Industry Trend Analysis - EV Growth To Shake-Up Platinum and Palladium Markets - DEC 2017

BMI View: The rise of electric vehicles will have a negative long-term impact on demand for platinum and palladium, due to their use in conventional gasoline and diesel vehicles that will be increasingly phased out. Despite this, the low penetration of electric vehicles in the broader autos market forecast over the next 10 years and continued growth in platinum/palladium-containing hybrid vehicle sales will sustain demand for both metals in the shorter term, delaying any serious effect in this regard over 2017-2026.

In previous analysis we outlined how the electric vehicle (EV) revolution will be a positive demand game-changer for various metals including lithium, cobalt, copper and nickel ( See 'Commodities Of The Future: Long-Term Consumption Patterns', April 6 2017' & 'Long-Term Nickel Demand To Rely On EV Growth', August 18 2017). Conversely, both platinum and palladium metals will be among the biggest losers from EV growth due to their primary use in internal combustion engines (ICE), found in gasoline and diesel cars, that will witness a decline in production as automakers look for more environmentally friendly options. However, the continued use of PHEVs (Plug-In Hybrids) and hybrid vehicles that comply with emissions regulations, coupled with the low penetration of EVs expected in the coming years means any considerable negative demand pressure will only be felt on a multi-decade horizon.

On the supply-side, ongoing palladium and platinum supply disruptions among major producers will tighten both markets in the coming years, providing upside pressure to an otherwise challenging price environment over our forecast period. We expect prices for both platinum and palladium to continue diverging in the coming quarters. For the first time in over a decade, palladium prices broke through the USD1,000/oz in October 2017 and overtook platinum prices. This price trend comes as demand for platinum, used primarily in diesel-fuelled vehicles, continues to takes a hit from the repercussions of the Volkswagen diesel emissions scandal ( See ' VW: Wider Implications Of Emissions Scandal ', September 24 2015) which has subsequently benefitted palladium, used more widely in the now favoured gasoline-fuelled vehicles.

Contrasting Fortunes
Platinum and Palladium Spot Prices, USD/oz
Source: BMI, Bloomberg

Electric Vehicle Growth To Harm Demand Outlook...

Platinum and palladium are primarily used in catalytic converters which convert toxic gases and pollutants from ICE vehicle exhausts into less toxic pollutants. Up to 80% of demand for palladium and 40% of demand for platinum is accounted for by their use in vehicle exhausts. The entry of new EVs that have no exhaust and therefore no catalytic converters made of platinum or palladium, will pose considerable downside risks to both metals' future demand outlook. BMI's Autos team expects the shift from ICEs to EVs to become a growing trend due to government subsidies for electric car purchases aimed at supporting carbon emission targets. For example, automaker Volvo announced earlier this year that every car launched from 2019 onwards will have an electric motor. Furthermore, major markets have already announced goals to completely ban ICE vehicles in the coming decades in order to comply with emissions targets. The UK and France will ban the sale of new gasoline and diesel cars by 2040, India aims to do by 2030 and Norway by 2025, while up to 10 other countries have announced similar initiatives ( See ' 2040 Petrol/Diesel Sales Ban: Initial Thoughts ' , August 1 2017).

Fast EV Sales Growth But Still Low Penetration
Global - Passenger Car Sales By Engine Type (Historic and Forecasts)
Source: IEA, National Sources, BMI

... But Only In The Long-Term

Despite the growing demand-side risks, growth in EV sales volumes will only begin to significantly dent platinum and palladium consumption on a multi-decade horizon. Even though we forecast the pure EV fleet to grow by an annual average of 41.6% from 2016 to 2025 to 23.6mn units, electrified cars will only account for 3.5% of total passenger cars on the road by 2025. Furthermore, hybrid cars (PHEVs or conventional hybrids) which use both electricity and ICEs and therefore contain palladium or platinum, will remain in use for the foreseeable future. Hybrid vehicles are considered to be environmentally friendly enough to not be included in the gasoline and diesel vehicle bans being imposed by governments globally. For example, hybrid vehicle sales will not be included as part of the ICE-vehicle ban proposals in the UK, France and Norway. We are forecasting robust annual average growth of 36.0% for PHEV sales over 2017-2025, faster than any other vehicle type. This will offset the effects of slowing ICE sales growth rates that would reduce overall demand for platinum and palladium in the coming years.

Output Improving But Will Remain Subdued
Select Countries - Platinum & Palladium Average Production Growth (%)
Source: BMI, USGS

Supply Disruptions To Drive Market Tightness

On the supply-side, continued disruptions among struggling platinum group miners and weak project pipelines will weigh on production growth in key producing countries. In South Africa, the largest platinum group metals producer in the world, the sector will continue to suffer from high costs, labour unrest and exchange rate volatility. For example, Anglo American Platinum reported a 20.0% drop in earnings in H117 due to lower production results stemming from a strong rand and low platinum prices (see first chart below), while Lonmin announced in October 2017 that it plans to cut over 1,000 jobs before end of year, plagued by rising costs.

Low Prices and Rising Costs Taking Toll
Select Companies - Net Income (USDbn)
Source: BMI, USGS

Russian miner Norilsk Nickel witnessed a 4.0% y-o-y drop in platinum output over H117 due to low platinum prices, while palladium production for the company stagnated over the same period. We expect few capital investments into new projects by platinum group miners in Russia in the coming years, with only two new palladium projects and one new platinum project currently in the pipeline, according to our key mining projects database. As a result both Russia and South Africa will witness minimal production growth in platinum and palladium over 2017-2026 adding to the existing market deficits, which in the case of palladium is close to 770koz as of September 2017, according to Citigroup.

Key Platinum & Palladium Producers
Geography Indicator 2015 2016e 2017f 2018f 2019f 2020f 2021f
National Sources/BMI
South Africa Platinum Mine Production, moz 4.02 3.80 3.65 3.51 3.46 3.50 3.63
South Africa Platinum Mine Production Volumes, % y-o-y 3.57 -5.50 -4.00 -3.80 -1.32 1.17 3.65
South Africa Palladium Mine Production, moz 2.35 2.37 2.42 2.46 2.48 2.49 2.51
South Africa Palladium Mine Production Volumes, % y-o-y 10.89 1.10 2.00 1.50 1.00 0.50 0.50
Zimbabwe Platinum Mine Production, moz 0.44 0.46 0.42 0.42 0.42 0.43 0.43
Zimbabwe Platinum Mine Production Volumes, % y-o-y 0.80 3.17 -7.50 -2.00 1.00 1.50 1.50
Russia Platinum Mine Production, moz 0.81 0.82 0.82 0.82 0.81 0.82 0.83
Russia Platinum Mine Production Volumes, % y-o-y 0.00 0.50 0.40 0.00 -1.20 1.00 2.00
Russia Palladium Mine Production, moz 2.82 2.82 2.83 2.86 2.91 2.95 2.99
Russia Palladium Mine Production Volumes, % y-o-y -3.42 0.00 0.50 1.00 1.50 1.50 1.40
Canada Platinum Mine Production, moz 0.24 0.29 0.29 0.31 0.31 0.31 0.32
Canada Platinum Mine Production Volumes, % y-o-y -3.93 18.44 1.00 5.00 1.00 1.00 1.00