November 2019
The platinum miners in South Africa have had an incredible run in 2019 even with the platinum price remaining subdued. The move higher has largely been due to two other metals that can be found with platinum, namely palladium and rhodium. Global supply of platinum group metals (PGM’s) predominately comes from South Africa, Russia and the Unites States with South African deposits largely being rich in platinum while Russian and American deposits are palladium rich.
While platinum is considered a precious metal, along with palladium and rhodium, their value is largely derived from their use in industrial applications. Palladium and rhodium are both used in the catalytic converters of gasoline vehicle exhaust systems to limit greenhouse gas emissions. In recent years, demand for the two metals has been driven by the move away from diesel vehicles to gasoline vehicles as well as more stringent vehicle emissions regulations requiring more palladium and rhodium to be used per catalytic converter. Over the same time period the demand for platinum has softened due to a decrease in jewellery sales as well as the switch from diesel (where platinum is predominantly used) to gasoline vehicles.
The surge in palladium use has led to years of palladium demand out stripping supply as gasoline vehicles continue taking market share from diesel vehicles. This has driven the ratio of platinum to palladium to its most extreme level in history. While it is unlikely to happen overnight, substitution between palladium and platinum is possible and we see this as the most likely way to balance the market. We don’t see a supply side response to the palladium deficit as feasible in the near term due to the time it takes to build a PGM mine. An average PGM mine takes at least 5 years to build. Also, due to years of relatively low PGM prices, there has been limited investment in the industry and coupled with high mining inflation in South Africa, there is virtually no new supply coming online over the next few years.
We continue to remain constructive the platinum sector as we believe that increasing environmental regulations globally will continue to support demand while the supply response will only be seen years from now. Switching from palladium to platinum should be a net positive for the South African miners due to their platinum rich deposits and we continue to believe the sector offers an attractive risk/reward profile.