Rick Rule – Platinum Supply Issues ahead

Over the last couple of days we have shared excerpts from the excellent interview with commodities legend, Rick Rule (gold and silver) by Real Vision.  Today we finish off with his thoughts on platinum and then also share a recent demand update from the World Platinum Investment Council.

Lets start off with the question put to Rule:

“What are your views on platinum and palladium?

Yeah, I think speculators need to continue to own them. The only thing that can go wrong with platinum and palladium would be a broad based recession or depression, which would reduce industrial consumption for them. The truth is that the primary application for both is in internal combustion engines, [?] notwithstanding, internal combustion engines will be with us, I would say, for 30 or 35 years, and nobody of any age in any country is particularly fond of smog. It takes about $150 worth of PGMs to outfit a gasoline car to provide the type of air quality that we now enjoy in the United States.

There's not a lot of demand for more smog. This $150 worth of PGMs enables the automakers to sell a car for $50,000 or $60,000. Where the price of PGMs to double, it wouldn't change the shelf price of an automobile, which is to say the demand for these metals is very inelastic relative to price in the near term. The price can go up. The supply side is even more interesting. Platinum group metals are produced in South Africa, Zimbabwe and Russia in any quantity.

Well, I'm not saying that any of those countries is going to blow up right now, I think all three of those countries has some potential for supply disruption. And in any hint of supply disruption, the automakers have to pay for platinum, and palladium, whatever the market asks them to pay. There's a lot of room on the upside. Then finally, structurally, in South Africa, pardon me the pun, the industry is between a rock and a hard place. There is uncertainty in South Africa revolving around the economic transition from white to black, about a whole bunch of things.

I'm not saying this is a bad discussion, but there's not much fiscal stability around the mining business in South Africa. In fact, there's a lot of discussion of nationalization of the mines. In a circumstance like that, the shareholders are unwilling to put sustaining capital investments in the mines and unwilling to open new mines. The mines get more and more neglected and more and more long of tooth. The management substitute labour, which is cheap for capital, which is dear, which they might not own.

In the near term, that's popular because you have 70% black youth unemployment in the north eastern part of South Africa. But the workers, because they have a low skill set, because they're not particularly productive and because they're not allowed to employ much capital, are very, very, very inefficient, you're substituting labour for capital there. The labour force needs to be paid more, but they're unproductive so they can't be paid for. The labour force needs to employ more capital, but they can't because the miners are afraid to provide the capital.

The miners need to open new mines, and they need to provide sustaining capital investments in the existing mines but they won't because they're not sure who's going to own them. We have a circumstance where the most efficient producer in the world in some senses, or at least the best endowed producer in the world, is in some peril. I think for that reason, speculation in platinum and palladium with money that you could afford volatility and absolute risk in and for money that you could be patient with until and unless something went wrong in one of South Africa, Zimbabwe or Russia, would be money well spent for one speculator.”

Rule talks largely about supply issues, so lets get the latest from the World Platinum Investment Council on demand:

“Platinum industrial demand has exhibited strong growth in recent years, at a compound annual growth rate (CAGR) of 6 per cent between 2013 and pre-pandemic 2019. This is significantly above the CAGR of two key industrial benchmarks, being more than double that of global GDP (gross domestic product) and triple that of industrial production as measured by the OECD (Organisation for Economic Co-operation and Development), over the same period.

In 2021, platinum industrial demand is expected to account for almost 40 per cent of total platinum demand, net of recycling supply; unlike automotive and jewellery demand, consumption of platinum in industrial applications is usually expressed on a net basis, that is the gross demand less the supply of ‘closed-loop’ recycled metal. As economic activity driving platinum’s industrial uses recovers, forecasts indicate that it will rebound by 25 per cent year on year, to 2.4 moz. Significantly, this is also 13 per cent higher than demand in pre-pandemic 2019.

China continues to be a major contributor to platinum’s industrial growth. For example, Chinese petroleum refining capacity has almost tripled over the last 20 years to keep pace with the rapid growth in domestic energy demand. Latterly, the ambition for self-sufficiency in petrochemicals, a key part of China’s long-term social and economic policies, has seen strong demand for platinum catalysts in not only petroleum refining but also in the production of bulk chemicals such as paraxylene, propylene and hydrogen peroxide. 

Globally, demand for platinum in the chemical and petroleum sectors is expected to recover well this year, rising by 11 per cent and 65 per cent respectively after the pandemic-related curtailment of activity in 2020.

Multiple applications

Aside from the petrochemical industries, platinum has a multitude of well-established other end-use segments including glass manufacture, medical and electrical. 

Platinum demand across its industrial uses arises from three main categories: industrial catalysts, including manufacturing silicones and the production of nitric acid as a feedstock for fertiliser; platinum components, such as those used in medical devices (stents, pacemakers, neuromodulation devices) or sensors; and relatively small top-up requirements as industrial catalysts and manufacturing equipment wear out, with much larger amounts of metal required when new process plant capacity is built. 

Some new capacity build-out in the glass sector planned for 2020, delayed due to the pandemic, is being added to the capacity expansion already planned for 2021, resulting in a major increase in demand this year, up by 70 per cent or 260 koz.

Platinum’s diverse industrial uses leave it well-positioned to benefit from economic growth as the world recovers from the effects of the COVID-19 pandemic. As economic activity steps up, assisted by large scale government stimulus funding, investors are recognising an increased need for commodities, including industrial metals, and are acting on the upside this brings to the investment case for platinum. So far this year, investors in North America and Europe alone have increased their holdings in physically-backed platinum ETFs by over 200 koz.”