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How long can this PGM bull market last?

Bruce Williamson from Integral Asset Management discusses the shifting global demand for rhodium, platinum and palladium.

SIMON BROWN: I’m chatting now with Bruce Williamson, CIO at Integral Asset Management. Bruce, I appreciate the early morning time. You had a note earlier this week on PGMs generally and the industry. Sort of prepping for this, the note that you sent me is that there’s been a fundamental shift that’s putting pressure on the global auto industry and the usage of the PGMs – rhodium, platinum, and palladium – and how that demand has moved away from what’s practically coming out of the ground (to that) for recycling. This creates an imbalance and is exerting pricing pressure.

BRUCE WILLIAMSON: Hi, good morning, Simon, and good morning to the listeners. Absolutely. There’s this imbalance that has developed, but it’s taken many, many years to unwind. You can go back as far as 2005. 

In days gone by the mining companies urged the auto industry to pay attention to the splits that were in the ground. Typically, if you look at South Africa as a major supplier and Russia, of the three PGMs about 40% is platinum, about 53% palladium, and about 5.6% rhodium. I’ll be specific with a decimal because when platinum got far too expensive from about 2005 onwards, the autocats, the newcomers into the auto industry, started using a lot more palladium. Over the years they’ve now started moving far away from what is in the ground, and the cycling repeats what was put into the cars 15, 20 years ago. So what we find today is that in the auto industry, which dominates in palladium and rhodium, of what they consume about 70% of their PGMs is going into palladium, and 7.5% percent into rhodium; only about 20% goes into platinum. So they’ve moved completely away from what comes out of the ground and, surprise, surprise, there’s a big, big imbalance. 

SIMON BROWN: I was just chatting with Chantal Marx earlier in the show around the brilliant results that we’ve seen coming out of the PGM miners, and this suggests that this is not a flash in the pan. You’re talking around this fundamental imbalance and therefore this creates a strong case for the prices in certain markets – particularly the rhodium, which has collapsed a bit in recent times – and to keep those prices fairly elevated.

BRUCE WILLIAMSON: Simon, remember that for this to happen there had to be really, really hard times. Lonmin shareholders lost their company, Sibanye took it over. Original shareholders literally came away with nothing. So right the way through, from about 2010 almost to 2018, in rand terms the six PGMs – and I add them up because others can be important – sat at about R10 000, or sat at $1 000 down to $600 an ounce. In dollar terms, we rose from $600 per ounce to about $3 700. And in rand terms, we rose from R10 000 to above R50 000 per ounce. What has happened is although in the ground palladium – depending on whether you use three PGMs or six – is 7/8%. It now accounts for 50% of the basket of PGMs.

And so it is absolutely vital. It’s used to control the nitric oxide, the NOxes, that come out, and we can’t go away from that. Plus we’ve got this huge green push to further decarbonise. There is nothing they can do. So you ask yourself if they are going to stop producing cars because they don’t want to pay for a few grams of PGMs. 

I suspect that prices will stay high. I think they’d run ahead of themselves, but they can stay rather elevated for some time. Remember, and it’s a bit uncertain, Russia is a huge supplier and the biggest supplier of palladium, (where the) permafrost has been thawing for a number of years, and the Norilsk operation has had three big incidents owing to permafrost thawing. Now we might see further problems around that issue.

SIMON BROWN: I take your point. I liked the point. The electric vehicle manufacturers are not moving away from PGMs. And even when we are seeing electric vehicles over the decades ahead, that green energy demand will pick it up. 

Bruce Williamson, CIO integral at Asset Management, I appreciate the early morning time. 

In our poll, we are asking you today (about this) on our Twitter and LinkedIn after chatting with Bruce. We’ve seen great results and trading updates from the JSE-listed PGM miners; do you continue to hold? Do you think there’s more to come, are you’re taking some profits – Chantal Marx said maybe a bit of profit — or perhaps you just missed it entirely. I think there’s more to come. And I think this could be a longer-term cyclical bull market for the PGM miners. Have your vote, have your say on, LinkedIn and Twitter. 

Listen to Friday’s full MoneywebNOW podcast here.

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