Platinum Group Metals Facing Supply Constraints, Soaring Prices

Includes: PAL, SWC, XSRAF
by: Scott Moore

Platinum group metals (PGMs), namely, platinum, palladium, rhodium, iridium, ruthenium and osmium, are heading toward a period of exceptional volatility over this decade, with looming supply constraints and dramatic fluctuations in price, according to a recent report published by Thintri, Inc. The same materials are threatened in the longer term by competing materials in some of their most important markets.

PGMs are critical constituents in catalytic converters in motor vehicles, in disc drives, oil refineries, glass manufacturing, medical devices and implants such as pacemakers and dental crowns, and a host of other applications. Some are also highly valued in jewelry and investment. PGMs are rare, difficult to process and quite costly.

Like most natural resources, PGM supplies are inherently limited, but to a greater degree than other important minerals. PGMs are produced in just a few countries; the US imports 95% of the PGMs it consumes.

The limits of those supplies are now becoming clear. Already, Russia, the largest palladium producer, has announced that its palladium supplies are dwindling.

Industry analyses indicate that known PGM reserves are sufficient for another 360 years at present rates of production and consumption. However, that figure drops to 15 years if rising demand, particularly from growing industrialization and automobile sales in emerging economies, is taken into account.

Growing demand is fueled by a range of factors including accelerating motor vehicle sales around the world, a rising industrial sector in many regions and a growing consumer preference for white metals in jewelry. As demand exceeds available supplies, prices will rise significantly.

The scarcity of PGMs leads to wide price swings in response to relatively modest variations in demand. In the recent past, Rhodium, for example, went from over $6,000 per ounce in mid-2007 to $10,000 per ounce in mid-2008 and dropped to a little above $1,000 before the end of that year.

On the other hand there are technologies already on the market, and others near commercialization, that are poised to alter the picture just as dramatically in the other direction through increasing supplies or replacement of PGMs entirely.

While some PGM applications, such as jewelry and electronics, are relatively immune from substitution at this time, a number of PGM markets are vulnerable to replacement by nanotechnology-based solutions available at a fraction of the cost. Such alternatives can partly or completely replace the PGM content in critical applications like catalysts in automotive, energy and industrial markets.

Other new methods will eventually, in effect, bring new supplies to market through improved recovery. New techniques for recycling catalytic converters and similar products are able to recover far more PGM content than was possible previously. In addition, once-inaccessible PGM content in copper and nickel mine waste and slag can now be exploited. The availability of literally mountains of mine waste and slag throughout western North America and other parts of the world will soon set off a "gold rush" to exploit those resources.

Mining companies like Stillwater Mining Company (NYSE:SWC), North American Palladium (NYSEMKT:PAL) and Xstrata Plc (OTC:XSRAF), are faced with not only uncertainty in the prices of their products and possibly fluctuating demand, but also extraordinary opportunity, at least in this decade.

Stillwater, the sole major US supplier of platinum and palladium, mines the J-M Reef in Montana, the only significant US deposit of PGMs and one of a few significant deposits outside South Africa and Russia, which makes it a key resource in the event of political destabilization in either country. South Africa has already endured labor unrest in its PGM mines.

North American Palladium's Lac des Iles (LDI) mine in Ontario, Canada, is one of two primarily palladium deposits in the world (most palladium is found as a byproduct of mining other metals). Because palladium is often used as a (relatively) lower cost alternative to platinum, while at the same time applications specifically for palladium are growing, palladium prices have climbed dramatically over the past decade. With declining palladium output in Russia, North American Palladium is in a strong position for a few years.

Xstrata is a more diversified company, producing platinum as well as copper, nickel, zinc and ferrochrome. Xstrata operates in more than 20 countries and serves the needs of a broad range of industries. Due to the company's diversity, it will benefit modestly from rising PGM prices and will be cushioned from price drops due to materials competing with PGMs. Xstrata has produced its platinum from the Mototolo Mine in South Africa, and in 2007 expanded its platinum capacity by acquiring Eland Platinum Holdings in the same country, where it now plans to double its concentrating capabilities.

All three companies are well positioned in the short term to ride a wave of growing PGM demand in key applications, including automobiles (catalytic converters and spark plugs), disk drives, glass manufacture and catalysts in petroleum and general industry. These markets will grow not only with the recovering US economy but more importantly with the rapidly rising standard of living in the developing world. Automobile sales and increased energy consumption in emerging economies will stress available supplies of platinum, palladium and rhodium. Later in the decade the fortunes of PGM suppliers are likely to reverse as improved recovery methods combined with cheaper alternatives loosen supplies and lower prices for mined PGMs.

Today, platinum group metals are at an extraordinary intersection of market forces. The confluence of growing demand, limited and/or dwindling supplies, and growing availability of alternatives and new supplies, will likely create a period of extraordinary volatility before things stabilize.

Much of this decade will witness a transition of PGM markets to adjust to a new reality of price volatility and tightened supplies, while others move to take advantage of the new opportunities presented in PGM recovery and replacement.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.