Marius Paun | London, UK | Senior dealer | Friday, 23rd October 2019
Platinum is an industrial metal and specifically a metal widely used in the car industry. Today it is mostly produced in South Africa and Russia. It is part of the so-called platinum group metals together with palladium and rhodium. By and large the price of the various components of the group will be determined by the popularity and production levels of the type of vehicles on the roads in the future. Will it be a mixed of electric and petrol cars with diesel vehicles slowly becoming obsolete as appears to be the case now? Or will diesel cars reverse the trend and come back into fashion at some point?
So, although platinum is part of the jewellery industry as well, its main use is in diesel cars and, to be exact, in the catalytic converters used in the diesel engine. The role of platinum in converters is to oxidise carbon monoxide and hydrocarbons. It is also known that its ‘sister PGM metal’ palladium, tends to be used in petrol engines. Apparently, platinum can be a substitute for palladium in petrol engines but that would only make sense when palladium price is well above the platinum’s i.e. close to double in price. And guess what… Currently, we are not far off that difference in prices. So, it is fair to say that the car industry might be pondering that substitution sometime in the near future.
Currently, there is a well-reported hype regarding electric cars, which are scheduled to replace diesel and petrol cars, and that hybrid cars are the temporary solution to make the smooth shift towards electric vehicles. For example, JP Morgan predicted that hybrid vehicles will account for around a quarter of global sales by 2025. Nonetheless, the hybrid cars still use fuel, hence over 90% of cars will still have an internal combustion engine in the next five years.
A few years back, we had the famous Volkswagen diesel scandal which sparked a whole array of changes in regulations and public opinion perception. It also delivered an almost fatal blow to the demand for diesel vehicles in Europe whilst the demand for petrol engines has actually increased. This trend was reflected in the prices of platinum which went sharply down and palladium which soared. To put things into context, before the scandal it was not unusual to see the price of platinum at least three times that of palladium.
Assuming that the shift to petrol-based engines and hybrid cars will continue to happen on a large scale, what could stop cheap platinum replacing the more expensive palladium going forward? One scenario circulated in the financial media could be hydrogen fuel-cells vehicles. Natural gas has become all of a sudden plentiful in the USA and is the primary source of hydrogen for commercial vehicles. However, batteries are currently impractical for commercial haulage fleet, without innovation to battery technology meaning hydrogen fuel cell could be a viable alternative to diesel. Most importantly, in favour of platinum, it is also the catalyst in fuel cells.
Looking at the fundamentals, demand for platinum is split between catalyst converters for diesel vehicles around 40%, about 30% jewellery, 20% industrial uses and the rest around 10% for investment purposes. The yearly demand has been over 6 million ounces since 2004 with very few exceptions. It is also predicted to reach 15 million ounces from the car industry alone by 2040 with the bulk coming from fuel cells vehicles seen as the potential ‘rescuer’.
What’s interesting is that there is constantly a big gap between supply and demand-, with demand outstripping new global production by almost one third. To counter this, the difference has been made up by recycling and selling off the existing stockpiles. South African miners’ inventories have been destocking and so far have been managing to make up for the lack of any new massive discoveries, or lack of investments to boost production. Could that de-stocking continue for long? Let’s wait and see.
During the commodities boom before the 2008 credit crisis, platinum enjoyed an absolute massive rally. It started at a low of $350 an ounce before 2000 and moved up steeply reaching a high of $2299 an ounce in March 2008. It crashed then even faster in 7-8 months to $750 an ounce. After that it embarked on a steady multiyear rally to a high of $1912 touched in August 2011 but since it was a downward trip. It hit a low of $754 in August last year not far off from the low of 2008. It has been struggling for any meaningful gains since retesting that low but it felt like a dead cat bounce. It’s now sitting rather quietly swinging around $900 an ounce handle.
As per usual the first thing to notice is the long term and that’s down.
However, drawing the trend line (red) we can see it has been broken on the upside in July this year. In addition, our moving averages, 9MA and 21 MA have recently reversed course and are now pointing upwards. What’s more, the 9 MA has crossed above the 21 MA.
On the bullish side, we can see the next resistance level around $940 which posed problems (it took a while to breach) on the way up but also on the way down during the last few years. It will be followed by $1028 mark but surely the bulls will keep a close eye on the 23.6% Fibonacci retracement at $1118.
On the way down $850 level seems to act as the next immediate support which was retested unsuccessfully recently. If that is to be broken, then the bears will be looking at $810 but ultimately the multi-year support just above $750 will come into focus.