Platinum perspective: should we buckle up?
The platinum group metals (PGM) sector has generally performed very well over the past year thanks to a strong rebound in global car sales. Since the end of April, however, we have seen a dramatic drop in the prices of these stocks.
Should investors be worried? What are the prospects for PGMs?
In our opinion, the recent price corrections are overstated. The long-term outlook for the sector remains uncertain, but we remain optimistic about its medium-term potential.
Surge … and collapse
Since July of last year, prices for platinum, palladium and rhodium have jumped following a significant increase in global car sales, which more than offset a pick-up in supply after the Covid-19 shutdowns . Since the end of April, however, prices have fallen sharply from high levels.
At the time of this writing, palladium has fallen over 30% to less than $ 2,000 / oz, platinum is down 25% to less than $ 1,000 / oz, and rhodium has fallen more than $ 1,000 / oz. 50% to about $ 14,000 / oz.
These are massive corrections, but it should be noted that despite these declines, palladium and rhodium prices are still very high (while platinum prices remain low) by historical standards, as can be seen in the graphic below:
The recent price corrections are likely due to a drop in auto production due to a global chip shortage. With almost all of the palladium and rhodium destined for the automotive market, it makes sense that the corrections were more pronounced in the case of these two metals.
In our opinion, the impact on new car production has already been over 8 million units, against the background of a total market of 92 million new cars sold in 2019. This has resulted in lower levels. car inventories at decades-long lows and a boom in the used car market.
The situation remains fluid, but it appears to be a temporary issue that should resolve itself towards the end of this year and early next year. There is also expected to be pent-up demand as automakers restock their inventories.
The most important question is whether the acceleration in sales of new electric vehicles will affect the medium-term investment case for PGMs.
In our view, the outlook until about the middle of the decade still looks quite favorable for the basket of metals, with demand still strong. We expect higher charges per vehicle to more than offset lower internal combustion engine sales.
Supply growth is also still moderate after a decade of underinvestment. The projects in progress largely serve to compensate for the decline in the existing base over the next few years.
Our best assessment, therefore, is that the market is currently in an ideal situation and that we are likely to see prices still hover comfortably above marginal cost levels over the next several years.
The longer term outlook for PGMs is more uncertain as it is now clear that electric vehicles will become the dominant powertrain. By some industry estimates, sales of new battery-powered electric vehicles would account for up to 40% of total new car sales in 2030, up from around 3% in 2020.
This has a large negative impact on the demand for PGM – especially palladium and rhodium – because a battery electric vehicle does not need a catalyst. To compensate for this, in our price estimates from 2025 we use much more conservative estimates for palladium and rhodium than current spot prices.
The potential offsetting factor for 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 blurry, it seems governments are now realizing that hydrogen must be part of the solution if the world is to meet its emission reduction targets.
The increase in hydrogen consumption will therefore at least partially offset the impact of the fall in automobile demand. Platinum appears to be the best performing metal in this application, which could reverse the current scenario where palladium is in deficit and platinum is in surplus. South African producers generally produce much more platinum than palladium, and therefore would generally prefer higher platinum prices.
Dividends and redemptions
Last year, the PGM companies made huge profits and largely returned them to shareholders in the form of dividends and buybacks. Northam has essentially repurchased 29% of its shares thanks to the accelerated closing of its Zambezi BEE operation, which has been very value-creating for all stakeholders.
Amplats has paid dividends of Rand 220 per share since August of last year. This represents approximately 16% of the company’s current market capitalization.
In our opinion, the company’s stock prices never gave much credit to the very high palladium and rhodium prices seen earlier this year, but still corrected their recent highs quite significantly. Given that we expect a still strong medium-term outlook for PGM metals, we believe the near-term price corrections are overstated and represent an attractive opportunity.
While there is still a lot of uncertainty about the longer-term outlook, even after recent spot price corrections, most producers should be close to paying off their current market caps in dividends by the middle. of the decade if current prices hold. We are therefore of the opinion that the risk / reward ratio is more skewed upwards for PGM miners.
Christiaan Bothma is an investment analyst at Sanlam Private Wealth.