Edward Sterck, Director of Research at World Platinum Investment Council
Palladium faces declining usage
Outlook for platinum remains robust
WPIC sees sharp uptick in platinum ETF holdings
ETF investors drawn to platinum due to discount to gold, interest rate easing
Palladium, once trading at nearly between $2,800 and $3,000 an ounce, has plunged to around $1,075 amid shifting automotive demands influenced by electric vehicles.
As it faces declining usage, experts predict a substantial pivot toward platinum, driven by its critical role in the hydrogen economy and increased automotive substitution.
Palladium Historical Price Chart. Source: Macrotrends
The outlook for platinum remains robust, bolstered by rising ETF demand as investors seek value in a market projected to experience a significant deficit in the coming years. The current price of platinum as at September 23, 2024, is $958.10 per ounce, according to Macrotrends.
Platinum Price Historical Chart Data. Source: Macrotrends
BSE ETFs
On the Botswana Stock Exchange (BSE), New Palladium ETF and Platinum ETF were trading at P259.50 and P121.70 as at 23rd September 2024.
An ETF is an index fund or investment fund that tracks an index or the price of a commodity and trades like a share on an exchange. In this case, the New Palladium ETF and the Platinum ETF track the spot price of the metals respectively.
A Shift in Automotive Demand
The World Platinum Investment Council (WPIC), which provides insights to advance platinum investment, shared insights on the challenges and opportunities ahead, highlighting a shift in automotive demand and the potential impact of battery electrification on palladium's role in the global economy.
Automotive demand for Palladium is around 80% of total demand, Edward Sterck, the Director of Research at WPIC said during an Absa ETF Webinar recently.
Palladium like Platinum is primarily used in the automotive industry for catalytic converters, which help reduce harmful emissions from internal combustion engines. The demand for palladium in this sector has been driven by stricter environmental regulations and a growing emphasis on reducing vehicle emissions.
Erosion of palladium and uses
In recent years, the shift towards electric vehicles (EVs) has introduced some uncertainty regarding palladium demand, as EVs do not require catalytic converters.
Sterck believes “We are going to see a continued increase in battery electrification”.
The challenge, according to Sterck is that it’s just happening at a slower rate than most market commentators had anticipated. But fundamentally, he believes over time the market will see “an erosion of 80% of palladium and uses”.
Palladium demand pretty good over the medium term
However, there are some challenges, though, "that could be supportive of palladium over the medium to longer-term".
Sterck insisted that the outlook for palladium demand over the medium term is "actually pretty good" with WPIC forecasting palladium to move into a surplus from 2026.
“The tipping point in surplus is only driven by supply, and that's not mine supply”.
Supply Challenges for Palladium Shape Value Adjustments
Sterck anticipates a lot of challenges to mine supply. He expects a 1.3-million-ounce increase in palladium recycling supply over the next few years, primarily driven by end-of-life vehicles from the early 2010s.
Sterck noted significant challenges for recycling, citing a current shortage of end-of-life vehicles. This has led to a lack of quality scrap material for both platinum and palladium.
So there's some real question marks over whether that 1.3 million ounce increase in recycling supply is really going to come through or not, said Sterck. If it doesn't come through, he said then, palladium remains in a deficit for the foreseeable future, and at that point, “you would then see value expectations adjusting quite significantly in terms of where palladium should be priced”.
He thinks the outlook for Palladium is probably better than the market is pricing right now. But he is convinced that its future is probably not as good as platinum, still.
In other words, there is value in holding palladium. The future looks bright, maybe not necessarily as bright as platinum, but there could be value in including palladium in an investment portfolio.
Platinum is Good for the Hydrogen Economy
There is an expectation that higher for longer automotive demand. Further palladium is being substituted for platinum back into gasoline vehicles to liberate platinum for the hydrogen economy.
“Platinum still has a much greater, longer term, new sort of energy transition theme in terms of the hydrogen economy, which palladium lacks,” Sterck said.
In other words, he means that palladium doesn't benefit from the hydrogen economy. So, over the longer term, Sterck said platinum gets that demand-pull.
Platinum Benefitting From Substitution
WPIC said in its Q2 2024 report that Platinum saw a quarterly demand of 2,421 koz, reaching a four-year high. The council found that, for 2024, the automotive platinum demand is benefitting from ongoing platinum for palladium substitution, higher heavy-duty platinum demand and hybridisation trends, which are cumulatively offsetting a rising light-duty electric vehicle market share.
Looking at the automotive sector, the council said platinum demand is forecast to increase by 1% year-on-year in 2024, reaching its highest level since 2017.
“Automotive demand was up 1% year-on-year as recent trends such as platinum for palladium substitution and higher-for-longer ICE-based vehicle demand persisted,” the council said adding that economic considerations may be magnifying battery electric vehicle (BEV) affordability barriers (alongside other concerns).
Reluctance for BEVs boosts Platinum
Whilst BEV demand is still growing, WPIC found that market share gains have witnessed a marked slowdown.
The BEV light-duty market share is now forecast to increase from 11% in 2023 to 13% in 2024 (compared to an initial 15% market share forecast). Notably, WPIC said the weakness in BEV sales is not a function of broad market weakness but rather consumers turning to more affordable combustion engines or hybrid drivetrain options.
It’s important to note that China is the largest market for battery electric vehicles, accounting for approximately 60% of the global market.
“We've seen a lot of efforts by the government there to try and incentivise people to switch to battery electric vehicles,” Sterck said.
“We're seeing significant growth in the pace of adoption of battery vehicles. On the flip side, that's translating into increased demand for internal combustion engine containing vehicles, principally hybrid vehicles, which is resulting in a boost effectively, in the demand for platinum group metals and obviously platinum specifically.”
“The narrative of higher-for-longer PGM automotive demand is certainly entrenching itself within investor’s considerations; each 1% change in light-vehicle market share for ICE-based drivetrains represents around 21 koz of platinum demand.”
Fundamentals of Platinum Will Establish Price
With the reset of the palladium prices, the strong underlying deficits, and the robust outlook in terms of automated demand for platinum, WPIC thinks that the underlying fundamentals of platinum are going to return to being the most important drivers for establishing value or the platinum price going forward.
WPIC is seeing continued market deficits to the foreseeable future, +/- 500,000 ounces of platinum. This results in a continued drawdown of above-ground stocks. Ultimately, as those stocks are depleted, the residual holders of those stocks probably have or should have, higher value expectations, which would be reflected in the price that they would want to receive in order to make those stocks available to the market, said Sterck.
Graphics by WPIC
“That's as a result of the ongoing supply-demand deficit, the rapid depletion of above-ground stocks."
“Prior economic decisions to substitute platinum for palladium continue supporting incremental platinum demand (2024: 752 koz) despite the metals reaching price parity during Q1 2024.”
Graphics by WPIC
Sterck said the demand forecast for this year will be a little bit over 8.1 million ounces. That's up 3% year on year, leaving a deficit projected for 2024 of over a million ounces. That contrasts with a deficit of 731, 000 ounces in 2023.
Platinum Supply
Mine supply is predominantly sourced from South Africa, which accounts for about 70% of global platinum production, followed by Russia at around 11%. Mine supply increased by 5% year-on-year to 1,570 koz in Q2 2024, largely driven by South Africa, according to WPIC.
Graphics by WPIC
Recycling supply increased by 1% year-on-year to 388 koz in Q2 2024. A substantial portion of the platinum supply comes from recycling. For example, recycled platinum from used catalytic converters is a major source, as these components contain a significant amount of platinum.
Although automotive recycling supply increased by 2% year-on-year, WPIC said scrap aggregators continue to highlight challenges securing sufficient feedstock, with lingering suggestions of hoarding by scrapyards.
Recycling supply is expected to remain constrained in 2024, albeit with a forecast year-on-year increase of 36 koz in 2024 (+2%).
"Automotive recycling continues to be impacted by a lack of quality feedstock due to sourcing headwinds and hoarding," WPIC said adding that the result is that total platinum supply for 2024 is forecast to decrease 1% versus 2023 (-71 koz) and at 7,089 koz will be 8% lower than average supply over the past ten years. Total supply in Q2 2024 came to 1,958 koz, up 4% over last year and up 22% compared to the prior quarter, reflecting mine supply seasonality.
“We see persistent risk to both supply in terms of mining and recycling which could exacerbate platinum deficit. And we have all this high for longer automotive demand scenario with potential growth from jewelry.”
WPIC revealed that jewelry demand increased by 5% year-on-year, with only North America recording lower demand (-1% year-on-year), albeit off a high base. Industrial platinum demand decreased by 4% year-on-year in Q2 2024, almost entirely due to weaker chemical demand (-48% year-on-year) following fewer plant commissionings as China moves beyond a period of elevated capacity investment.
"These things are factoring in the investment interest in platinum both in China and the rest of the world," Sterck said.
Demand for Platinum ETF
Contrary to weak demand for gold ETF, Sterck said they have seen demand for platinum ETF, particularly in the UK during the second quarter of the year. He revealed that inflows were 444, 000 ounces and saw more at the beginning of the third quarter.
WPIC reported quarterly platinum demand of 2,421 koz in Q2 2024 reached a four-year high. “Demand increased by 13% compared to a year earlier due to a sharp uptick in platinum ETF holdings (+444 koz),” the council said explaining that ETF investors were drawn to platinum due to its increasing discount to gold, expectations for interest rates easing, and platinum’s strong underlying fundamentals, reflected in consensus forecasts for a market deficit in 2024.
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