Visualizing Platinum & Palladium's Place In The World

Tyler Durden's picture

The platinum group of metals (PGMs) have received some perhaps unwarranted attention in recent weeks as the 'coin' idiocy came and went; but, it is noteworthy, as Eric Sprott points out that with demand rising and supply under pressure, the outlook for investment in physical platinum and palladium is increasingly compelling. The following infographic (and various supply and demand dynamics) provides a succinct picture of what these metals are used for, where they are produced, and the supply/demand imbalances.

 

Source: Sprott Physical Bullion Trusts

Reasons To Own Platinum and Palladium

SUPPLY

1. PGMs have a high supply risk.

In the British Geological Survey's Risk List 2012, the platinum group of metals (PGMs), of which platinum and palladium are widely viewed as the most significant, received a high supply risk index based on the list's seven criteria: scarcity in the Earth's crust; production concentration-location of principal producers and contribution to global supply; reserve distribution-global distribution of reserves; recycling rate; substitutability; governance (top producing nation); and governance (top reserve-hosting nation).

2. Overall global supplies of platinum and palladium are expected to decrease substantially in 2012, resulting in supply deficits.

A substantial reduction in primary and secondary supply is expected to move the platinum and palladium market from surplus to deficit in 2012, according to the Johnson Matthey Platinum 2012 Interim Review. Gross demand for platinum is predicted to remain firm, however, severe disruptions to platinum mining are expected to result in a 10% drop in global mine production of platinum. The report also estimates an 11% decline in supplies from recycling. Together, these factors are expected to result in an overall 10% decline in worldwide platinum supplies and a deficit of 400,000 oz. Gross demand for palladium is predicted to increase 15%. However, both mine production and recycling are expected to contract by 4% each, and stock sales by more than two thirds, resulting in a deficit of 915,000 oz.

3. Production is highly concentrated in only two countries

Unlike many other metals that are found in numerous regions, the majority of platinum and palladium production is concentrated in South Africa and Russia, which combined to account for 88% of platinum production and 80% of palladium production in 2011.

4. Widespread labour disruption, mine closures and other issues are negatively impacting the supply of platinum and palladium from South Africa, which produced more than half of the supply of the metals in 2011.

Platinum supplies from South Africa, which accounted for 75% of global production in 2011, are projected to fall to an 11-year low in 2012, declining 19% from the peak in 2006. The country is also the second largest producer of palladium but supplies of this metal are projected to drop more than 6% in 2012. A myriad of issues in the country are lowering cash profit margins and resulting in less supply of the metals, including labour disputes, closure of marginal operations, declining ore grades, , and progressively lower depths required for mining operations in some locations. Additionally, the availability and cost of electrical power continues to be precarious and the uncertain political environment, including increased rhetoric and political pressure regarding possible nationalization and/or ''super'' taxation, could reduce the ability and willingness of industry participants to make the necessary investments to sustain current supply.

5. Dwindling stockpiles of palladium in Russia are nearing depletion and may not be able to offset declines in mine production.

Russia is the largest source of palladium, through both mining and state sales of stockpiles. However, the supply of the metal from existing stockpiles is projected to drop 68% in 2012 and is expected to account for just 3% of global supply. Additionally, mining supply is projected to drop by approximately 4% in 2012 and active mines in the Norilsk region of Russia are showing declining grades of ore extracted, which suggest that production levels at these mines may have peaked..

6. Alternative sources of new supply for platinum and palladium are not readily available.

North America accounted for just over 5% and 13% of global mine production of platinum and palladium, respectively, in 2011. However, production of both metals in the region is projected to decline slightly in 2012. The only region expected to increase platinum and palladium production in 2012 is Zimbabwe, though it remains a relatively small producer of the metals. However, increasing political tensions and threats over security of tenure in the country has deterred new investment.

7. The majority of platinum and palladium producers are operating at a loss.

The cash costs and capital expenditures required to mine a 3E PGM oz (~60% platinum, ~30% palladium, and ~10% rhodium) have risen to a level such that most mine production is already cash flow negative.  Only five companies are slightly cash margin positive after accounting for capital expenditures. A 15-year trend of declining ore grades and anticipated labour settlements with increased wages are expected to further increase cost and stress balance sheets for these producers.

DEMAND

8. There are diverse sources of demand for platinum and palladium.

More than a quarter of the demand for platinum and palladium is from non-autocatalyst industrial uses. For platinum, sectors utilizing the metal include petroleum refining, electrical, glass manufacturing, medical, biomedical and dental, and other manufacturing such as turbines. For palladium, demand comes from the electronics (as resistors and capacitors in circuit boards), dental and chemical industries. The metals are also used in jewelry, particularly platinum which is sought after for its rarity, silvery-white lustre and resistance to wear and tarnish.

9. More stringent vehicle emission standards continue to drive demand growth for platinum/palladium in autocatalysts.

Due to their powerful catalytic properties, platinum and palladium are essential components in catalytic converters in automobiles as they form the surface catalyst upon which the critical chemical reaction converting engine exhaust emissions into neutral compounds occurs, resulting in the reduction of the toxic components from combustion. There is no widely used substitute for the metals in autocatalysts and emission standards are becoming increasingly stringent across Asia increasing platinum/palladium loadings per vehicle. Demand for palladium in autocatalysts is expected to grow by 7% to an all-time high of 6.5 million oz in 2012, resulting in a combined 5% increase in autocatalyst demand for the two metals to 9.6 million ounces. For 2013, automotive demand for palladium is anticipated to grow by 24% and for platinum by 13%.

10. China is an increasingly important demand driver for both platinum and palladium.

China recently surpassed the U.S. to become the largest auto maker globally and auto sales are projected to grow at 5% per annum over the next three years, according to IHS Global.   Palladium loadings per gasoline powered vehicle produced in China have approximately tripled over the past decade and in 2010, China adopted the Euro IV emission standard, which is expected to materially increase the PGM loadings in Chinese-produced vehicles. The country's demand for platinum in jewelry, particularly among the younger generation, comprised close to 70% of the global share in 2011 and is growing. From 2006 to 2011, platinum purchases doubled on the Shanghai Exchange.

11. Strong long-term annualized returns and uncertainty about the global financial system has the potential to take more supply of platinum and palladium off the market.

The returns on both platinum and palladium outpaced the S&P 500 Total Return Index in the ten years leading up to November 21, 2012, according to Bloomberg. The Manager of the Trust believes investor demand, through ETFs and funds acquiring the physical bullion, may increase as investors seek to protect their portfolios from inflation, deflation, economic slowdown and currency devaluation.