Anglo American Platinum’s decision to inject over R1.3 billion into two venture capital funds to support the development of innovative uses for Platinum Group Metals (PGMs) has resurrected the debate about the future of these precious metals.
South African platinum miners have experienced a tough time over the past few years amid falling prices and sentiment in the market for PGMs has turned even more negative as fears of a trade war have escalated.
Speaking at the Allan Gray Investment Summit, Karl Leinberger, chief investment officer of Coronation, said most investors feared or loathed an investment in platinum miners – for good reason.
“They have been desperately terrible investments for the last ten years.”
Yet, he still sees opportunities in the market. One example is Northam Platinum.
This was despite the fact that platinum bears argue that the bulk of PGMs are used in catalytic converters in automotive manufacturing, and that most people will be driving battery-powered electric vehicles in 30 years.
Leinberger said while he was positive about the future of electric vehicles, Coronation had done an enormous amount of work on automotive manufacturers (OEMs) and the detail around the vehicle drive chain to understand what disruption would mean for PGM markets.
“The big surprise coming out [of the analysis] is that even if you go out ten, fifteen years, you get big, meaningful deficits in PGM markets, which is just absolutely not reflected in the price.”
Leinberger cautioned against broad brush strokes. Five years ago, investors were arguing that coal was a sunset industry and that the world would move away from it completely, but the coal price has gone up significantly from its earlier lows.
“I think that the emotion and short-termism can sometimes present big opportunities. We think Northam is a great company. It is well positioned within the PGM industry.”
Although Johny Lambridis, portfolio manager at Prudential, did not share Leinberger’s optimism, his bearish view on platinum was not related to developments around electric vehicles, but about recycling in the industry.
Europe is a big user of the metal for its vehicles, but in 2017 new vehicle sales on the continent were comparable to 1998, Lambridis said.
“You effectively have had no growth in new vehicle sales and effectively therefore the car park is not growing.”
Initially the local platinum industry benefited from the fact that there were increased loadings in these catalytic converters, but that has stabilised. Diesel penetration in the car park also rose, but since the VW emissions scandal it has also started to plateau, he added.
“We don’t have growth in [the] number of vehicles and effectively all you are doing – you are taking one catalytic converter, you are recycling it (getting the platinum out). Do you actually need South African platinum? So that is our concern.”
Where an industry was in decline, one would usually see steps to reduce capacity, he added.
One example is British American Tobacco that – in response to the decline in tobacco smoking – has been closing factories and reducing staff numbers to improve its margins.
“In South Africa, the government will not let you cut shafts. That is our sort of bearish case for platinum.”
Lambridis said their bearish view might change if other uses for platinum were developed.
“But if we are relying solely on catalytic converters, we don’t see the investment case.”
Andrew Lapping, chief investment officer at Allan Gray, said forecasting commodity prices was exceptionally difficult to do, as there were many factors to consider.
“These complex forecasts, people are not good at them.”
What was not known however, was whether sentiment towards the industry was positive or negative.
Lapping said at the moment, sentiment towards PGMs is “beyond horrendous”. Investors are selling ETFs and prices are low. Back in 2007 when prices were much higher, investors loved platinum.
“There was this huge bull argument and people were buying platinum at over $2 000 an ounce. Now at $850, people don’t like it. That is something you do know.”