Platinum group metals (PGMs) is a term used to refer to six metallic elements: platinum, palladium, iridium, rhodium, ruthenium, and osmium. Although they are not as well known as certain other hardware (gold or silver), their usage is widespread. In fact, a quarter of all goods produced today either had PGM involved in the manufacturing process or contained one of these metals. Since platinum and palladium are the most common of the PGMs, we will focus our attention here.
The largest use (50% of total output) of these two PGMs is in the automotive industry, producing catalysts that reduce harmful automobile emissions. In addition, their unique physical properties promote their consumption in a number of other industrial applications. Palladium’s market includes electronic components for personal computers, cell phones, fax machines, as well as petroleum and dental applications. Platinum is used to produce jewelry, data storage devices, fiberglass, paints, nitric acid, anti-cancer drugs, fiber optic cables, fertilizers, and fuel cells.
The passage of more stringent emission regulations in the developed world and growing wealth in emerging markets is resulting in rising automobile sales, and, therefore, increased demand for catalytic converters. Purchases of vehicles in China, in particular, have been stellar in recent years. Still, there is plenty of room for growth. The East Asian giant has less than 100 automobiles per 1,000 people. In comparison, there are more than 400 automobiles per 1,000 consumers in the United States and Europe. The number is even lower in India and other parts of Africa, Asia, and South America that are experiencing economic growth. Therefore, the auto industry’s best days likely lie ahead.
Platinum is the most commonly used PGM metal in catalytic converters. Its price was recently $1,685 an ounce, compared to a more reasonable, but still strong $710 an ounce for palladium. Firming fundamentals for both metals in recent years has resulted in incidents of converter theft. Each converter can cost $1,000 to replace.
Platinum’s prospects, in particular, appear to be bright. It is efficient in oxidizing carbon monoxide and hydrocarbons, making platinum popular for diesel applications. For gasoline-powered engines, platinum and palladium are similarly effective. But, with the latter trading at a material discount, it is often the choice.
Restricted supplies are also supporting fundamentals. In South Africa, the biggest source of platinum, a number of government-mandated safety work stoppages have led miners to lower production guidance for 2012. In all, flattish year-over-year yields are probable in 2012 from the country, and a minuscule uptick globally.
Palladium’s supply outlook also appears hampered. Norilisk Nickel, which produces about 40% of the world’s total output, expects 2012 output to decline. Russia, which has historically accounted for 65% of the metal’s annual yield, has curtailed supplies in recent years. There is speculation that the country has either depleted this resource or is hoarding it in an effort to drive prices higher. Too, the aforementioned constraints in South Africa’s platinum sector are also hurting palladium supplies. The confluence of the these factors suggests certain publicly traded companies appear poised to reap substantial profits.
North American Palladium (PAL), one of few palladium producers in the world, is positioned to benefit from rising prices and an ongoing development program. It is in the middle of a mine expansion at the Lac des Lles (LDI) mine, which will boost output from roughly 100,000 ounces, to 250,000 ounces by 2015. Concurrently, cash costs are on pace to decline sharply during the same timeframe, positioning LDI to be one of the cheapest sources of the metal in the world. What’s more, the company produces gold. Development initiatives at the company’s Sleeping Giant gold site appear set to unlock potential, with expectations of a material advance in production in 2012, to 40,000-50,000 ounces. North American Palladium is also expanding mill capacity at other gold locations, bringing its annual gold yield outlook to over 120,000 ounces later this decade.
Stillwater Mining (SWC) is engaged in the development, extraction, and processing of palladium, platinum and other PGM metals, as well as the recycling of catalytic converters. Its primary asset is the J-M Reef, the only known source of PGMs inside the U.S. and one of the most significant resources outside South Africa and Russia. In anticipation of strong long-term market fundamentals, management announced two new development and potential expansion projects. Once work at the Blitz and Graham Creek plays is completed within the next five years, output should advance sharply.
Bear in mind that investments in entities that produces either of these metals are not for the faint of heart. A substantial portion of both elements is mined in Russia and South Africa, two countries where non-operational risk is high. Therefore, prices for platinum and palladium tend to fluctuate sharply. For those with a tolerant risk palate, the reward is potentially considerable. One only needs to look at the global auto manufacturing industry to realize this. In 2011, there were approximately 80 million automobiles produced. This number may well increase by 50% over the next decade.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.