year.

“My view is that the activity is happening to a greater extent," he said. "At the moment we've got, you know, 200,000 to 400,000 ounces of substitution built into our numbers, because that's what people can sort of get a good handle on. I believe it's far higher for a bunch of reasons.”

One of those is the UK’s decision to levy a 35 percent duty on platinum and palladium imports from Russia and Belarus. The move, which could be replicated across the globe, speaks to the likelihood of increased platinum or palladium substitution this year.

Platinum's role in the hydrogen economy

Another factor that could prove beneficial for the platinum space is the growing hydrogen economy. This point is also underscored in the WPIC's Q1 review, which was released in mid-May.

According to the industry body, “Global security concerns and inflationary risks only strengthen platinum’s credentials as a robust investment asset to protect against uncertain times and as an investment for the future.

“This is particularly true given the metal’s critical importance in the production and use of green hydrogen, which has a key role to play in domesticating energy security for Western countries pivoting away from an over-reliance on Russian energy supplies as well as reducing carbon emissions in the move towards net-zero.”

For Raymond, the COVID-19 pandemic brought a renewed world focus on sustainability and climate change, issues the director of research believes can be addressed by the green hydrogen economy.

“The simple act of taking either wind or solar power and using that electricity to electrolyze water to produce hydrogen, and then taking that green hydrogen and putting it into a fuel cell electric vehicle and driving it; not only are your emissions, zero — just water — but you also reduce your reliance on fossil fuels,” he said. “And that really is the key to why the hydrogen economy makes sense.”

Even though the economics make sense, large upfront expenditures were a barrier to the hydrogen sector's growth until COVID-19. Notably, US President Joe Biden has re-entered the Paris Climate Accord, emphasizing the country's commitment to green energy and providing funding for the transition towards decarbonization.

"And that all happened (before) the war — then the invasion occurred, and you suddenly had this recognition that up to 40 percent of Europe's natural gas was coming from Russia,” Raymond said. "That's a real big deal.”

That realization has led to several changes. One in particular was foreshadowed by the WPIC in Q4 2021.

“We flagged last quarter that you can actually put up to 20 percent of green hydrogen into a natural gas pipeline network without changing the capital equipment,” he explained. “And if you did that, you'd halve your reliance on Russian oil for Europe.” Just two weeks after the WPIC’s finding, Europe announced just that.

The last major factor that could bring sustained price growth for platinum is rising prices for the battery metals integral to electric vehicle manufacturing. Prices of raw materials have now almost doubled in some cases, and those increases are ultimately passed on to consumers.

Raymond sees this as an opportunity for gas engine automakers to make their vehicles more environmentally friendly, which would require higher platinum loadings in catalytic convertors.

Platinum is anticipated to hold in the US$990 range for 2022, while Metals Focus is forecasting that palladium prices will average US$2,290 in 2023.