(Thomas Mak, Farzan Faizeen)
From originally being viewed as an obstacle for gold mining due to its intractable nature, it is an understatement to say that the demand for platinum has grown. After World War II, platinum’s unique combination of intrinsic properties has been relied upon in a range of processes, namely in the healthcare industry with applications in cancer treatments but also in catalytic converters, required in cars to reduce the toxicity of exhaust emissions. These wide-ranging applications have changed the structure of the market, with net consumption increasing nearly tenfold between 1946 and 1986 (see Table 1).
(Source: The Platinum Market: Recent History and Future Developments)
However, the price of platinum in comparison to over a decade ago has decreased. In 2008, platinum reached its peak of $2,276.00. But in 2019, this figure had decreased to $984.20. This is partly due to the transition from diesel/petrol cars to electric cars since the latter does not need to install a catalytic converter because electric cars themselves emit no harmful greenhouse gases. Nevertheless, this transition is still relatively slow because different countries place differing levels of importance on the environment, thus the role of platinum in catalytic converters may be sufficient and demand may proportionally increase in some areas of the world. However, it is unlikely it will reach the level it once was anytime soon.
Impact of COVID-19
Due to COVID-19, there has been a further increase in the overall decline of the platinum market. South Africa, the largest platinum producer in the world, had forced mining companies to halt or radically reduce production on 27/3/2020 due to a 21-day lockdown invoked by the government, which led to mining companies declaring force majeure on several contracts. Moreover, the government’s COVID-19 lockdown measures inevitably affected South Africa’s platinum supply performance in H1 as the supply of platinum has decreased by 19% to 1773 koz in Q4 2019. In respect of demand, due to the COVID-19 pandemic causing a decline in jewellery and automotive sales, the WPIC has predicted an 18% decrease in platinum demands compare to 2019.
Despite the COVID-19 pandemic bringing the global automotive market to a halt, the impact of tightening emissions standards has helped to prevent a steep decline in platinum demands. With climate change rising to the top of the political agenda after 60 countries vowed to take active steps in reducing greenhouse gas emissions at the 2019 UN Climate Action Summit, governments around the world are putting stringent regulations in place to combat the ongoing climate crisis.
Although a collapse in global car production demand has caused a 20% decrease in platinum prices in Q1 2020, World Bank’s analysts remain optimistic in platinum’s longevity and growth potential as they predict that platinum prices will gradually bounce back and average 8.8% higher than 2019.
World Bank’s confidence in platinum can be attributed to the following two factors: first, regulatory implications. The demand for platinum will gradually increase because governments would be eager to reduce the harmful emissions of hydrocarbon and carbon monoxide to legislated levels. Second, supply disruptions. From December 2019 to March 2020, South Africa suspended platinum production twice due to the threat of COVID-19 and nation-wide power cuts. Temporary suspensions on platinum production provided additional tailwinds to platinum prices as the supply chain faces substantial disruptions.
(Source: International Platinum Group Metals Association)
By far the largest use of platinum in global markets today is automobile catalytic converters, a pollution containment device fitted to vehicles. Many fast-growing emerging markets like Brazil, China, India, and Russia – the BRIC countries – are introducing more environmental regulations to reduce harmful emission from automobile engines.
Take China as an example, local car manufacturers are already modifying some of the existing mechanical designs to comply with the China VI regulatory standards. For commodities analysts, the most important provision in the China VI regulation is the mandatory requirement for all heavy-duty vehicles to have diesel particulate filters (DPF) fitted in engines by July 2021. DPF is a ceramic filter that is designed to trap pollutants inside the filter and reduce the level of greenhouse gas exiting from engines. Platinum is a key component of DPF that covers the inner structure of the ceramic filter. Thus, we can anticipate a higher demand for platinum because China – the largest automobile market in the world – relies on DPF to reduce harmful emissions and improve air quality.
While the introduction of the China VI regulation is driving up demand for platinum, power outages in South Africa have caused a fall in platinum supply. South Africa’s monopoly state-owned utility, Eskom, was forced to impose power blackouts on 10/12/2019 after facing severe difficulties in repairing power plants and finding adequate replacements.
The decision to impose nation-wide power cuts brought mining companies to a standstill. Among them is the world’s largest primary producer of platinum– Sibanye-Stillwater. Following the announcement of the blackout order on 10/12/2019, platinum prices surged by 2.7% (see the graph above) because the slump in platinum supply outpaced the physical demand.
With the COVID-19 pandemic plunging the global economy into deep contraction, commodities have become an attractive alternative for investors. Historically, precious metal commodities like gold have dominated the headlines due to its longstanding reputation of being an effective hedge against currency fluctuations when central banks act to accommodate shocks like economic recession and macroeconomic volatility. However, the growth potential of platinum also deserves recognition. With platinum sets to play a catalytic role in the global ambition of reducing greenhouse gas emissions, coupled with the concern of South Africa’s ability to supply platinum in the long-run, platinum finds itself in the enviable position of ‘high demand – low supply’.
Nonetheless, investors should approach platinum with a healthy degree of scepticism because platinum does have its own downside risks. For instance, the prevalence of electric cars would certainly reduce platinum demands because catalytic converters will never be used in electric car engines. The ongoing transition from fossil fuel producing engine (i.e. petrol/diesel) to non-fossil fuel producing engine (i.e. electric) may have a negative impact on the long-term growth potential of platinum.
Economic recession: A substantial decline in economic activities at a specified region. Typically, two consecutive quarters of GDP decline would be regarded as a recession. But apart from GDP, factors like unemployment rates, industrial production and retail sales are also considered when defining recession.
Macroeconomic volatility: Measured by calculating the standard deviation of the annualised return over a certain time period, and the value of the standard deviation would provide an indication on whether unemployment, inflation and interest rates would increase or decrease over a given period of time.
Downside risks: The risk of actual net return being below the expected return rate. Or, the risk of being uncertain about the margin between actual net return and expected return rate.
Force majeure: A contractual clause that alter parties’ obligation and liabilities under a contract when an extraordinary, unforeseeable event (e.g. pandemic, labour strikes, civil war) occur that is out of the parties’ control.
H1: The first half of the fiscal year (from April to September), whereas H2 is the second half of the fiscal year (October to March).
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