Thursday 29 June 2023

Deflating speculative bubble of catalyzer precious metals

For more than three years, palladium has been more expensive than gold. At best gold briefly reached parity. For one ounce of Rhodium you paid, at its peak price, more than tenfold the price of gold at that moment. Both anomalies have since disappeared. Is the speculative bubble of catalyzer precious metals deflating?

I would like to start with a remark from the October 2022 article: Diverging price trends of 'white' precious metals

"Electrification of the car fleet may however imply the end of palladium shortage, let alone its need for catalyzers. Again, investors are not looking this far forward."

Finally it seems to be dawning on speculators that the European Commission is serious about its intentions to ban the sale of new fossil fuel powered vehicles from 2035 onward within the EU.  Japan intends  adopting the same date to ban new fossil fuel powered vehicles. These will not be the first bans, but the first really influential bans on the total car manufacturing market. Norway has decided to ban registration of new fossil fuel driven cars as early as 2025. Iceland will follow suit in 2030. The Chinese Island province Hainan also plans to ban new fossil fuel driven cars in 2030.

German car manufacturers kept open a loophole for the use of synthetic fuels. That should allow new hybrid vehicles to be sold fifteen more years.

Even nowadays, low emission areas in the historic center of many European cities are limiting the use of fossil fuel driven cars to recent models with catalyzer and additional dust filter. 'Park and ride' is not only easier, it gets compulsory for many car owners travelling to a European city.

The below table pictures the current (June 28, 2023) price of the precious metals, together with a (post Nov-2010) all time high, preceded by its date. Also shown is an indication of how deep the price has dived as compared to the all time high. All time highs are spot prices on a closing basis. Moreover for Rhodium and Palladium (both have a high bid/ask spread) average of bid and ask is adopted. Only recently the spread was reduced for Palladium from $150/oz to $60/oz. (For gold it is only $1).

Are we at or near the bottom?

If history teaches us anything, I would argue: no. Rhodium has been less expensive than gold for several years. As the yellow metal peaked in 2011 near $1900/Oz, one could buy more than two ounces of Rhodium for that kind of money. For decades, Palladium used to be the cheaper (Platinum Group Metals) PGM-metal when compared to platinum. Nowadays, you can no longer buy three ounces of platinum for the price of one ounce of palladium, but the latter still sells at a premium of nearly 40% to platinum, which still only quotes about half the price of gold. For decades, platinum had been more expensive than gold.

Will those long standing historic ratios ever return? Hard to say... But the anomalies of the recent past seem having run their course.

Graphs (click any graph to show it on its true maximum size and resolution)

The article mentioned above includes long term graphs spanning decades. I will presently focus on the last few years: Data from Jan 2021 onward include the all time highs for both Palladium and Rhodium.  Silver and platinum had been weakening relative to gold for quite a while. Silver had reached its lowest value in over a decade at the start of the pandemic. Is its recovery sustainable? Platinum has never regained parity to gold since early 2015. Will this impairment last forever?  Graphs don't prove anything for the future, they merely show a tendency that may have some time to evolve.

Rhodium and Au:Rh

Rhodium (left axis, blue) and Au:Rh (right axis, brown)

The days of one ounce of rhodium selling for up to 15 Oz of gold are definitely behind us. These speculative peak rhodium prices won't be seen again anytime soon. Other than catalyzer material with a superb quality in breaking down nitrogen-oxide compounds, rhodium has only few industrial applications. It is best known for its ability to protect silver mirrors from degrading under the influence of air pollution containing sulfuric compounds.

Palladium and Au:Pd

Palladium (left axis, blue) and Au:Pd (right axis, brown)

Palladium is the one-trick pony in the PGM stable. The entire mining production is used for catalyzer material. Mainly since it is the preferred metal in catalyzers for regular car gasoline. Its excessive price has set up catalyzer producers in replacing some Pd by Pt (with an even superior wear and heat resistance). However it takes some time to have the new designs tested and approved. Palladium recovery from spent catalyzers is an important source for raw material. Its availability mainly depends on the pace of car fleet renewal. Recycling is a lot cheaper than mining.
While less catalyzers will be needed as more new electric cars are produced, the availability of spent catalyzers will decline only gradually and its (recycled) palladium volume will cover a larger fraction of the supply than what is currently the case. The days of palladium shortage are probably behind us.

Platinum and Au:Pt

Platinum (left axis, blue) and Au:Pt (right axis, brown)

The all time high of the Platinum price dates back to 2008 when it reached $2276. In our observation period since Nov 2010, its price never exceeded $1650/Oz, which is the current maximum we work with. Until early 2015, platinum most often traded at a premium relative to gold. As diesel engines fell out of favor, less platinum was used in producing the specific catalyzers which needed this material.
Fleet renewal provided more platinum, which -added to mine production- created an excess supply.
Platinum prices have been weak since almost a decade. Platinum currently sells at only half the price of gold, a ratio only seen for brief lapses of time in the past. Last few years, platinum has had difficulties in upholding $1000/Oz for longer than some weeks, although the very deep swoons beneath $800/Oz no longer occur. On the long term, low platinum prices may lead to mine supply destruction. Several platinum mines were kept afloat because of their secondary production of both palladium and rhodium.
As those prices plummet, mining profit margins are dwindling. Designing-in platinum for new catalyzers may provide the additional demand enabling prices to stabilize. 

Unlike palladium, the industrial demand (outside the car industry) for platinum is significant . Electrolysis of water for hydrogen production requires platinum electrodes. Fuel cells producing electricity from hydrogen equally require platinum. Whereas it is unlikely that the large fleet of passenger cars will ever run on hydrogen, it is the preferred combustible for heavy vehicles which need to operate continuously and need to refill quickly. 

Silver and Au:Ag

Silver (left axis, blue) and Au:Ag (right axis, brown)

Over the observation period, silver reached a maximum of $49/Oz late April 2011. That is nearly at par with the historic maximum of $50/Oz early1980. 

The Au:Ag ratio has spiked to above 120 at the onset of the pandemic in 2020 when silver plummeted far more than did gold. Its recovery also brought it to $30/Oz, a price level not seen again since summer 2020. After its 2022 summer swoon, silver started an uptrend and is more or less keeping pace with the yellow metal. The uptrend of the Au:Ag ratio seems broken, though its early days to call it a reversal.

The silver demand in industry is substantial, with solar panels taking up the largest volume. Silver is a better electricity conductor than is copper and it is chemically more stable. Minting of circulation silver coins is a thing of the past, but so is recovery from used coins. Much the same story can be told about photography. Silver usage in jewelry and in bullion investment coins or commemoratives is fluctuating. It often exhibits a pro-cyclical demand pattern. Silver and gold bullion ETF's are rather popular, unlike their PGM counterparts. 

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