Platinum

Even today, platinum normally remains in the shadow of the two most prevalent precious metals: gold and silver. Nevertheless, platinum is probably the precious metal that modern industrial society relies on the most. The range of its applications extends from relatively old technologies like steel and petroleum processing to pharmaceuticals for fighting cancer or use as a component for coating computer hard drives.

South Africa is the #1 producing country by far

The relatively low annual extraction of platinum seems to contradict the innumerable ways in which it is used. Only about 250 tons of it are mined every year, a quantity that would fit under any rather large dining table due to its high specific weight. South Africa is by far the most important producing country: the country on the Cape is responsible for almost 80% of worldwide production. Three mining companies (Anglo Platinum, Impala Platinum und Lonmin) dominate production, followed by several smaller companies like Northam and Aquarius Platinum. Since the price of platinum began to rise in the middle of this decade, a series of additional so-called junior mining companies has been planning to start production at some time in the future. However, for the time being, they have encountered major obstacles regarding the accessibility of trained workers, capital and infrastructure, such that many of these projects have had to be delayed until well into the next decade.

Russia follows in a distant second place on the list of the top-producing countries. Russia is said to account for less than 30 tons or 15% of worldwide platinum production, for the most part in conjunction with the much more prevalent palladium as a byproduct of nickel mining. Thus Norilsk Nickel is by far the leading Russian supplier of platinum.

Currently, all other producing countries, including the US, Canada and Zimbabwe, are mere also-rans. However, Zimbabwe has large deposits, which may be exploited more intensively after the political situation has settled down.

In view of the difficulties faced not just by the junior mines, it is unlikely that South Africa will achieve a significant expansion of production in the coming years. In other countries, there is virtually no potential for increased production. This is particularly true because existing mines on the Cape are approaching the end of their life cycles, so that new projects are initially designed only to replace existing capacity. Mines are also challenged by significantly higher production costs in recent years due to higher expenditures for raw materials and personnel. Finally, the fact that international platinum trading is conducted in dollars means that the weakness of the US currency has contributed to a reduction in producers’ revenues. This does not make increased production, which under certain circumstances could lead to an oversupply in the market, appear very attractive.

Much as South Africa dominates the supply side, the global automotive industry dominates the demand side. Most of all, platinum is known for its use in automotive catalytic converters, but there are a whole host of other, more hidden applications. For example, platinum is also used in airbag triggers, lambda sensors and spark plugs. In addition, there are applications for platinum in the glass industry, in the conversion of crude oil into gasoline and in the steel industry.

However, as far as quantities of metal being used are concerned, all other application areas lag well behind emission controls, which consume almost 160 tons of platinum per year. Of that amount, almost 28 tons or about 17% are derived from recycled catalytic converters; the rest is newly mined. The amount of platinum used in catalytic converters as well as in diesel particulate filters has been climbing steadily, more than doubling in the last 10 years. This increase is partially attributable to the tremendous popularity of diesel vehicles, particularly in Europe. Until 2007, only platinum could be used in these vehicles for emission controls. Since then, however, it has been possible to replace up to 30% of the platinum with much less expensive palladium. Manufacturers of gasoline-powered vehicles have always been able to choose between platinum and palladium. Recently, they have relied on palladium for cost reasons.

Dependence on platinum makes continuous access to this material critical to the automotive industry. Of course, automobile manufacturers have modest inventories, but in the event of a disruption in South African production, the stocks would not last longer than four to six weeks. In February 2008, there was a foretaste of the potential consequences of such a disruption, when platinum mining in South Africa was halted for a week due to problems with the electrical supply. Within a few weeks, the price almost doubled as a result, reflecting the expectation of additional shortages. In this situation, it wasn’t even the automotive industry that purchased the metal, but speculators instead, who bought in the hope of achieving a quick profit and thus contributed to restricting the supply.

In the future as well, the performance of the platinum market will be closely linked to the automotive industry. In the short term, it can be assumed that a weak economy should lead to lower automotive sales and thus to less overall use of platinum. In addition, the relatively high price of diesel fuel in some countries should result in a lower market share for diesel-powered vehicles. At the same time, new growth markets in Asia and the Commonwealth of Independent States favor gas-powered vehicles, whose catalytic converters are likely to use palladium.

On the other hand, the demand for platinum over the medium and long term should increase regardless, because many countries are tightening emission standards for trucks and other heavy vehicles. Contrary to past experience, such restrictions should make the use of catalytic converters and particulate filters mandatory in the future.

An additional potential application for platinum is the future technology of fuel cells. So far, researchers have not found any alternative to the white metal for this purpose. Furthermore, a fuel cell for a passenger car requires much more platinum than an internal combustion engine.

The demand for platinum in other industrial applications has climbed steadily in recent years. However, these industries do not use this metal in their end products as much as in the manufacturing process. Examples include the glass industry, which requires 14 tons annually, and the oil industry, which requires almost 7 tons.

The silicon industry (approx. 6 tons) and the electronics industry (approx. 14 tons) are notable exceptions, since the platinum they use cannot be recovered.

The jewelry business is the second largest application area for platinum. It ranks well behind the automotive industry, but well ahead of other industrial users. Even so, almost 50 tons per year are purchased, primarily by Chinese and Japanese consumers. As a rule, this metal is not normally lost forever, but is recovered by the recycling process only after a very long period of time. Demand from the jewelry industry peaked just prior to the year 2000, but it has sharply declined since 2002 at the latest, in part as a result of high prices. A reversal of this trend can be expected only if the price of platinum once again declines well below $1,000 per troy ounce.

The white metal has resumed a major role as an investment product since the emergence of innovative investment products like exchange traded funds (ETFs). Previously, it was possible to acquire platinum only in the physical form of coins or bars. Following an interim peak at the turn of the century, relatively infrequent use was made of this option. Only after 2007 did ETFs see to it that institutional investors (such as pension funds) also sought the metal in substantial quantities. However, the sustainability of such investments cannot currently be predicted. The price decline in the late summer of 2008 led investors to close out their positions on a large scale and thus turn their backs to the metal. This partially offset the price increase caused by purchases during the previous winter. Over the course of 2008 investors had to adjust—at times painfully—to the inadequate liquidity of the platinum market and the extreme volatility of the price. Both factors made it extraordinarily difficult to forecast potential income.