Peak Platinum, Perhaps?

DETROIT () -- The very small club of platinum group metals producers and traders is currently basking in the warmth of sustained high prices for their highest volume products, platinum and palladium. This is due to the public perception that as more and more cars and trucks are built with internal combustion engines (ICEs), the demand for platinum group metals (PGMs) for emission control catalysts and particulate filters will increase ahead of supply.

In addition the public has been led to believe that even if there is ultimately a "hydrogen fuelled energy" economy in place of our current petroleum fuelled one the vehicles of that future will be powered by mobile fuel cells that will transform hydrogen to electricity that will be used indirectly, through batteries or directly by connection to electric motors attached to the wheels.

Since today the only practical technology known for transforming hydrogen to electricity involves catalytically extracting electrons from hydrogen gas on a platinum catalyst attached to a proton exchange membrane (PEM), and the amount of platinum needed by currently manufactured fuel cells of the appropriate size is 1 to 3 troy ounces per unit, it would seem assured that platinum has a rosy future in the OEM automotive industry.

But this perception is flawed because it doesn't take into account that:

  1. Since there is no hydrogen fuel production and delivery infrastructure, fuel cells, as generally and widely used electric generators, must await that development, and;
  2. The intermediate technology to decrease or eliminate the use of petroleum hydrocarbons as fuel, which if chosen now would be either hybrid (ICE and a battery) or all-electric (battery driven) cars and trucks will ultimately use no platinum group metals at all!

An analysis of the direction being taken under political pressure by the global OEM automotive industry leads to the conclusion that its usage of platinum group metals as emission control catalysts will decline sharply when and if hybrids, plug hybrids and all-electric vehicles come into mass production and that the development of fuel cells as automotive power sources is really in limbo due to the enormous cost today of the platinum group metal, mainly platinum, catalyst needed for each fuel cell, so that hybrids and all-electric vehicles may well become the final answer to eliminating the contribution of global warming gases asserted to be from automobiles, trucks and, even, trains.

The annual volume entitled Platinum published by the U.K.'s Johnson-Matthey, Ltd. consistently tells us that global new production of platinum and palladium is around 6 million troy ounces per year each. I rely for my analyses the (essentially the same) figures generated by the USGS, though, because the USGS is not concerned with affecting the market through the figures it publishes, it gains no competitive advantage by over-, or under-stating figures.

Both Johnson-Matthey and the USGS mention in their analysis of trends only some, but not all, of the factors that an end user, such as a car company purchasing department, takes into consideration when it is trying to forecast costs. I believe that investors should look at the components of the analysis of future trends used by such a large end user purchasing group to attain a much broader perspective than would be gained by listening to analysts representing producers and financial organizations with their need to safeguard negative information and to emphasize only what gives competitive advantage to their employers.

I have devised an acronym, S.T.R.ENG.T.H., to make the factors involved in forecasting needs and controlling costs for a commodity item by OEM auto makers' purchasing departments easier to remember, list and to discuss. I do not claim my list of factors to be exhaustive, and it may be somewhat repetitious, but it is easy to remember.

'S' stands for "substitution." The purchasing director will always ask, "Can a cheaper material be found that will do the same job and fit in the same space?"

In 2001, the price of palladium, then commonly used in automotive emission control catalytic converters as an oxidation catalyst, soared as speculators drove it to $1,100 per troy ounce from a price of a fifth or sixth of that just a year earlier. Financial advisors told the Big Three that the price would soon go to $3,000. One of the three, the Ford Motor Company, took the advice and locked in a huge quantity of palladium, perhaps a million ounces, for ongoing delivery at prices between $500 and $1,000 per ounce.

The other car companies, unlike Ford, did not completely depend on self-interested suppliers for research and development, so they asked their in-house R&D departments if a substitute material were available. Yes, they were told, platinum can be used for the same purpose in approximately the same quantities. The switch was made and the lack of demand caused by the automotive industry switch and by the fact that for the same reason, speculative pricing, the electrical industry switched out of palladium to cheaper nickel and silver alloys for contacts soon collapsed the speculative bubble.

Palladium has never recovered, and even though platinum has now achieved palladium's record 2001 price, there is probably not going to be a switch back, because of the next factor.

'T' stands for "thrifting," the industrial term for using less of a material to achieve the same result.

Two of the Detroit Three accelerated their thrifting of platinum for use in catalytic converters after the 2001 palladium price spike. A telling example of what GM has achieved is illustrated by the fact that today, in February 2007, the first buyer of a scrap catalytic converter from a 2004 GM full size car will pay between $50 and $75 for it, while he will pay up $750 for a scrap catalytic converter from a 2004 Lincoln Navigator. It is interesting to note here that GM, for example, does applied research in emission control catalysis while its largest cross-town rival no longer does, and instead depends on its suppliers for such research into how to use less of their products.

The automakers learned their lesson and switched from palladium to platinum. They do not seem interested in switching back, even in the face of higher platinum prices, because it is believed by OEM automotive financial staffs that the excess of palladium supply over demand is being manipulated, perhaps by hedge funds, and they do not wish to test that hypothesis by switching back again.

'R' stands for "recycling."

Gasoline producers use enormous platinum group metal gauzes or coated 'beads' inserted into the tops of large 'cracking' towers to catalyze the breakdown of long chain petroleum oil hydrocarbons into the components of what we call gasoline. Just the platinum in one pound of such gauze costs nearly $20,000 and with fabrication costs, each gauze for each tower can cost as much as $40,000 a pound. When the PGMs used in such cracking towers have been exhausted by 'poisoning,' the oil companies, unlike the car companies, recycle everything. The PGMs are purified and remanufactured into new gauzes or beads. Losses are predictable and, except for new construction, the amount of new PGM material needed each year is and can be well defined.

The OEM automotive industry is not in any way uniformly organized in recycling PGMs from catalytic converters. Only one of the companies has even had a long-term program of supplying its dealer returned converters to a central collector who in turn decants the coated catalyst from its shell and ships it to primary PGM producers to be introduced into their processes as a feed to augment ore concentrates. Losses in this process are substantial and the amounts of PGMs recoverable are no where near as predictable as in the oil industry.

The recycling of automotive catalytic converters may be undergoing a sea change soon if the Pro-Or [TSXv:POI] process, which I to Resource Investor readers late last year, is successful. The Pro-Or process is substantially more efficient than the current processes used to reclaim PGMs from automotive scrap. The key issue that will arise from the Pro-Or process is that it will enable, perhaps, hundreds of small scrap yards to process on-site the scrap catalytic converters they collect. The only problem will be for them to sell their intermediate mixed metals or mixed metal salts to those specialist companies that can further refine them into coater-quality chemicals for use by catalyst manufacturers.

In any case this new feed will be mostly invisible to places like the London Platinum and Palladium Market (LPPM), so that the LPPM's market price making ability will decline. The car companies may benefit by having more competition and more recovery thus creating a downward price pressure.

'Eng'ineering 'T'echnology stands for the development of power plants for cars that do not need PGMs at all.

Honda may well be working with GM right now to build a hybrid vehicle that uses a small gasoline powered internal combustion engine that is efficient enough so that it doesn't need a catalytic converter. This engine when combined with a rechargeable, high capacity, high cycle life, storage battery system based on lithium-ion technology if it is ready soon enough or nickel-metal-hydride technology, if it is not, will not use any platinum group metals in its operation!

A design like the (GM again) Chevrolet "Volt" may hit the road as an all-electric vehicle running on some combination of batteries and a fuel cell or on just either one. It might also turn out to be a plug-in hybrid, a vehicle the batteries of which are charged from house current, so that the car can be immediately operated from those batteries, and any on-board internal combustion engine need be used only when the batteries need recharging, which could be done while the gasoline engine is simultaneously turning a generator producing electricity, which is powering electric drive motors directly during the charging cycle.

Honda has already developed a smaller mobile fuel cell than anyone else. Hydrogen availability could make the mass production of this type of power plant possible, and the development of a substitute material for platinum could make it practical. But as long as a fuel cell of vehicle operation capacity requires the long term use of 1 to 3 troy ounces of platinum then no more than a maximum (at 1 troy ounce per vehicle) of 12 million vehicles a year could be built even if all of the platinum and palladium produced yearly in the world were dedicated solely to this use.

It is projected that in 2010, there will be 70 million motor vehicles produced globally and, from then on, annually. The math is simple and definitive. Platinum and palladium as components of currently feasible fuel cells simply do not exist in sufficient quantity to do the job. They must be replaced or their usage in the technology must be drastically thrifted. At present levels of usage there is no future for PGMs in fuel cell technology.

In summary, global warming concerns dictate that future engine technology must be predicated on not using oil products as the primary fuel. This means that there will be no need to treat the exhaust and thus no need to use platinum group metals for that purpose.

There is one more factor that the OEM automotive companies are just learning to use to smooth out the risk of commodity availability and price volatility due to supply and demand fluctuations or speculation.

'H' stands for "hedging."

I wrote about this topic in an article for Resource Investor two weeks ago entitled "." What I didn't say in that article is that Russia has been positioned by nature, economics and politics to be a, if not the, dominant force in world energy politics.

If we need either oil or PGMs in the future we are going to have to deal with Russia, the world's largest oil producer, the world's largest palladium producer, and through its historical political and economic support of, and past and present supply of weapons to, the ANC, now in power as the contemporary government of the Republic of South Africa, a more powerful influence on the ultimate disposition of that country's platinum production than Johnson-Matthey or the People's Republic of China. Russia has hedged its bets perfectly on all possible outcomes of the global warming crisis and the global energy economy.

Now I come at last to the title of this article, and why I chose it.

The PGM producers and trading companies know everything I have said above very well. They are, however, on the horns of a dilemma. If they have the enormous reserves, in just the Republic of South Africa, that the USGS reports, and if they can find the capital to undertake a Manhattan Project to access the reserves and bring the PGMs to market in the huge quantities that, for example, a fuel cell powered hydrogen economy would require, for both mobile and stationary systems, then the prices for the PGMs will fall or their margins of profit will fall or both will happen as supply exceeds demand but interest on capital accrues and recycling becomes more efficient.

Incremental added production will not convince anyone. The producers have to go after the whole hog very soon to kick start a global energy revolution in which they participate.

If those same companies adopt a wait and see attitude and, during that time, non-PGM substitutions are discovered or more non PGM using technologies are perfected they will lose the very market that propelled them to their current status, the OEM automotive emissions control catalyst market, and be left only with a declining petroleum refining market and a jewellery market with diminished lustre.

I think that for these reasons platinum production has peaked. I think that usage will continue at current levels for the next few years, and then begin to decline as non ICE powered vehicles begin to be made in ever larger numbers. If there is no substantial progress in fuel cell catalyst design that dramatically reduces the need for PGMs then I think that eventually PGMs will only be used in jewellery and specialty chemical metals as they were up until 30 years ago, the demand for which will be met from inventories of recycled materials and, perhaps, one or two, surviving, probably Russian, producers.

About the Author
Jack Lifton

Jack Lifton is a leading authority on the sourcing and end use trends of rare and strategic metals. He is a founding principal of Technology Metals Research LLC and president of Jack Lifton LLC, consulting for institutional investors doing due diligence on metal- and material-related opportunities.

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