IT’S been a horrible year for platinum group metals (PGM). Platinum and palladium prices, which comprise 70% to 80% of total South African production, are down 9% and 48% over the last 12 months.
After two years of bumper profits and record dividends, miners of the metals are left contemplating production cuts, some of them permanent. What’s more, the outlook for the PGM sector looks grim.
Coronation, an asset manager, said it had liquidated its positions in PGM companies as political and social pressures would inhibit their ability to cut producton. It also reflected on past company profligacy: mining firms had allocated capital poorly.
There is, though, a counter-argument emerging suggesting that the sell-off in metals has been too steep. In addition, the outlook for the PGM basket as a whole is better than some suppose. Inevitable, you may conclude, that in a cyclical market the contrarian voice should now emerge. Yes, inevitable; but it might also be true.
RMB Morgan Stanley analysts say that while there are sound reasons PGM prices have deteriorated as they have, three factors inform a counter-consensus outlook.
First, demand for battery electric vehicles (BEVs) may be slowing. The bank’s current assessment is that BEVs comprise as much as 40% of total auto sales by 2030 (much higher than the 30% forecast by the International Energy Agency). But downside risks such as lower light duty vehicle demand could reduce this to 28% by 2028, it says.
Secondly, recycling of PGMs is slowing as a result of lower new vehicle sales amid tightening economic conditions. Hoarding of PGM autocats as a result of lower metal prices and a clamp-down on scrap as concerns grow over provenance may also reduce supply. For 30 years, the compound average growth rate of secondary supply from recycling has grown 9%. But this growth has stalled in the last four years, the bank says.
Thirdly, the adoption of minor PGMs iridium and ruthenium in hydrogen technology could see these scarce metals provide the kind of uplift the market saw with rhodium. It’s questionable how useful price volatility of this stripe is for the PGM sector in the long term – the rhodium price went from $4,000 per oz to $30,000/oz and back again in about three years – but it would nonetheless breathe fresh life back into the sector.
“Prices seem to have fallen too fast too soon in our view particularly given the slowdown in EV penetration rates,” said UBS. “Although the negative long-term demand picture remains unchanged, we think there is scope for upside from recent lows,” it said of palladium.
Predictably, producers think PGM prices will emerge from the current winter. Neal Froneman, CEO of Sibanye-Stillwater, is convinced the sell-off has been overdone. The internal combustion engine will have a much longer tail than some suppose as lithium supply, a key ingredient in the BEV pie, will be harder to increase.
That Sibanye-Stillwater is spending billions of rands building two lithium mines is a point worth savouring, however. A long-term structural change in the PGM market is underway. The future role of PGMs in the overall drive-train is the great imponderable.