Introduction to Platinum

Thirty times rarer than gold, platinum is found at very low concentrations in the Earth’s crust. Platinum extraction from mining is concentrated in only three geographical locations in the world, with 80 per cent of all production in Southern Africa. Around 6 moz (190 metric tons) of platinum is mined worldwide each year, compared to 108 moz (3,300 metric tons) of gold. Each year, a further 2 moz (60 metric tons) of platinum comes from recycling, predominantly from autocatalysts in end-of-life vehicles.

Non-investment platinum demand is broadly split between three segments: automotive applications (mainly autocatalysts in diesel vehicles) at c.40 per cent of demand; jewellery, also at c.40 per cent; and industrial at c.20 per cent of demand.

Platinum has strong, long-standing associations with the luxury goods market, especially in western markets and Japan. Recent growth in demand for platinum jewellery has come from the US, China and India, which maintained double digit growth in 2018. Research has shown platinum to be the precious metal most associated with love and the expansion of platinum into global jewellery markets is rooted in buyer behaviour in the bridal sector, especially among millennials, although self-purchasing is becoming an increasing trend.  

Industrial uses of platinum are myriad and industrial demand has quadrupled over the last thirty years. For example, its catalytic properties are used to make nitric acid for fertiliser and in the petrochemical industry to make higher octane fuels during the reforming process. Platinum’s high melting point, stability and non-corrosiveness are vital to the glass making industry, as it can withstand the high temperatures necessary without distortion or causing contamination. Light emitting diode screens and glass fibre are produced using platinum.

Automotive demand – traditionally the strongest demand sector for platinum - suffered as a result of the emissions testing scandal of 2015. However, the rate of decline is easing, and consumer confidence in diesel vehicles may return as new, more stringent emissions standards come into force globally.

For the past 50 years, platinum has traded at a premium to gold for over 80 per cent of the time as its supply/demand fundamentals added to its ‘precious’ value. However, in recent years, negative sentiment, rooted in concerns over the decline in demand for platinum in jewellery and autocatalysts, has seen this premium eroded.

Today, platinum’s investment case is becoming more widely known. The reasons for past price weakness are better understood and supply/demand fundamentals are showing signs of strengthening (Figure 2), with demand growth signalling future deficits. On this basis, platinum looks undervalued relative to gold and silver, with its price still close to an all-time low, presenting a low-risk entry point for investors.

This re-reading of the platinum investment case and consequent shift in sentiment, recognising upside potential as well as inherent supply constraints, is reflected in 2019 year-to-date growth in ETF holdings, as shown in Figure 3.

There is significant upside on the horizon for platinum automotive demand. In Western Europe, automakers are now required to comply with new European fleet CO2 emissions targets. As a result, automakers are likely to resume the active promotion of diesel cars (which was halted following the 2015 emissions scandal), because increasing the proportion of diesel cars sold will assist in meeting emissions targets and avoiding costly fines. The resultant increase in sales of diesel cars will have a positive impact on platinum demand – for example, a 4 per cent increase in diesel share equates to an extra 100 koz of platinum demand per annum. Outside of Europe, the high price of both palladium and rhodium, coupled with constrained supply, argues for substitution from palladium to platinum in gasoline autocatalysts, presenting further upside potential for platinum, especially as China 6 emissions regulations kick in, which are even more stringent than US and EU regulations.

So far this year, the palladium price has traded, on average, US$595/oz higher than platinum. This is well beyond the level that autocatalyst manufacturers have suggested as being the point of substitution on cost grounds alone. Johnson Matthey expects palladium’s eighth consecutive deficit in 2019 to be over 800 koz, with significant palladium demand growth expected as China 6 is implemented. Significantly, over 80 per cent of palladium is produced as a by-product, to nickel in Russia and platinum in South Africa, so meaningful short-term palladium supply growth is not possible. A very limited amount of palladium substitution by platinum would be material for platinum demand; only 5 per cent substitution would increase annual platinum demand by 400 koz.

Demand for platinum fuel cell electric vehicles (FCEVs) is on the rise, with growing acceptance that FCEVs will sit alongside battery electric vehicles as part of a multi-drivetrain solution to achieve zero on-road emissions. In the near term, platinum demand from FCEVs will come from heavy duty applications.

Platinum is rare, concentrated in one location with underground reserves requiring significant capital investment to extract and refine. Platinum mining output from South Africa has fallen steadily since 2006, despite ten years of rises in the price of the basket of metals sold by platinum mining companies. New mining projects coming on stream will not compensate for the expected reduction in yield from mature, high-cost operations in the near term and the outlook is pointing to a reducing surplus with potential for a deficit as latent demand growth takes off.

Platinum is suited to many more private and institutional portfolios than currently include it and there are several ways to include platinum as an investment: physical bars and coins (typically 99.95 per cent fine bullion); online bullion accounts; physically-backed exchanged traded funds; and through futures contracts.

With the high correlation between the prices of platinum and gold (even after removing the effects of the USD), platinum performs much of gold’s diversification role and offers upside potential should it revert to a position where its price reflects supply/demand fundamentals that recognise upside from demand growth and its industrial value-in-use. Recent NYMEX positioning supports the view that this is beginning to happen, with recent short-term prices being positively affected by net investor positioning on Nymex (Figure 4).

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