Written by Mandi Dungwa – Portfolio Manager
The transportation of people and goods is expected to evolve significantly as the world endeavours to reduce global greenhouse gas emissions to zero by 2050 – in our attempt to moderate climate change. This transition will materially impact the markets for platinum group metals (PGM). We explore these dynamics and our expectations for this evolving market.
Going green at full steam
Fossil fuel-powered internal combustion engines (ICEs) have been the main technology employed in transportation for the past 100 years. This is set to change as the world transitions to greener transportation modes. As charted below, the transport sector is responsible for 24% of global greenhouse gas emissions, with road transport making up over 70% of these emissions.
Since 1975, vehicular emissions have been managed and reduced using PGM autocatalysts, that reduce toxic gases and pollutants emitted from engines. Autocatalysis does not, however, eliminate these harmful emissions completely.
The passenger road vehicle segment is currently the largest contributor to global transport emissions, at around 45%. Efforts to tackle this have seen increasingly strict emission control standards being imposed and several countries and cities announcing upcoming bans on the sale of new petrol and diesel cars – many by as soon as 2030. There is much uncertainty around what the future mix of passenger vehicles will be, given the practical constraints with respect to the transition. Over the medium term, we believe that hybrid vehicles will increasingly replace ICE vehicles as they produce 10% to 75% lower carbon dioxide emissions and are more scalable than battery electric vehicles (BEVs).
BEVs or hydrogen fuel cell electric vehicles (FCEVs) produce zero carbon emissions directly and should therefore become the ideal solution in the long term. Despite ongoing research and development (R&D) around improving the energy efficiency of FCEVs, BEVs are significantly more energy-efficient and already more commonly found in this segment.
The widespread adoption of BEVs is, however, currently restricted because: (i) they are significantly higher priced than hybrid and ICE vehicles, given their high cost of manufacture; (ii) there is insufficient battery charging infrastructure in place; and (iii) manufacturers are not yet set up to produce sufficient volumes of BEVs and there is a scarcity of the raw materials that are required for batteries.
While hydrogen fuel cells may not be the leading technology in the passenger vehicle segment at present, we believe that it is the answer for the future of the heavy-duty vehicle segment. This is key for PGM demand going forward as there is a large requirement of PGM’s in these applications. Currently, this predominantly diesel-fuelled transport mode contributes just over 29% of global transport emissions.
Heavy-duty vehicles require large amounts of power to pull heavy loads across vast distances and high energy density FCEVs are proving more economically viable and efficient than BEVs in this area (which take longer to refuel and require much space to accommodate the large, heavy batteries used).
While hydrogen fuelled technology is still in its infancy – requiring further optimisation and a significantly wider adoption to lower the costs – truck manufacturers such as Daimler have indicated that it is their preferred zero emissions vehicle solution for long-haul, heavy-duty fleets.
The shipping and aviation sectors combined, account for over 20% of transport emissions. Technologies such as hydrogen fuel cells, sustainable biofuels and e-fuels will need to be implemented to effectively reduce emissions in these sectors. However, they are currently not commercially viable and require further R&D.
The movement towards zero emission mobility is largely dependent on government reduction target policies. In addition to banning the sale of ICEs, developed countries have committed to investing substantially in charging infrastructure for electric vehicles and to supporting the purchase of such vehicles through consumer subsidies.
Developing countries lag far behind. For example, 40% of used ICE passenger vehicles are exported to Africa, compared with only 2% of new vehicles being purchased there. Developing nations need to consider the trade-off between economic growth, affordability and sustainable development. This makes the transition towards greener mobility practically more difficult for them, with limited long-term visibility on a solution.
The knock-on effect for PGM demand
As 70% of 3E (platinum, palladium and rhodium) PGM demand comes from the automotive sector, developments in this area will have a material impact. Initially, an increase in the purchase and use of hybrid vehicles that continue to use autocatalysts in the same quantities as existing ICE vehicles, will support PGM demand growth. This will be boosted by the continued push for tighter emissions legislation by governments globally. Longer term, the increased use of electrified drivetrains will see PGMs used more frequently via the deployment of hydrogen fuel cell technology (mainly platinum, ruthenium and iridium).
Platinum is predominantly used in autocatalysts for diesel vehicles, while palladium and rhodium are more heavily used in petrol autocatalysis. The demand for platinum will benefit from FCEVs becoming the preferred choice in the heavy-duty segment as the platinum content in these technologies is higher than the current content per diesel vehicle. This is positive for the long-term platinum price, which is currently depressed by a surplus of supply over demand. We expect this situation will reverse in the face of declining supply and a rising demand environment.
Given its dominance in petrol autocatalysis, palladium is due to face a significant reduction in demand if evolving mobility trends develop in line with expectations. A declining passenger vehicle petrol ICE market share will reduce palladium demand in the medium to longer term and there appears to be few new sources of demand for the metal.
Oxides of nitrogen (NOx) are air pollutants emitted by diesel and petrol engines (including hybrids). These are harmful to humans and damage crops and natural ecosystems. Rhodium is particularly useful in controlling the reduction of these emissions. As such, we anticipate that the tightening of NOx-related emissions regulations will increase the demand for rhodium over the next decade. Following that, however, the decline of ICE vehicle production will see a reduction in demand for rhodium in line with palladium demand. The left table below explores the uncertainty that exists for the PGM market between the various stages of evolution over the next decade.
Other sources of PGM demand
Platinum is used in jewellery (28% of demand), owing to its purity, strength, resistance to fading and aesthetic appeal. We expect this segment to be supported by the growing middle class in China and India, and growing consumer incomes globally.
Platinum, palladium and rhodium also have a wide range of other uses in industrial applications, where they are used in the manufacturing of goods ranging from fertilisers to cancer medication. Ruthenium is used as a catalyst in many chemical and electrochemical processes and in the manufacture of semiconductors and hard disk drives. Being highly corrosion-resistant, iridium is used to make crucibles. While we expect the industrial demand for PGMs to be robust into the future as global economies grow, this source of demand will remain rather small.
Hydrogen power technology has the potential to accelerate the deployment of renewable energy, replacing a larger proportion of fossil fuels and bringing about progress in the decarbonisation of the energy sector. In addition to hydrogen fuel cells that use hydrogen to produce electricity, electrolysers are used to produce hydrogen by splitting water into hydrogen and oxygen. Platinum, ruthenium and iridium are key components in this process if Proton Exchange Membrane (PEM) electrolysers are used. While still a nascent technology, PEM electrolysers have significant potential, as demonstrated by the sizable investment into this technology taking place at present.
Supply and pricing outlook
The years between 2012 and 2018 saw very low PGM prices relative to mining costs, with a significant portion of South African mining supply making losses at this time. Producers responded by reducing the capital investment that sustains future production in favour of balance sheet preservation. Consequently, supply will decrease as existing mines deplete, to be increasingly replaced by growing supply from the recycling of autocatalysts (via the scrapping of older vehicles).
While South African producers have announced some incremental growth, these are only medium-term (five year) replacement projects and a declining production base is expected to follow thereafter. PGM miners produce a basket of commodities that vary in relation to geographical location. South Africa is well suited to benefit from the evolving PGM demand trends, given its exposure to platinum, ruthenium and iridium (above right).
The local PGM market picture
Currently, the PGM revenue basket is unsustainably high in our view. High palladium and rhodium prices are due to substantial deficits of supply relative to demand, but as mentioned, demand for these metals will decrease as ICE vehicle usage declines. Our medium-term expectations are for the PGM basket price to be supported by growing platinum and rhodium demand. Longer term, we anticipate a basket supported by growing demand for platinum, iridium and ruthenium from PEM electrolysers and FCEVs. Yet, the timing of this (and likely the extent) remains uncertain, which has led PGM company boards to opt for paying out cash flows to shareholders rather than investing in growing future production.
Our clients are invested in low cost South African PGM producers that are expanding production in the currently high PGM price environment and growing cash flows, such as Northam Platinum and Anglo American Platinum. Their low cost of production relative to competitors positions them favourably in the positive (but lower than current) metals price environment and acts as a defence against weakness in an uncertain, but evolving, PGM market.