Automakers Speeding Platinum Substitution Push Market to Deficit
Comment of the Day

May 17 2023

Commentary by Eoin Treacy

Automakers Speeding Platinum Substitution Push Market to Deficit

This article from Bloomberg may be of interest to subscribers. Here is a section: 

Automakers are accelerating the substitution of platinum for pricier palladium in catalytic converters,
putting the market for the metal on track for a deficit for the first time in two years, according to Johnson Matthey Plc.

Demand from automakers will exceed 3 million ounces for the first time since 2018 as platinum is increasingly preferred over palladium, which will continue to see its usage decline, the firm wrote in a report on Monday. Both precious metals are used to cut emissions from car exhausts.

The car industry’s switch has taken years, but is finally having a sizeable impact on the fundamentals of platinum group metals. While palladium has traded at a premium to platinum since 2017, the gap has narrowed to near the smallest in more than four years.

“Just as substitution benefits platinum, it disadvantages palladium,” said Rupen Raithatha, market research director at Johnson Matthey. “These are all incremental trends.”

Investors are increasingly eyeing risks to platinum supplies from South Africa, the world’s top miner, as power blackouts threaten to cripple its output. So far, the country’s miners have limited the impact by idling processing plants, allowing mining to continue, though more severe outages could hit overall production, according to Johnson Matthey.

The firm sees platinum in a small deficit of 128,000 ounces in 2023, following two years of large surpluses. That compares to the record shortfall forecast by the World Platinum Investment Council.

Eoin Treacy's view

Platinum took a leg lower as the diesel cheating scandal broke. That destroyed a major demand driver for the metal. In a normal environment, the massive disparity between palladium and platinum would have encouraged automakers to retool years ago. The reason that did not happen is they are devoting all their energy to building electric vehicle production capacity and do not envisage using as many catalytic converters in future.  

That begs the question why are they retooling now? The only rationale I can think of is most palladium comes as a by-product of nickel mining in Russia. With so much uncertainty about dealing in Russia products and Norilsk Nickel sanctioned, platinum might finally be looking like the better option.
Together with the promise of greater hydrogen fuel cell demand, that is a fundamental support for platinum prices. Platinum continues to hold the break above $1000 and a sustained move above $1200 would confirm a return to medium-term demand dominance.

The palladium/platinum ratio continues to trend lower and in absolute terms palladium is susceptible to breaking lower as it distributes around the psychological $1500.
One note of caution is Johnson Matthey is underperforming in a significant manner. While demand for platinum should benefit the price because the market is small and supply is constrained, declining overall demand for catalytic converters is still a well understood trend. 

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