Which economic and industrial factors affect the price of the Platinum Group Metals (PGMs), namely platinum, palladium, and rhodium, which subsequently impacts the price of scrap catalytic converters?
A Hedge Against Inflation
From an investment perspective, precious metals are non-interest-bearing assets. Investors will sometimes add precious metals to their portfolios as a hedge against inflation, increasing in value as the purchasing power of the dollar declines. Price volatility and the opportunity cost of other investments that compound and yield interest plus logistical considerations pose a downside to holding physical metal. Other investors prefer government bonds, namely Treasury Bills, which are shown to pay higher rates when inflation rises. Treasury Inflation-Protected Securities (TIPS) offer a guaranteed rate of return by the government, albeit the rate is often lower than other government-backed securities. Note, the semi-annual coupon payment can trigger a taxable event. Finally, as a hedge against inflation, some investors will buy Exchange-Traded Funds (ETFs) which invest in precious metals while holding on to Treasuries as well. Treasuries may be more favorable tax-wise, but ETFs are taxed exactly like typical stock and bond securities.
The Big Factors: Inflation. The US Dollar. Treasury Bill Yields. Equity Markets.
Dr. Jonathan Butler, Mitsubishi’s Head of Business Development, stated in November that the US CPI inflation came in at 7.7%, the lowest since January and the third consecutive monthly drop. The equities and industrial commodities, including PGMs, rallied in the hopes that the Federal Reserve will start to slow interest rate hikes this year into next. At the beginning of December, ISRI Chief Economist, Joe Pickard, reported that The Federal Reserve Board (Fed) Chair Powell at the Brookings Institute, stated they have not seen “clear progress of slowing inflation.” Chair Powell mentioned that smaller rate increases could start in December, and that the Fed’s monetary restrictions will be kept in place. “We are tightening the stance of policy in order to slow growth in aggregate demand. Slowing demand growth should allow supply to catch up with demand and restore the balance that will yield stable prices over time. Restoring that balance is likely to require a sustained period of below-trend growth.”
Here in early December, the anticipation of smaller interest rate hikes in December and the beginning of 2023, has caused the yield of the inflation-adjusted Treasury Bills to drop. The US Dollar has pulled back against other major currencies. The US equity markets have reacted negatively to the better-than-expected jobs numbers. All these factors bode well for the precious metals complex in the near to medium term both as a risk/inflation hedge and in industrial demand.
Summarized in a November 11th weekly PGM report from Mitsubishi’s Dr. Jonathan Butler, The European Commission finally announced its long-awaited Euro 7/VII emissions standards for light/heavy duty vehicles respectively. These will take effect from July 2025 for cars and vans and July 2027 for heavy duty vehicles. It is widely thought to represent the final generation of emissions rules before the phase-out of internal combustion engines, in the 2030s. On our initial reading of it, the new standards are neutral to mildly positive for PGM demand:
· In NOx control of light duty diesel vehicles, it brings the NOx limits into line with those of gasoline vehicles, which is mildly positive for demand, though many NOx control systems use non-PGM containing SCR and in any case the light duty diesel market remains in decline.
· It introduces emissions limits for ammonia for the first time (which may require a small amount of Pt to reduce ammonia slippage from diesel SCR catalysts).
· It introduces tighter NOx, particulate and CO limits for heavy duty vehicles – this is perhaps the most positive development from a PGM standpoint, though the implementation date is not until 2027.
· It removes conformity factors for both gasoline and diesel light duty emissions, so emissions limits have to be met under all driving conditions, though in reality many automakers were already working to achieve emissions targets without the inflated conformity levels in the light of dieselgate.
However, the rules are less stringent than initially expected, with no changes to existing Euro 6 limits on NOx and particulate numbers for gasoline vehicles and the new rules only really apply under extreme driving scenarios and therefore do not represent a broad-based change to loadings in the way that Euro 6 and previous generations of emissions standards did. The auto industry has lobbied hard against the imposition of tighter standards in the light of material supply, inflation and customer affordability issues. In the end, the rules as published do not please either environmental groups, who argued in favour of tighter standards, or the auto industry which claims Euro 7 will divert investment away from electric powertrains. They may also be somewhat academic in a market where consumer choice is clearly moving towards electric vehicles.
In the US there remains some pent-up demand for new automobiles. The global microchip shortage continues to limit auto production to 40-year low leaving cars on the road longer to an all-time high average of 18 years. Auto scrappage rates have dipped in the short term because of the limited supply and increased cost of end-of-life vehicles plus labor shortages to process the vehicles. In the medium to long term cars will continue to be scrapped resulting in higher and amounts of palladium-rich catalytic converters coming into the secondary supply. Long term, as the adoption of electric vehicles rises, the demand for and use of PGMs will decrease ultimately softening the price most markedly for palladium which is set to be poised for a first time surplus in coming years. If the long-haul fleet vehicles begin to make use of the hydrogen economy, you can expect a higher demand and increased price for platinum which is the primary PGM used in hydrogen-based fuel cell applications.
In the short to medium term, expect more of the same. The PGM outlook in brief for 2023 is that the new Euro 7/VII emissions standards for light/heavy duty vehicles will be neutral to mildly positive for PGM demand. PGM mine and recycling supply has decreased in 2022 along with auto production. The supply and demand are not set to soar any time soon with inflation concerns. The World Platinum Investment Council (WPIC) Director of Research, Edward, Sterck, states that “the [platinum] market is moving into a meaningful deficit, and that the availability of above ground inventories is severely restricted and unlikely to offset that deficit in the rest of the world excluding China Within China, it is only likely to be offset if we see significantly higher platinum prices than we have today, which would then attract that inventory back into the markets. So, a meaningful deficit in 2023.” In the long term, as we move toward a hydrogen economy, continue to watch platinum.
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