Start with an overview of precious metals pricing as they are impacted by geopolitical factors, economic outlook, and more
China’s reopening, recession risks, and easing supply-chain challenges has set the broad backdrop for metals at the start of the year, but we believe the underlying fundamentals are poised to diverge across precious metals. Monetary policy rate-hiking expectations were a key variable at the start of the year and have jumped between extremes over the past few weeks.
The market is pricing in peak interest rates for major central banks in the coming months, as well as assuming the USD and inflation have already peaked. Taming inflation remains key, and we expect growth to pick up in H2. But the macro backdrop has worsened owing to the recent financial market distress and has overshadowed fundamentals.
Indeed, the first quarters of the past three years have posed new external risks to the complex and broader asset markets: COVID initially hit demand and then supply chains, Russia’s invasion of Ukraine has impacted supply, and most recently, financial market distress has triggered a surge in safe-haven demand and affected market expectations of monetary policy, increasing fears of recession and reduced demand. Underlying supply and demand dynamics are set to return to the driver’s seat, but for now the economic outlook dominates sentiment.
We Believe 2023 Will Be A Watershed Year For Some Pgms, Marking The Start Of Serial Deficits For Platinum And The End Of Serial Deficits For Palladium
Can you talk a bit about the supply and demand dynamics for PGMs, specifically looking at their influence as precious metals versus their industrial use?
We expect all three PGMs – platinum, palladium, and rhodium – to deliver deficit markets in 2023. While the macro backdrop has presented headwinds, particularly as the USD has strengthened, we expect underlying demand to firm as the year unfolds and supply growth to be limited.
While palladium and rhodium are firmly driven by industrial demand, given their heavy exposure to the auto-catalyst market – 83% and 88% of projected 2023 demand, respectively – the platinum market has sizeable jewellery and investment demand exposure. Jewellery makes up just over 20% of global consumption and, before the pandemic in 2019, investment demand represented 14% of annual demand.
Thus, platinum’s more diversified demand profile results in the metal tracking both macro and economic drivers, depending on market sentiment. Some market participants watch the gold-platinum ratio as an indicator of relative value between the two and view platinum as a commodity that follows gold with an industrial boost. The ratio has reached 2 in early 2023, shy of the peak at 2.49, but well above parity. Historically, platinum has traded at a discount to gold, but the surplus market in recent years has weighed on its outlook. Having said this, we believe 2023 will be a watershed year for some PGMs, marking the start of serial deficits for platinum and the end of serial deficits for palladium.
While the bounce-back in auto-catalyst demand on easing chip shortages and tighter emissions standards theoretically bodes well for palladium, electric vehicles’ growing market share and the declining share of gasoline vehicles is likely to limit palladium demand growth. This is likely to be the start of palladium’s market share falling.
The key factors for the PGMs this year are skewed towards fundamentals. They started 2023 on a weak note, posting double-digit losses in the first two months of the year. Palladium has suffered the most, falling by 20% YTD to test levels last seen in June 2019, while rhodium has fallen below US$10,000/oz for the first time since August 2020. The PGMs have not escaped macro headwinds that have, to a large extent, driven downside risk as recession-related concerns have grown and a slower-than-anticipated boost from China’s reopening has weighed on anticipated industrial demand.
Palladium’s premium over platinum has fallen to levels last seen in May 2019 and the drop in rhodium prices suggests a much weaker auto market; but we note three themes that suggest the bulk of the downside has been priced in.
Number one, mine-supply growth constraints. We forecast a recovery in mine supply in 2023 following smelter rebuilds, flooding, and inventory builds in 2022; but producers have warned that power-supply uncertainty in South Africa could reduce production guidance and equipment availability could limit supply growth in Russia. This puts at risk around 175Koz-1Moz of our supply estimates, which would deepen deficits across all three PGMs.
Next, we have scaled back our global auto production growth estimates to 5% for 2023 and trade data implies much restocking has taken place. While recession fears weigh on consumer appetite, auto inventory levels are still low and supply-chain challenges are easing. Most importantly, the market is gearing up to implement Euro 7 standards, which are likely to boost PGM loadings.
Finally, investor positioning is very light across ETFs and tactical interest suggests an upturn in macro sentiment could buoy prices quickly.
What are the impacts of the growing electrification of the auto industry on the PGM markets in the medium and long-terms?
The electrification of vehicles is set to be a key determinant of demand growth for both silver and the PGMs over the long term.
A consensus seems to be building that battery electric vehicles (BEVs) will dominate the market share of powertrains. However, it is uncertain whether this trend will remain intact given wild swings in auto production forecasts; ongoing concerns around sourcing of raw materials such as cobalt, nickel, and lithium; and development of the auto market in EM. Development of the hydrogen economy could help to offset lost demand from internal combustion engines and even increase overall platinum demand. On the other hand, development of alternative fuel vehicles paints a less favourable picture for palladium.
We forecast that while the market share of internal combustion engines is set to fall, given the growth of overall auto production and tighter emissions standards – notably Euro 7 being implemented in 2025 – overall PGM loadings are set to increase, and platinum and palladium auto-catalyst demand is not set to plateau for another three years. Total demand is likely to stabilise before falling towards the end of the decade, allowing room for demand growth from current levels.
Can you explain the role for PGMs in the growing hydrogen economy and how you see this impacting demand?
In the search for renewable and greener energy, prospects have brightened for the hydrogen economy (particularly proton exchange membrane technology leads efforts, supporting platinum and iridium demand) and fuel cell electric vehicles (FCEVs). FCEVs are estimated to use at least 30g of PGMs, platinum in particular. This is around six times the amount used in a gasoline vehicle. FCEVs have been slower to take off than battery electric vehicles. However, several notable developments now suggest volumes could pick up, especially in the heavy-duty truck sector.
Development Of The Hydrogen Economy Could Help To Offset Lost Demand From Internal Combustion Engines And Even Increase Overall Platinum Demand
FCEVs are the most expensive option now; but in five to seven years, when considering the total cost of running and paying for vehicles, they could become the cheapest option. A key reason why BEVs are less likely to succeed is that they do not currently have the range required for long distances; also, the battery is very big, expensive, and heavy, and would reduce the payload a truck could carry. But the development of ‘green’ hydrogen could result in 400-850Koz of platinum demand by 2030. This demand growth is significant but given the lack of current investment in platinum and iridium, there could be a shortage of metal in 10 years.
Which economies are set to benefit most from the changing demand dynamics for PGMs?
We think palladium demand will decline, but platinum and especially iridium demand is set to grow. South Africa is the world’s largest producer of these two metals, followed by Russia, Zimbabwe, the US, and Canada.
The other area of growth is likely to come from recycling if primary supply struggles to keep pace with demand. Platinum and iridium cannot be exclusively mined, so production is driven by the economics of the whole PGM basket.
