The Case for Platinum

By Trevor Raymond, Director of Research, World Platinum Investment Council

The Case for Platinum

Platinum Group Metals’ critical participation in clean energy and decarbonisation of transport is creating potential investment opportunities.

2020 has thrown the world some unexpected curveballs. As we watch the consequences on the economy of COVID-19 and a looming global recession unfold, it would be all too easy to lose sight of even more crucial issues to do with the environment that were – even just months ago – front of mind. The truth is, however, that these issues will continue to exist long after.

The global transition from internal combustion engine (ICE) vehicles to electric vehicles will take at least 15 to 30 years. During that period, the remaining portion of ICE vehicles on the road needs to be as CO2 efficient as possible.

Within this context, Platinum Group Metals (PGMs) have an important strategic role in the long-term decarbonisation of primary power generation and transport. They are also able to facilitate mandatory reductions in CO2 emissions from internal combustion engines that legislators have imposed to manage the transition away from fossil-fuel reliance. The COVID-19 pandemic may have increased the importance of their role.

Platinum’s role in autocatalysts is already underway. For example, a diesel mild-hybrid vehicle with a platinum autocatalyst (non-plug in and with regenerative energy storage that is not driver controlled) has c.35% lower CO2 emissions than a conventional gasoline vehicle. Similarly, palladium is being used to catalyse gasoline mild hybrid vehicles which are part of the power train mix – despite not being as CO2 efficient as a diesel mild hybrid.

PGMs not only enable improved emissions control during the transition, but are also a fossil-free solution in their own right. The platinum-based proton exchange membrane (PEM) fuel cell is ideally suited to mobile vehicle applications due to its small size and high electrical power capacity. It means that electric vehicles can be powered by hydrogen, providing a zero-tailpipe emissions vehicle that reduces long-term reliance on fossil fuels. Fuel cells also facilitate growth in the renewable portion of primary power generation enabling electricity to be stored as hydrogen. Increasing renewable power generation in turn reduces the CO2 impact of recharging Battery Electric Vehicles (BEVs), making it easier to secure the most CO2-efficient mix of BEV and Fuel Cell Electric Vehicles (FCFVs) in short- and long-range applications respectively.

Platinum and palladium offer less obvious choices for investors seeking exposure to clean energy. Because most palladium is produced as a mining by-product its long-term value is set by platinum, as over 80% of palladium is used as a cost-effective alternative to platinum in autocatalysts, at a substitution ratio of 1 to 1. The long-term investment case for palladium follows that of platinum, but this can disconnect as substitution occurs, as it currently is, offering additional investment opportunities. Platinum is an undervalued precious and industrial metal that provides exposure to a hard asset and that offers some of the diversification benefits of gold but with industrial upside from its demand growth potential.

In the move to decarbonise transport, emissions from the on-road fleet must not be ignored

The imperative for lower CO2 emissions, to contribute to global climate change reduction goals, has focussed debate and effort on zero emission vehicles like BEV and FCEV as well as mass mobility, shared driving, and autonomous vehicles. Irrespective of how quickly the transition from the existing powertrain mix to a carbon free one takes place, it is imperative that we do not neglect a similar focus on the emissions from vehicles already on the road and the reducing portion of ICE vehicles being sold.

On our roads since the 1990s, hybrid vehicles combine a gasoline or diesel engine with an electric motor. There are various categories of hybrid vehicle, with ‘mild’ or ‘full’ hybrids typically characterised by the amount of battery power they have. Mild hybrid cars use their electric motors to ‘power assist’ during acceleration and cruising to improve fuel efficiency and reduce CO2₂ emissions – the electric motor cannot power the car independently. In a full hybrid, both the electric motor and the conventional engine can be used to power the vehicle, either independently or in combination. In mild and full hybrid vehicles the battery is recharged in a process known as regenerative braking, whereby the engine gearing provides braking effort when the car is slowed down, converting this energy to charge the battery. These cars have a small, usually 48-volt, battery that is not designed to be separately charged and the driver does not control the transition between battery or engine power.

Mild hybrid diesel vehicles produce far less CO2₂ than equivalent gasoline or even diesel vehicles, and growth in sales of current diesel hybrid models will assist automakers in managing their potential exposure to fines by reducing overall fleet CO2 emissions. Increased sales of diesel cars (mild hybrid and plug-in mild hybrid) are positive for platinum demand and increased sales of gasoline mild hybrid cars are positive for palladium and rhodium.

The increased use of lower-CO2 diesel vehicles in Europe is a quick win as market share in the region was above 50% prior to the Dieselgate scandal in 2015. Conversely, in China, passenger cars are almost exclusively gasoline as the ratio of refinery output requires that diesel is reserved for heavy-duty haulage and agricultural vehicles. Increasing the ratio of diesel from oil refineries would require significant capital investment in refining. This makes it more likely that China will transition from gasoline (likely to be dominated by gasoline mild hybrid) to electric vehicles. This is also the likely route in North America, but more as a result of the reputational damage Dieselgate caused. As the mix of short-range, medium and heavy-duty BEVs and long-range heavy-duty fuel cell electric trucks grows, the reduced diesel fuel demand could support an increase in mild hybrid diesel passenger cars in both regions.

The Bosal retrofit of Euro 5 high NOx (Nitrous Oxides) emitters underway in Germany, for example, will keep lower CO2 diesel vehicles on the road by solving their high NOx emissions. The alternative would see diesel vehicles banned from cities resulting in zero re-sale value and being scrapped, either by the owner or in a state funded scrappage scheme. Both would worsen perception of diesel cars and drive consumer preference back towards gasoline cars and increase fleet CO2 emissions. Retrofitting vehicles, including older high NOx emitting Euro 6 diesel cars (pre-Euro 6 d Temp), would appear to be a far more cost-effective use of taxpayers’ funds than scrappage schemes; keeping lower CO2 older vehicles on the road as well as not undermining purchases of new diesel vehicles.

Why platinum-based fuel cells for vehicles?

When thinking of electric vehicles, much of the focus tends to be on BEVs, overlooking zero emission FCEVs. In fact, the two are equally important. In a platinum-based fuel cell, electricity is generated through an electrochemical reaction by combining hydrogen and oxygen, with heat and water as the only by-products. Molecules of hydrogen and oxygen react and combine using a proton exchange membrane (PEM) which is coated with a platinum catalyst, and there is no combustion.

Platinum is especially suited as the catalyst in mobile fuel cell applications as it enables the reactions between hydrogen and oxygen that take place to occur at an optimal rate, while being stable enough to withstand the complex chemical environment within a fuel cell and the high electrical current density necessary, performing efficiently over the long-term. However, unlike a battery, fuel cells do not need lengthy recharging stops to ‘refuel’. Platinum in FCEVs is currently a small, but growing, demand sector for platinum, with future demand growth coming predominantly from the heavy-duty sector, especially in the near term.

In many cases, those looking for fossil fuel-free transport solutions with zero emissions (other than water) are increasingly recognising that platinum-based hydrogen fuel cells offer the range and power output needed by vehicles like buses that batteries alone cannot offer.

Fleets of platinum-based fuel cell electric heavy duty vehicles are growing – and, with them, vital refuelling infrastructure. Ambitious global CO2 reduction targets remain on the agenda, despite the current economic setback suffered by many governments in response to the COVID-19 pandemic. Across the European Union, heavy-duty vehicles – trucks, buses and coaches – are responsible for about a quarter of all road-transport related CO2 emissions. Last year saw the implementation of EU regulations to reduce CO2 emissions from new heavy-duty vehicles by 15 percent in 2025 and 30 percent in 2030, compared to current emissions (measured from 1 July 2019 to 30 June 2020).

Measures such as this are providing further impetus to the growing market for zero-tailpipe emission, heavy duty FCEVs, which use a platinum catalyst as a key component. Hyundai, the South Korean automaker, is a major backer of hydrogen-powered fuel cell technology and is about to begin deployment of its H2 XCIENT fuel cell trucks in Switzerland. This initiative plans to grow the fleet of such vehicles on Swiss roads from 50 this year to 1,300 in 2023. All FCEVs, including Hyundai’s, which can travel up to 400 km without the need to refuel, have a significantly greater range than their battery-only electric vehicle (BEV) counterparts.

Fuel cells in heavy duty vehicles like trucks have a further advantage in as much as they are able to maintain a consistent power output, even as the load increases. For example when carrying more weight or going up mountains – avoiding the loss of capacity and payload associated with the large heavy batteries a BEV would need if it were to fulfil a haulage function. In North America, Hyundai has partnered with Cummins, the 100 year-old engine maker, to develop electric fuel cell powertrains for the commercial vehicle market. Elsewhere, global truck giants Daimler and Volvo are planning to work together to develop fuel cells for trucks. Their intention is to bring fuel cell trucks to the market in the second half of the decade.

Hyundai’s initiative with its partners in Switzerland brings further benefits. By combining with the food retail sector, the project will deliver a zero emissions freight solution for two of the country’s leading grocery chains which will result in the roll-out of a network of hydrogen refuelling stations to, in the first instance, service the fuel cell Hyundai truck fleet.

A network of between 100 and 150 refuelling stations is expected to be in place by 2025 – infrastructure that is viable, and critically funded by the partners, as it only takes c.15 trucks per station to turn a profit as opposed to the c.700 FCEV passenger cars that would otherwise be needed. What does this mean for platinum and palladium? PGMs are highly valued and used in many industrial applications as their physical and catalytic properties are suited to the manufacture of, or use in, items such as automotive components, electronics, fertiliser, glass and medical devices. In the automotive sector, platinum, palladium and rhodium are key components in autocatalysts which reduce harmful emissions from vehicles and improve air quality.

Historically, tightening emissions legislation rather than changes in volumes of vehicle sales have driven PGM automotive demand growth. Between 1990 and 2019 annual car sales rose from c.54 m to c.92 m, while PGM use in autocatalysis rose from 2.2 moz per annum to 13.8 moz per annum.

“Platinum’s investment opportunity rests on two key issues within the context of the COVID-19 pandemic: constrained supply and demand growth potential.”

Tightening emissions standards for oxides of nitrogen, including more stringent on-road rather than laboratory testing, continue to require more PGMs per car, as does the use of low-CO2 hybrid and mild-hybrid vehicles. This is because greater PGM loadings are required on these vehicles, which operate at cooler engine temperatures in their start-up phase.

Patterns of use between platinum, palladium and rhodium in autocatalysts have varied over time, while emissions standards have grown ever more stringent. Usage is determined by multiple factors including the effectiveness, availability and price of each metal. The catalytic efficiency of each metal is influenced by engine temperature, fuel type, fuel quality and durability of the autocatalyst’s washcoat (the layer on the autocatalyst surface that holds PGM molecules in place). Today, platinum is predominantly used in autocatalysts in diesel vehicles, with palladium principally in those in gasoline vehicles. However, this usage is shifting, with substitution of platinum for palladium occurring due to sustained palladium deficits and the high price of palladium, now still over US$1,000/oz higher than platinum.

Palladium’s price rise to $2,800/oz resulted from 8 years of supply demand deficits and the fact that Chinese automakers buy metal in the spot market rather than using a hedged forward book, as is commonplace in the west. During previous disconnects between the price of platinum and palladium, substitution of platinum for palladium balanced the two markets. If only 5% of palladium used in gasoline vehicle autocatalysts is replaced by platinum, this represents 450 koz per annum. Understandably, automakers and autocatalyst manufacturers have not published details of substitution already underway – it’s proprietary and confidential information and publication would increase the platinum price – but is a process likely to continue during and after the pandemic.

The unprecedented negative fiscal impact on national governments due to the COVID-19 pandemic is likely to significantly restrict funding of the power grid and charging infrastructure necessary to support the mass roll out of BEVs and the hydrogen infrastructure to support FCEVs. However, reducing climate change remains paramount, perhaps even heightened by the improved air quality experienced during lockdowns. This makes it essential to reduce CO2 from internal combustion engine (ICE) vehicles at the lowest overall cost and is likely to increase the use of platinum and palladium. Diesel vehicles, whether new sales or the existing fleet already on the road, emit between 20% and 35% less CO2 than conventional gasoline vehicles. Encouraging the sale of new diesel cars, which are now low NOX, and low CO2, and preserving the low CO2 benefits of the on-road diesel fleet are both essential parts of the toolkit needed to manage the transition. Automakers in Europe have been preparing the technical changes to reduce new vehicle CO2 emissions for several years. In 2020, we are likely to see increased platinum demand as automaker CO2 strategies include the wide range of diesel and diesel hybrid vehicles already on sale, which have higher platinum loadings.

Clean energy investment opportunities

Platinum’s investment opportunity rests on two key issues within the context of the COVID-19 pandemic: constrained supply and demand growth potential; the latter including investment demand as increased global risk makes physical assets and precious metals more attractive investments. Somewhat counterintuitively, the case for platinum now is more compelling than it was before the start of the pandemic.

Mining shutdowns to prevent the spread of COVID-19 are expected to reduce platinum mine supply by c.253 koz in 2020, yet this reduction will be eclipsed by a smelting outage (converter failure) in South Africa, reducing refined platinum production in 2020 by c.500 koz. The material falls in PGM prices this year as the pandemic unfolded has reduced producer margins, increased uncertainty in future prices and further reduced the likelihood of any near-term capacity growth. Mine supply risk is weighted to the downside. Platinum demand growth potential remains strong due to the increased relevance of diesel vehicles, substitution of platinum for palladium, near term heavy-duty FCEVs and increasing investment demand. Record platinum bar and coin sales in the first quarter of 2020 (312 koz) reflected consumer investment in the face of heightened global risk. The tighter platinum market is also expected to increase investor interest. The significant surge in platinum buying on the Shanghai Gold Exchange and in platinum imports into China in 2020 reflect a prudent value response by long-standing manufacturing participants in platinum, industrial and jewellery, increasing stock levels for short- or long-term benefit. Sales of platinum on the SGE were up from an average of 171 koz per quarter in 2019 to 455 koz in Q1 2020. Similarly, direct platinum imports into China that averaged 573 koz per quarter in 2019 rose to 834 koz in Q1 2020. Current extreme price movements also highlight that platinum remains at historic discounts to itself, to gold and to its sister PGM, palladium.

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