Insights Industry Insights Auto Production Decline Driving Demand Down

       

Platinum: Auto Production Decline Driving Demand Down

Platinum is a precious metal considered to be 30 times more rare than gold. The rareness is due in part to the limited quantity mined each year relative to demand. The supply of platinum mined domestically is primarily from two sites located in Montana and owned by The Stillwater Mining Co. (SMC). These two mines produced a total of 12,800 kg of platinum in 2007; globally, this is less than 3% of production. Demand for platinum is driven by a wide range of products and devices for industries including automotive, jewelry, electronics and chemical (see chart below). Domestically, the amount of platinum consumed increased 156% from 2006 to 2007 to 156,000 kg; however, 2008 has shown a decline.

SUPPLY

Domestic production decrease caused by labor

Production of platinum from SMC decreased from 2006 to 2007. The Stillwater Mine had a decrease of 10% and the East Boulder mine had a decrease of 9% of production. These decreases were attributed to a shortage of skilled miners. In addition to the shortage of workers, the mines stopped production for 7 days while a new labor agreement was negotiated. Historically, production declined at a steady rate from 14,000 kg in 2003 to a low of 13,300 kg in 2005. A dramatic increase in production in 2006 as a result of an expansion of the ore production rate yielded 14,400 kg, but dropped again in 2007 to 12,800 kg, the lowest rate of production in five years.

New productions sites under consideration

A new mine referred to as the NorthMet Mine, located near Duluth, Minnesota and operated by PolyMet Mining Corp., is expected to start initial production in early 2009. According to PolyMet’s website, operation permits are expected shortly after the publishing of its Environmental Impact Statement. The mine is expected to be operational for 20 years and produce 638.2 million tons of ore, of which 0.01% would be precious metals including palladium, platinum and gold. Exploration of other viable sites for precious metals, including platinum, is being conducted by:

Increased recycling of platinum

A substantial secondary source of platinum is derived from the recycling of catalytic converters from the automotive industry. Approximately 18,000 kg of platinum was recovered from the recycled material, accounting for approximately 65% of the global recycled supply. SMC’s recycling program recovered 11,600 kg of precious metals; the amount of platinum was not available. The U.S. also imports recycled platinum, including scrap and waste material as well as coins. In 2006, 39,400 kg of recycled platinum was imported; 101,000 kg in 2007; and 60,800 year-to-date through July.

Imports key to increasing domestic supply

The domestic mines are not able to keep pace with current demand. The U.S. is reliant on other platinum producing countries, including: South Africa, Russia, Canada and Zimbabwe. In 2006, the U.S. imported 111,009 kg of platinum in various forms, including recycled material. In 2007, the amount imported increased 63% to 181,720 kg. The U.S. imported 97,413 kg year-to-date through July.

DEMAND

Automotive industry demand down

There are two factors within the automotive industry that can continue to directly impact the demand for platinum in the automotive industry: the current economy and subsequent decline in demand for automobiles, and the transition from gasoline powered engines to alternative fuels. The demand for vehicles has been steadily declining; as of October 2008, production within the United States was down 23.1% for light vehicles compared to the prior year. This represents a decrease in vehicle production year-to-date of more than 2 million units, which directly impacts the amount of platinum required by this industry.

Platinum is a key component in the production of catalytic converters used in exhaust systems. In the mid 1970’s, clean air legislation increased the importance of the catalytic converter as it provides the filtering necessary to reduce emissions produced by gasoline and diesel powered engines. Platinum is currently the most active catalyst used and accounted for 53% of platinum consumption in 2007, an increase of 8% from 2006. Other materials, such as nickel and copper have also been tried, along with various other combinations of materials. Due to limited supplies of alternative materials, the use of alternative materials is not viable. However, catalytic converters are often recycled and have a resale value which varies depending on the metals market pricing.

Secondly, the transition from gasoline powered engines to alternative fuels could transition the demand for platinum from the catalytic converter to the battery. Fuel cell technology is also dependent on platinum as a catalyst, but not at the same level as the catalytic converter. As discussed in the AccuVal AdVisory™ insight on batteries, the automotive demand is anticipated to be in excess of $10 billion by 2015 for hybrid electric batteries.

Demand for platinum jewelry impacted by volatile pricing

In 1979, the Federal Trade Commission first published its guide on the use of platinum in the making of jewelry. Platinum’s foray into the jewelry industry has made it the second largest demand factor for platinum with a historic growth rate of 20% each year. Domestically, demand from the jewelry industry decreased slightly from 2006 to 2007; globally, consumption decreased to the lowest level in 16 years. The high and volatile price for platinum is suspected as the main factor driving this decrease. The pricing for platinum increased, in dollars per troy ounce, from $694.44 in 2003 to $1,308.44 in 2007, an increase in excess of 88%. The average price, year-to-date for 2008 is $1,889.86. For an overview of the pricing of platinum in 2008, click here. The highest price reported in 2008 was $2,275.00 on March 4th, and the lowest price initially reported was $1,328.00 on August 19th, which is still slightly higher than the average for 2007. However, the price for platinum has continued to drop significantly in the past few months, reaching a new low of $774.00 on November 20th. This new, lower price prior to the holidays may temporarily drive the demand for platinum jewelry back up.

Electronic and chemical industries diversify demand

These two sectors use platinum in a wide array of products from glass fibre optics, flat panel screens, radiation therapy and pacemakers to computers, razors and tableware. The glass fibres in fiberglass are universally used to reinforce plastic and concrete and in the production of ship hulls and airplane fuselages as well as the fibre optics used in the telecommunications industry. Because of platinum’s durability and conductive qualities, it is ideal in the medical industry as a biologically compatible material used in the construction of pacemakers to stabilize heart rhythms but also in radiation therapy to target cancerous tumors. The production of the magnetic alloys used in computer technology also depends on platinum, enabling greater storage.