The platinum group metals (PGM) sector has performed very well overall over the past year thanks to a strong rebound in global auto sales. However, since the end of April, we have seen a dramatic drop in the prices of these stocks.
Should investors be concerned? What is the perspective of the PGMs?
In our opinion, the recent price corrections are exaggerated. The long-term outlook for the sector remains uncertain, but we remain optimistic about its potential in the medium term.
Surge … and fall
Since July last year, prices for platinum, palladium and rhodium have skyrocketed following a significant rebound in global car sales, which has more than offset the recovery in supply following the Covid-19-related stoppages. However, since the end of April, prices have fallen sharply from high levels.
At the time of writing, palladium was down more than 30% to less than $ 2,000 / oz, platinum was down 25% to less than $ 1,000 / oz, and rhodium was down more than 50% to about $ 14,000 / oz.
These are massive fixes, but it’s worth noting that despite these drops, palladium and rhodium prices are still very high (while platinum prices remain low) by historical standards, as can be seen from the following graph:
Recent price corrections are likely due to lower car production due to global chip shortages. With almost all the palladium and rhodium going to the automotive market, it makes sense that the corrections were more pronounced for these two metals.
In our estimate, the impact on new car production has already been more than 8 million units, in the context of a total market of 92 million new cars sold in 2019. This has caused car inventory levels to decline to multi-decade lows and a boom in the second-hand car market.
The situation is still fluid, but it appears to be a temporary problem that will probably be resolved towards the end of this year and the beginning of next. There should also be pent-up demand as automakers replenish their inventory lines.
The bigger question is whether accelerating new EV sales will affect the medium-term investment case for PGMs.
In our opinion, the outlook until about the middle of the decade still looks quite favorable for the metal basket, with demand still strong. We expect the higher loads per vehicle to more than offset the lower sales of internal combustion engines.
Supply growth also remains weak after a decade of underinvestment. Current projects go a long way to offset the decline in the existing base over the next few years.
Therefore, our best assessment is that the market is currently in a sweet spot and that we are likely to continue to see prices comfortably staying above marginal cost levels for years to come.
The longer-term outlook for PGMs is more uncertain, as it is now clear that electric vehicles will become the dominant powertrain. Some industry estimates indicate that new battery electric vehicle sales will reach 40% of total new car sales in 2030, compared to about 3% in 2020.
This has a large negative impact on the demand for PGM, especially palladium and rhodium, since a battery electric vehicle does not need a catalyst. To compensate for this, in our price estimates for 2025 onward, we use much more conservative estimates for palladium and rhodium than current spot prices.
The possible offsetting factor for the loss of demand due to the rise of electric vehicles is the rise of hydrogen as an alternative fuel, where PGM-based catalysts are also needed. While the outlook remains unclear, it seems governments now realize that hydrogen must be part of the solution if the world is to meet its emission reduction targets.
Therefore, the increased use of hydrogen will offset, at least in part, the impact of declining demand for automobiles. Platinum appears to be the metal that performs best in this application, which could reverse the current scenario where palladium is in deficit and platinum in surplus. South African producers tend to produce much more platinum than palladium, so they would generally prefer higher platinum prices.
Dividends and buybacks
Last year, PGM companies made huge profits, and largely returned them to shareholders through dividends and buybacks. Northam essentially bought back 29% of its shares through the expedited termination of its deal with Zambezi BEE, which has been invaluable to all stakeholders.
Amplats has paid dividends of R220 per share since August of last year. That’s roughly 16% of the company’s current market capitalization.
In our opinion, the company’s stock prices never gave much credit for the very high palladium and rhodium prices seen earlier this year, but they still corrected significantly from their recent highs. Given that we anticipate a still strong medium-term outlook for PGM metals, we believe that the short-term price corrections are overblown and represent an interesting opportunity.
While there is still a lot of uncertainty regarding the longer-term outlook, even after recent spot price corrections, it is likely that most producers will be close to paying their current market capitalizations in dividends by mid-September. decade if current prices hold. Therefore, we are of the opinion that the risk / reward ratio is more biased upward for PGM miners.
Christiaan Bothma is an investment analyst at Sanlam Private Wealth.