In today’s Exponential Investor:
- Precious metal or industrial metal?
- Risks are different for platinum and palladium
- Palladium could jump higher…
Today’s article picks up from where we left things on Tuesday.
The platinum group metals (often written as PGMs) are palladium, platinum and rhodium. As I explained earlier in the week, all three are precious metals, as well as important industrial meals.
They are densest metals known on earth. Principal-PGMs are resistant to chemicals, heat and don’t corrode.
You’ll find them in jewellery, medical devices and a wide variety of electronics. It’s early days, but the three of them are also proving up with working hydrogen.
They are used in a wide variety of medical and electronic uses. But their most important modern use is in catalytic converters.
A catalytic converter sits near the car engine and breaks down the pollution that comes out of the exhaust.
In other words, it scrubs the exhaust fumes that come out of the back of your tail pipe before they enter the environment.
Basically, these metals turn carbon monoxide, hydrocarbons and nitrous oxide into carbon dioxide, steam and nitrogen – all of which are safe to breathe.
Palladium has been mostly used in petrol engines, whereas platinum has been widely used in diesel engines. Platinum can be substituted for palladium in petrol engines. As the price of palladium increased rapidly in the last five years, car makers have started to substitute palladium for platinum.
Rhodium on the other hand is the best for nitrous oxide missions in petrol engines, but there is no substitute for this metal.
The question we asked on Tuesday, is would you invest in any other them?
But the risks for palladium and platinum are different to most commodities…
Two countries control supply
Nearly 40% of the world’s palladium comes from a place you’ll never get to visit.
That’s not because it’s a 2,800km hike northeast of Moscow. It’s because you’re not allowed. Both foreign and local tourists are banned from the city of Norilsk.
In fact, for years this place wasn’t even on a map. Not even road signs notifying you the place is ahead. Which doesn’t matter anyway as this city has no ‘ground connection’. The only way to access it is by plane. And to buy a ticket, you need to have formal approval from the government.
Unlike other cities in Russia that suddenly appeared on the map after the cold war ended, Norilsk was ‘closed’ in 2001. The only people who are allowed here, are the ones that work and operate the world largest metallurgical and mining complex.
The argument is that the city is of ‘strategic’ importance because of the precious resource the entire city rests on. In addition to the palladium, the Norilsk mine produces 23% of world’s nickel supply, 10% of our platinum needs, 8% of the rhodium supply, 3% of our cobalt and 2% of all our copper.
The Norilsk mine, however, has caused an environmental mess. The city of Norilsk is one of the dirtiest in the world. The snow is black, and the air taste like sulphur. The life span of Belarusians and Russians who live here is ten years less than the average for the rest of Russia. Most mine workers retire at 45. Almost all of them end up with ventilator for the rest of their days. Not helping matters, the Norilsk mine is rests on a permafrost that is melting.
On the hand, South Africa produces 70% of the world’s platinum, and 90% of the rhodium. All of it coming from what’s known as the “Bushveld Igneous complex”.
As you might imagine, South Africa’s platinum mines come with different problems.
There have been significant water issues in the past. The power supply can be unstable due to both bad weather and industrial action.
Not only that, but the mines there are old and deep. The infrastructure holding it up is deteriorating, and the mine is now at depths that is reaching the limit of where people can work.
The Bushveld Complex is 2km deep and at that depth the temperature underground is hits 70 degrees Celsius.
The Bushveld ore body has been traced as far deep as 6km. Yet with today’s technology it is impossible to mine that deep.
Our tech limit tops out around 75 degrees based on machines capability, costs and of course people’s ability to work in heat beyond this depth.
These factors may prohibit us exploiting the full bounty of the PGE mines in South Africa.
Structural issues to understand when investing in platinum and palladium
Both the supply of platinum and palladium markets are relatively evenly matched with demand. Plus, the in-ground resources are sufficient to meet the world’s needs for several decades.
To boot, scrap platinum and scrap palladium fills any supply/demand gaps each year.
So, the reasons to invest in platinum and palladium aren’t because of a fear of a shortage of the stuff. There’s plenty to go around.
The biggest problem with the supply of platinum and palladium is that we assume there is nothing that would disrupt this.
The opportunity for investors is because supply is concentrated to just two countries.
One of those countries isn’t particularly friendly at the best of times, and the other is plagued by civil disruptions and energy insecurity.
Both the Norilsk mine and South Africa’s mine can, and do, easily come offline. For example, a severe flooding event at Russia’s Norilsk mine 2020 took 28% of palladium out of the market in one swoop.
Similarly, catastrophic flooding in 2019 meant that power was cut to platinum miners, reducing platinum output for months. Both events drove platinum and palladium spot prices up higher.
Palladium is yet to find its place among the energy transition. But with the palladium spot price double platinum’s, many manufacturers have been toying with substitutions and using platinum in place of palladium. Frankly the long term case for palladium is looking bleak.
In saying that, in the short term palladium presents the better opportunity. Why?
Not all manufacturers have shifted from palladium. There’s still adequate demand from automakers for the metal.
There is a very real risk that the Russian supply of palladium will be whipped from the market. Whether through sanctions, or because Russia decides too.
At present, Russia looks to have honoured all their palladium contracts. Yet the ongoing war in Ukraine and weaponizing of energy makes Russia unpredictable.
Don’t get me wrong. markets won’t fall apart if there’s no Russian palladium coming through. What it would do though, is spook the market when global supply and demand for palladium is evenly matched.
Russia’s palladium can be replaced over the long with substitution, but not in the short term.
If supply disruptions were to happen, you could expect the spot price of palladium to shoot up very quickly.
Platinum, however, is a more long-term play. I’ll make the case as to why in the weeks ahead.
Until next time,
Co-Editor, Exponential Investor
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