Net-zero carbon emissions: How will this impact platinum group metals?

The drive towards net zero will have repercussions for how different industries and sectors will fare over the coming decades. The paths proposed for decarbonisation will affect the full spectrum of commodities.

May 26, 2021

7 minutes

Unathi Loos
Daniel Sacks
The drive towards net zero will have repercussions for how different industries and sectors will fare over the coming decades. The paths proposed for decarbonisation will affect the full spectrum of commodities.

The fast view:

  • The drive towards net zero will have repercussions for how different industries and sectors will fare over the coming decades.
  • Base metals like copper are the most likely beneficiaries of this trend towards a green global economy, whilst fossil fuels like coal and oil are facing an existential threat.
  • The fate of platinum group metals (PGMs) is less easily categorised.
  • PGM use in autocatalytic converters has played a vital role in reducing car emissions since the 1970s, but if internal combustion engines (ICEs) are phased out, the outlook for PGMs beyond 2030 looks challenged.
  • Until the adoption of battery electric vehicles gains critical mass, increasing PGM loadings in autocatalytic converters in ICE vehicles remains the most credible route to reducing car emissions.
  • The increasing loadings continue to drive demand for the metals and are forecast to keep the PGM market tight until the middle of this decade.
  • Miners and catalyst fabricators are exploring new or increased applications for PGMs in the auto sector, from platinum’s potential use in lithium batteries to its role in the production of green hydrogen.
  • We maintain a bullish outlook for PGM prices over the near term. PGM companies are generating record cash flows, have strong balance sheets, and have limited options for growth capex, all of which are supportive for increased future cash returns to shareholders in the form of dividends or share buybacks.

There is no doubt that the Paris Agreement of 2015 was an important step towards managing climate change risks. Its aim to reduce global warming to “well” below two degrees measured against pre-industrial levels has received the commitment of the most powerful nations, such as the European Union, the United Kingdom, China, and the United States of America (more recently again), amongst others.

As a first step towards reaching this ambitious goal countries have published their climate action plan, and these plans have repercussions for how different industries and sectors will fare over the coming decades. The European nations led the charge, with drastic measures to reduce emissions, which culminated in the European Commissions’ 2019 Green Deal to reduce emissions to net zero by the year 2050. Since then, many other countries have heard the rallying cry and made similar pledges to reduce their carbon emissions to net zero over the next three to four decades1.

As things currently stand, net-zero commitments doubled in 2020, with 61% of all countries across the globe committing to net-zero1, covering 63% of total global emissions2. Meeting these targets will certainly not be easy and requires drastic action from regulators; actions which will potentially create winners and losers in the commodities sector.

The paths proposed for decarbonisation will affect the full spectrum of commodities. Base metals like copper are the most likely beneficiaries of this trend towards a green global economy, whilst fossil fuels like coal and oil are facing an existential threat. The fate of platinum group metals (PGMs) however is less easily categorised. On the one hand, PGM use in autocatalytic converters has played a vital role in reducing car emissions since the 1970s, by converting harmful hydrocarbons (HC), carbon monoxide (CO) and nitrogen oxides (NOx) into less harmful gases3. This has earned PGMs the title of “green metals”. As such one would think PGM demand should thrive as economies rapidly focus on decarbonisation.

The reality however is less straight forward, and this is because of the expected demise of internal combustion engine (ICE) vehicles. Autocatalytic converters used in ICEs account for circa 60% of PGM 3E demand (platinum, palladium, rhodium)4. In December 2020, the United Kingdom announced plans to ban the sale of new petrol and diesel cars by 2030 and all hybrid vehicles by 2035. This ambitious plan is supported by a GBP1.3 billion package to support the build-out of electric charge points (including private homes) and significant subsidies for battery electric vehicle (BEV) purchases5. If these plans are acted upon, and if more countries set similar targets, the outlook for PGMs beyond 2030 – particularly for palladium and rhodium – looks very challenged indeed.

Figure 1: The primary source of PGM demand is as a catalyst in auto emission control
Gross demand by sector – 2019

The primary source of PGM demand is as a catalyst in auto  emission control

Source: Johnson Matthey, RMB Morgan Stanley Research estimates.

If one accepts that ICE vehicle sales have probably peaked as the adoption of BEVs accelerates, then why is the PGM basket price at all-time highs? The answer seems to lie in the investment time horizon. In the near term, it would appear that the circa 1 million-ounce PGM basket (3E) deficit of the last few years is likely to be sustained. Until the adoption of BEVs gains critical mass, the related infrastructure is made easily available and the cost of battery technology reduced sufficiently to be weaned off government support, increasing PGM loadings in autocatalytic converters in ICE vehicles remains the most credible route to reducing car emissions. The increasing loadings continue to drive demand for the metals, and is forecast to keep the PGM market tight until the middle of this decade, even in the face of rising BEV adoption6.

Figure 2: Light duty vehicle sales forecast to be 9.7m (11%) below 2019
Global light vehicle sales (million)

Light duty vehicle sales forecast to be 9.7m (11%) below 2019

Source: Johnson Matthey, RMB Morgan Stanley Research estimates.

Figure 3: The impact on absolute PGM autocatalyst demand cushioned by uplift in PGM loadings
Autocatalyst demand (000 oz)

The impact on absolute PGM autocatalyst demand cushioned by uplift  in PGM loadings

Source: Johnson Matthey, RMB Morgan Stanley Research estimates.

The recovery in auto sales post COVID-19 surprised many in its strength and duration. Given the high levels of household disposable incomes and the aversion to crowds post COVID-19, we are likely to see a sustained demand for cars in the very near term. However, flat demand growth post the COVID-19 recovery does not bode well for prices, unless supply is constrained. In that regard, the lack of investment in the sector over the past decade, the declining production profile of existing mines and the limited availability of sustainable projects at long-term prices is likely to be supportive of prices for much longer still. It is therefore likely that we will see PGM basket prices remaining well above cost support as the strict emissions standards and related higher loadings offset the decline in absolute auto unit volumes during this transition decade.

However, ten years is a very short timeline in the life of a miner. Miners and catalyst fabricators are hard at work exploring new or increased applications for PGMs in the auto sector. This ranges from platinum’s potential use in lithium batteries to its role in the production of green hydrogen. The potential addressable market is most significant for platinum in being part of the hydrogen economy. China has announced targets that hydrogen would make up 30% of its energy mix by 2030, whilst the EU’s plans for increased renewables in its energy mix by 2030 requires significant growth in hydrogen infrastructure. Green hydrogen (produced through electrolysis of water using renewable energy, platinum and iridium) makes up less than 2% of global hydrogen production currently. This is set to increase, displacing brown- (coal) and grey- (natural gas) produced hydrogen7.

Figure 4: The EU hydrogen strategy includes building 40GW  of green hydrogen electrolyser capacity by 2030 | Figure 5: Less than 2% of the c. 70m tonnes of  hydrogen produced annually is via electrolysis.

The accelerated adoption of fuel cell electric vehicles (FCEVs), combusted through a process converting water from a tank and oxygen from the air to produce electricity and water with platinum as the catalyst, could be a game changer. Given that fuel cells are a better alternative for heavy duty trucks, vehicles, buses and select commercial light duty vehicles, based on the size and cost implication for adequate battery storage, the overall demand from this application could very well offset the declines in ICE vehicles. This should keep the market in balance beyond 2040. Although it is still early days, there is sufficient optimism amongst the PGM miners that BEVs do not spell the end of PGM use in transportation.

In conclusion, we maintain a bullish outlook for PGM prices over our investment time horizon. The fundamentals in terms of constrained supply and robust demand supported by car sales and higher loadings, remain favourable in our opinion. Thankfully, PGM companies aren’t pricing in any kind of growth, earnings or otherwise. On the contrary, PGM stocks trade on record low PE multiplies and record high free cash flow yields, implying that the market expects earnings and cashflows to deteriorate markedly from here out. These shares already ‘discount’ an end-of-the-cycle type metals price crash, so we believe that risk/reward favours owning them. A re-rating of PGM shares is due, as metal prices remain ‘stronger for longer’, in our view. PGM companies are generating record cash flows, have strong balance sheets, and have limited options for growth capex, all of which are supportive for increased future cash returns to shareholders in the form of dividends or share buybacks. The demand outlook beyond 2030 may raise significant debate, but in the context of flat supply growth over that period the odds seem evenly balanced.

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Related content

 

1 Taking Stock: A global assessment of net zero target, The Energy & Climate Unit and Oxford Net Zero, March 2021.
2 Transforming our systems together: a global challenge to accelerate sector breakthroughs for COP26 and beyond; Race to Zero, United Nations Framework Convention on Climate Change (UNFCCC), February 2021.
3 PGM ESG Alert, Noah Capital Markets, January 2021.
4 South Africa PGM sector, HSBC Global Research, November 2020.
5 Government takes a historic step towards net zero with end of new petrol and diesel cars by 2030, UK government, https://www.gov.uk/government/news.
6 PGMs and the Energy Transition, RMB Morgan Stanley, February 2021.
7 Platinum Perspectives, Platinum’s role in hydrogen and decarbonisation is a big driver of platinum investment demand, World Platinum Investment Council, October 2020.

Unathi Loos
Portfolio Manager, SA 4Factor
Daniel Sacks
Portfolio Manager

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