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Platinum outlook: Do we need to buckle up?

A look at the investment case for South Africa’s PGM miners.
Image: Bloomberg

The platinum group metals (PGM) sector has performed very well in general over the past year on the back of a strong rebound in global car sales. Since the end of April, however, we’ve seen a dramatic slump in the prices of these shares.

Should investors be concerned? What’s the outlook for PGMs?

In our view, the recent price corrections are overdone. The longer-term prospects for the sector remain uncertain, but we’re still upbeat about its potential over the medium term.

Surge… and slump

Since July last year, the prices of platinum, palladium and rhodium have surged following a significant uptick in global car sales, which has more than offset a supply recovery after Covid-19-related stoppages. Since the end of April, however, prices have declined sharply off high levels.

At the time of writing, palladium was down more than 30% to below $2,000/oz, platinum was down 25% to below $1,000/oz and rhodium had declined by more than 50% to about $14,000/oz.

These are massive corrections, but it’s worth noting that despite these falls, palladium and rhodium prices are still very high (while platinum prices remain low) by historical standards, as can be seen on the chart below:

The recent price corrections are likely to be due to lower car production on the back of a global chip shortage. With almost all palladium and rhodium destined for the auto market, it makes sense that the corrections have been more pronounced in the case of these two metals.

In our estimation, the impact on new car production has already been more than 8m units, in the context of a total market of 92m new cars sold in 2019. This has resulted in car inventory levels declining to multi-decade lows and a boom in the second-hand car market.

The situation remains fluid, but this does appear to be a temporary problem which is likely to resolve itself towards the end of this year and into early next year. There should also be some pent-up demand as carmakers restock their inventory pipelines.

The more salient question is whether the acceleration of new electric vehicle sales will affect the medium-term investment case for PGMs.

In our view, the outlook until roughly the middle of the decade still looks quite favourable for the basket of metals, with the demand side still strong. We expect higher loadings per vehicle to more than offset lower internal combustion engine sales.

Supply growth is also still muted after a decade of underinvestment. Current projects largely serve to offset the decline in the existing base over the next few years.

Our best assessment is therefore that the market is currently in a sweet spot and that we’re likely to still see prices hovering comfortably above marginal cost levels for the next few years.

Longer-term outlook

The longer-term outlook for PGMs is more uncertain since it’s now clear that electric vehicles will become the dominant drivetrain. Some industry estimates are for new battery electric vehicle sales to be as high as 40% of total new car sales in 2030, up from about 3% in 2020.

This has a big negative impact on the demand for PGMs – especially palladium and rhodium – as a battery electric vehicle doesn’t need a catalyst. To compensate for this, in our price estimates for 2025 onwards, we use much more conservative estimates for palladium and rhodium than current spot prices.

The potential offsetting factor to the loss of demand due to an increase in electric vehicles is the rise of hydrogen as an alternative fuel, where PGM-based catalysts are also needed. While the outlook remains unclear, it does seem as if governments now realise that hydrogen needs to be part of the solution if the world is to reach its emission reduction targets.

Increased hydrogen use will therefore at least partly offset the impact of declining auto demand. Platinum seems to be the metal that performs best in this application, which could reverse the current scenario where palladium is in deficit and platinum in surplus. South African producers typically produce a lot more platinum than palladium, so would in general prefer higher platinum prices.

Dividends and buybacks

The past year saw PGM companies making huge  profits and largely returning this to shareholders by way of dividends and buybacks. Northam essentially bought back 29% of its shares through the accelerated completion of its Zambezi BEE deal, which has been very value-accretive to all stakeholders.

Amplats has paid out dividends of R220 per share since August last year. That is about 16% of the company’s current market cap.

In our view, the company share prices never gave a lot of credit for the very high palladium and rhodium prices seen earlier this year, but still corrected quite significantly off their recent highs. Given that we foresee a still robust medium-term outlook for PGM metals, we think the near-term price corrections are overdone and pose an interesting opportunity.

While there’s still much uncertainty regarding the longer-term outlook, even after the recent spot price corrections, most of the producers are likely to come close to paying back their current market capitalisations in dividends by mid-decade if current prices hold. We’re therefore of the view that the risk/reward ratio is more skewed to the upside for PGM miners.

Christiaan Bothma is an investment analyst at Sanlam Private Wealth.

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Prospects look good for one of our major exports. SA Inc needs to make sure its house is in order with regard to investment, regulation and illegal mining.

Unfortunately the ANC will get their snouts involved.

With a severe chip shortage which will take longer than one year to be fixed, the supply of new vehicles will be impacted and is already impacted thus the demand for Platinum and palladium will be affected by about 30% less demand.

1) You must be very brave to buy PGM shares now, there seems to be a big short on these shares for the past few weeks.

2) The demand has dropped significantly for Platinum due to chip shortage which affects vehicle production and the demand for platinum for catalytic converters.

3) As for Iron ore, China has 60 Million empty apartments so less construction to take place.

4) And then we have Evergrande waiting to explode like the Lehman Bros did in 2008.

5) We are in Red October season, the previous Stock Market crashes happened on the 17, 19?

Happy trading folks

The narrative in renewables is turning ever more towards energy density and this is where Hydrogen is the winner.
Platinum will also win in a sustainable future.
Otherwise we all all doomed and you might as well buy Bitcoin!

Pity that it takes more energy to produce hydrogen than you can get from it ne !! Physics is a Bi2@#ch

if that’s your belief just means our nearest star isn’t being harnessed to its full potential

End of comments.

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