Originally published January 22, 2020
Last week was big for platinum group metals (PGMs). Stricter emissions standards in China proved to be the catalyst for a huge move in palladium. Palladium and platinum are critical components of catalytic converters. Catalytic converters are the main emission control devices for virtually all internal combustion engine (ICE) modes of transportation. New Chinese air quality regulations require 30% more palladium in catalytic converters, substantially increasing demand for this rare metal.
Increased demand for palladium is coming at a time when supplies are tight. Nearly all palladium is mined in Russia or South Africa, and much of it is a byproduct of mining for other metals like nickel and platinum. Nearly 85% of all palladium mined is used in catalytic converters. As the chart below illustrates, the palladium market has been in a deficit since 2012.
New Chinese requirements could cause this deficit to widen substantially this year. Analysts expect roughly 9 million ounces of palladium to be mined in 2020. Demand is expected to increase to roughly 10 million ounces, leaving an estimated deficit of 1 million ounces. Palladium prices have skyrocketed, briefly threatening $2,300 per ounce before backing off to current levels of $2,240 per ounce – a gain of 17.3% in the first three weeks of the year.
Data Source: Reuters/Datastream
Platinum Is Much Cheaper Than Palladium
Platinum is a more efficient alternative to palladium when it comes to catalyzing ICE exhaust. It can withstand higher heat and less of it is required to catalyze to the same reaction. Platinum is also getting cheaper on an absolute basis than its expensive cousin. As illustrated in the chart below, an ounce of platinum was over $1,100 more costly than an ounce of palladium in 2010. It is now $1,227 cheaper and appears to be getting more so by the day.
Data Source: FutureSource
Platinum’s $1,100 premium to palladium caused automakers to switch to palladium for their catalytic converters during the past last decade. Why haven’t they switched back? There are two reasons we can discern: electrification and certification. The first involves the belief that ICE-powered cars are going the way of the horse and buggy as electric cars drive the future. Since the amount of metal required for a catalytic converter is small, why spend a ton of money to retool when the demand for your product is bound to decline?
Changes in manufacturing processes also require environmental certifications across numerous political jurisdictions. This means a lot more testing, and a bunch of new paperwork, all of which cost money.
However, the world isn’t going all-electric overnight. Populous nations like India could join China and demand reduced emissions in their ICE vehicles. And, of course, there is price. Should the trend in the chart above continue, the gap between platinum and palladium will come to a point where it will make more economic sense to bite the bullet and switch back to platinum – electrification or not. We believe the market is getting close to this turning point. Platinum could explode, if and when this occurs.
Data Source: Reuters/Datastream
This is why we expect the near-parabolic rally in palladium to help platinum. Platinum sliced through our first upside objective of $1,000 per ounce largely due to the price action of its manic cousin. Platinum then immediately tested long-term resistance at $1,048 per ounce before backing off. This is good news for RMB Group trading customers who followed our suggestion to buy platinum futures a year ago, and for those who added to or established new positions suggested in our blog earlier this month.
Platinum continues to make higher highs and higher lows. It took out its old swing high of $1,001 per ounce last week and then closed above that level multiple times. This positive price action means we can move our risk point up to $880 per ounce. It also dictates new upside targets which replace the $1,000 per ounce and $1,200 per ounce targets we originally established. Our new targets are $1,080 and $1,230 per ounce, respectively.
We continue to like platinum – especially on setbacks. Key levels to watch are $1,048 (the resistance level the market just tested) and 2016 highs of $1,199 per ounce. A series of closes above $1,200 per ounce would signal an upside breakout. This could set the stage for sharply higher prices down the road.
The RMB Group
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