LAWRIE WILLIAMS: German court ban yet another platinum headwind
The latest Metals Focus Precious Metals Weekly newsletter reckons that a German court decision, which would enable the major German cities of Dusseldorf and Stuttgart to impose access bans for some older, high polluting, diesel engine vehicles in parts of the cities already suffering high pollution levels is yet another headwind facing the platinum market and price. While the ruling does not necessarily mean an immediate ban on such vehicles some see it as the ‘thin end of the wedge’ leaving it open for municipalities to impose such bans at some time in the future. Metals Focus sees this as yet another hurdle for the platinum price, which is already facing bans elsewhere in Europe – the principal market for light diesel vehicles and will likely lead to a growing physical surplus for the metal.
To recap on the market for pgms in the exhaust emission control catalyst sector, what used to be the far lower priced palladium usurped platinum’s position as the exhaust emission control catalytic material of choice for petrol (gasoline) engines, but platinum retained its place as the catalytic material most suited for cleaning diesel exhaust emissions. Thus anything that puts a dent in the diesel market is a negative for platinum. What is uncertain though, is that with the big rise in the palladium price, which we saw last year due to the far better supply/demand fundamentals for the latter metal, whether platinum will now regain some of its market lost to palladium now that the pricing differential has reversed.
While that might seem to be a logical conclusion, Frank McAllister, former CEO of palladium producer Stillwater, has told us that catalytic converter technology had evolved so that palladium now has a modest technical advantage to platinum, meaning you could use a marginally smaller amount of palladium than platinum to reach the same emissions conversation. Whether new research into platinum as a converter catalyst might come up with similar results is unknown, but probably precludes any switch back to platinum in the short term.
Metals Focus does note though that in spite of its troubled fundamentals, platinum has so far outperformed its peers this year, rising by 6% year to date, compared with a broadly unchanged palladium price and a small increase for gold. This may appear contradictory, but it owes much to some investors buying into platinum in the belief that it had been oversold last year. Platinum also has a place in the jewellery market which gives it a broader demand pattern than palladium which so far, at least has not had much impact in this sector.
Palladium though has a stronger correlation than platinum to the equities sector and when equities crashed, albeit briefly, the palladium price came down as well leading to a brief period (a couple of days at most) when the platinum price climbed back above that of its sister metal, but it has since reverted to a discount again. (At the time of writing the platinum price is nearly US$50 below that of palladium).
Metals Focus analysts have something of a mixed view on prospects for the two metals. Palladium’s correlation with equities they see as a negative given they feel that equities are overbought and due a serious correction. On the other hand they suggest that platinum has a stronger correlation with the gold price and as they expect gold to rise over the year ahead that is viewed as positive for platinum. However they concede that, for the moment at least, palladium’s fundamentals are far stronger than those for platinum – palladium supply/demand is in serious deficit while platinum is in surplus. This they feel will eventually see the palladium price power past that of platinum even though the latter may gain a price advantage in the short to medium term.
So, the analysts see a palladium deficit ahead of around 1 million ounces this year, while pl;atinum remains in surplus and faces a number of other headwinds to add to an anticipated decline in light diesel vehicle demand.
However, in the medium term palladium still benefits from strong supply and demand conditions. In terms of the former, this owes much to a robust autocatalyst demand profile, which has seen global automotive palladium offtake rise from 5.7Moz in 2010 to an estimated record high of 8.2Moz last year. As a result, we believe that in 2017 palladium recorded a physical deficit of just over 700koz, the sixth uninterrupted deficit. Furthermore, in our recently published 5-Year PGM Forecast we are predicting a deficit of around 1Moz in 2018. As a result, above-ground stocks have fallen sharply this decade, from around 18Moz at end-2010 to a forecast of just below 14Moz at end-2018. Importantly, we believe that a large part of that stockpile is not immediately available to the market.
But longer term, the threat of faster than previously anticipated growth in the electric vehicle sector will likely eat into both the platinum and palladium markets. They may have a few years yet when this impact remains somewhat muted but in the ultra long term – perhaps by the middle of the current Century we see the outlook for the internal combustion engine, and hence for pgm based catalysts, as bleak. On the investment front it’s all a question of getting one’s timing right. Perhaps a few positive years but then there could be a major decline, particularly for palladium unless a significant new market is found.