In this article, the second in a series on the potential for disruption from the widespread adoption of EVs and Autonomous Vehicles (AVs), we assess the longer-term outlook for platinum (NYSEARCA:PPLT) and related metals such as palladium (NYSEARCA:PALL) that form part of the 'Platinum Group Metals' or PGMs.
The apparent unstoppable rise of electric vehicles and the prediction that they will come to dominate the powertrain market by the end of the next decade have created a very negative sentiment backdrop for PGMs, particularly platinum. Some predictions see sales of electric vehicles overtaking those of traditional 'fossil fuel' vehicles by as early as 2027.
Electric vehicles do not run on fossil fuels and do not require a catalytic converter to comply with environmental regulations. No catalytic converter means no need for any platinum or palladium and hence the dire outlook for PGM demand over the next decade. Reflective of the current negative sentiment emanating from the predicted rise of electric vehicles, a recent research report by UBS shows what a 100% uptake of global electric vehicles would mean for component metals demand.
Nevertheless, even the most optimistic predictions about the uptake of electric vehicles recognize that it may realistically take until 2050 before we reach a 100% penetration rate. In an interesting recent research report titled "Rethinking Transportation 2020 - 2030", the authors predict that 95% of passenger miles traveled within the US will be via fleet-owned autonomous vehicles (AVs) by 2030. They have termed these fleet-owned AVs 'Transport as a Service' or TaaS (Uber (Private:UBER) being an early example in this space) and expect that almost the entire AV fleet will eventually be comprised of electric vehicles.
This is probably the boldest prediction regarding the future success of both electric vehicles and AVs we have read anywhere to date. We still have some concern regarding the true economics surrounding AV fleets and detail these concerns in our first article in this series.
Based on our conclusions in the first article, we can safely say that AVs will probably not account for the entire vehicle fleet or 100% of passenger miles traveled for at least another three decades, if ever. However, even a 50% penetration rate for electric vehicles by 2030 will have a negative impact on overall PGM demand. So, can the potential loss of demand from a transition to EVs be replaced or at least partially replaced by other sources of demand? Well, one potential growth area for platinum could be its use in fuel cell engines.
Fuel cells use hydrogen with a platinum catalyst to generate electricity, which then drives an electric powertrain. It is also importantly a zero emission technology, and recharging a fuel cell vehicle takes only a few minutes as opposed to 30 to 60 minutes for electric vehicles in a best-case scenario using a "supercharger".
Realistically, if the range and recharge times for EVs do not significantly improve over the next decade, then fossil fuel and/or electric hybrids will likely remain a popular choice for many users, particularly for those living in suburban and rural areas where TaaS providers are unlikely to prove economically competitive. Let us remember that vehicles such as the Toyota Corolla and Honda Civic sell for roughly half of what the Tesla Model 3 and Chevy Bolt will sell for while still sporting a range double that of the Model 3 and Bolt.
Some may argue that electric vehicles will one day match or exceed the range and performance characteristics of internal combustion engines ("ICE") and future fuel cell powertrains. This may be the case, but predicting technological outcomes is prone to error, even for those who seemingly specialize in these areas. For one thing, the energy density of gasoline is still at least 10 times that of current lithium-ion batteries, even taking into account the superior efficiency of the electric powertrain.
Therefore, even though the purchase price of a new electric vehicle can match that of a traditional ICE vehicle, it is very unlikely using current battery chemistry that an electric vehicle costing the same as a traditional ICE vehicle will have the same or better range. Many experts believe that existing lithium-ion batteries are already delivering an energy density (250 watts per kilogram) that is close to their theoretical maximum.
According to Naoaki Yabuuchi, an associate professor at Tokyo Denki University cited in this article, today's best li-ion cells can put out about 300 watts per kilogram, but these levels are already close to the theoretical maximum. Many are now looking to next generation battery chemistry solutions such as lithium-air batteries, which theoretically can deliver an energy density at least four times that of current lithium-ion batteries.
However, even with lithium-air batteries, gasoline or diesel engines may still have better energy density and thus superior range relative to cost, while this type of battery technology is at least five years away from being anywhere near commercially viable. Of course, it is possible that other battery chemistries will be discovered or breakthroughs made that could eventually see electric battery energy density reach "parity" with traditional ICE vehicles.
From our perspective, we simply don't know. If one can make the prediction that electric vehicle performance will one day match or exceed ICE-based vehicles, we could argue just as easily that fuel cell vehicles will one day become the most economical powertrain, or at least in terms of speed and range. What we can say is that electric battery technology in this sense will likely remain less efficient from an energy density perspective until at least 2030.
Now, naturally, for many vehicle owners living in more urban areas and also for those that generally never drive that far, range may not be an important factor in the overall purchase decision. If EVs can sell at reasonable price and offer reasonable mileage, then many vehicle owners may opt for them over traditional ICE vehicles. So, EV market share will assuredly grow in the next decade. However, if range remains an important factor for many vehicle owners (particularly in suburban and rural areas), then EV penetration, even in developed markets will not reach 100% or certainly not by 2030. This will be particularly valid in developing markets, where cost and infrastructure constraints will be more challenging to overcome.
In fact, if fuel cell technology advances sufficiently, it is possible that by 2030, many vehicle owners will opt for a fuel cell powered vehicle incorporating a traditional lithium-ion battery that would enable the best of both worlds. So, it is not that difficult to envisage a scenario where, despite the widespread adoption of EVs in the next decade, there will remain some residual autocatalyst demand and potentially additional demand from emerging fuel cell vehicles.
Perhaps most importantly, fuel cell engines used in commercial fuel cell vehicles today contain at least 10 times more platinum than is currently used in the average diesel vehicle. Toyota (NYSE:TM) launched its first mass-produced fuel cell car - the Mirai or 'future' in Japanese - for the European market in October 2015. The Mirai fuel cell powertrain contains 32 grams of platinum versus 2-4 grams in a typical ICE.
Taking Europe as an example, this means that only some 10% of the diesel vehicles sold annually at present would need to be replaced by fuel cell vehicles by 2030 in order to sustain the same levels of platinum demand that we have at present. We should also remember that battery-powered electric vehicles are also very unlikely to displace ICE powertrains in the medium and heavy truck markets.
For a thorough discussion on why this is the case, we refer to this article.
This is good news for platinum, which dominates the heavy and medium truck catalyst market. 90% of trucks in these segments run on diesel (better fuel efficiency), and platinum is still generally the preferred metal for diesel-based catalytic converters. On a similar basis, diesel SUVs and premium vehicles (particularly in Europe) will likely also, for performance and range reasons, remain in demand for a long time to come. Platinum demand from these markets probably accounts for around 40% of total autocatalyst consumption or roughly 1.3mn ounces per year.
Also, as the graphic below shows, there is still significant scope for platinum demand growth in China and India's medium and heavy truck markets. These two countries combined only consume 200,000 ounces of platinum per annum (autocatalyst consumption), yet their combined unit sales exceed the combined unit sales of Europe and North America, where total platinum consumption in these markets are probably at least 600,000 to 700,000 ounces per annum.
Source: Frost & Sullivan
Both countries are now moving ahead with more stringent environmental regulations which will see platinum loadings increase steadily over the next five years, while the Indian market will likely continue to see decent top-line growth well into the next decade as well. Based on these assumptions and even assuming that platinum demand from the light-duty diesel market goes to zero by 2030, it is not hard to envisage total autocatalytic demand for platinum at around 2mn ounces per year in 2030, in this worse-case scenario. To be sure, this would still be some 60% below current demand levels for platinum in this industry segment, but we are excluding any potential growth in demand from the fuel cell market, which at present already accounts for some 50,000 platinum ounces per annum.
Although fuel cell vehicles are not really commercially viable at present, their technology has also made great strides in recent years. Who is to say that fuel cell technology will not develop sufficiently to emulate the success of electric vehicles to some extent over the next 15 years? The amount of platinum used per fuel cell vehicle will likely decline as the technology improves, but even if it halves by 2030, the total loading would still be roughly five times the amount used in diesel vehicles today.
More notable is the success that commercial fuel cell vehicles in the materials handling industry (forklifts) have already enjoyed. Plug Power (NASDAQ:PLUG) is the dominant company in the North American market and already has some 15,000 units deployed, servicing companies such as Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN).
Forklifts powered by fuel cells are increasingly in demand as companies seek to reduce toxic emissions in their industrial workspaces, while preserving performance. Fuel cell powered forklifts also have much shorter recharge times, an important cost advantage over pure electric-based forklifts. Annual global forklift sales are roughly 1mn and expected to reach 1.3mn units by 2020. As the current share of fuel cell powered forklifts in the broader market is still very small, this suggests a potential for significant growth in the years ahead.
A rapid penetration of electric vehicles over the next five years, particularly in Europe, would pose a negative headwind for PGM's demand. However, looking further into the next decade, there is reason to be more optimistic, particularly with regard to platinum, as it is currently the preferred PGM for existing fuel cell technology. It should also be remembered that unlike palladium, autocatalyst demand only accounts for roughly 40% of overall platinum consumption, and demand for the metal is also supported by jewelry and investor appetites.
Palladium is mainly used as a catalyst in gasoline (petrol) vehicles that also tend to be mainly light-duty passenger vehicles. This is exactly the type of market that will be severely disrupted if the predictions for EV penetration as well as TaaS adoption prove correct. Although it is likely that palladium could end up substituting for platinum as a catalyst in future fuel cell engines, the relative downside from the widespread adoption of EVs is much greater for palladium. For example, consider the fact that 80% of palladium demand is currently comprised of autocatalyst demand or 7.6mn ounces per annum out of 9.2mn ounces and that palladium is mainly produced as a by-product (therefore, supply is largely price insensitive).
Getting back to platinum and assuming some residual autocatalyst demand and further assuming some incremental demand growth from emerging fuel cell technology, it is not too outrageous to suggest that total autocatalyst and fuel cell demand could still total some 3mn ounce per year in 2030. Although current autocatalyst consumption is around 3.3mn ounces per year at present, as we have already highlighted, industrial, jewelry, and investment demand accounts for some 5mn ounces per year at present. As such, industrial, jewelry, and investment demand (and the latter is currently at very depressed levels compared to just a few years ago) would hardly need to grow at all from current levels to ensure that total platinum demand is higher in 2030 than it is today.
We concede that assuming flat demand growth for a metal does not present much of a positive outlook, but let's remember this analysis is based on an aggressive scenario where EV market share penetration rises to more than 50% globally by 2030 (an annual compound growth rate of at least 50%). There is clear upside to platinum demand growth if the uptake of EVs is less rapid, and again, we would note that should oil prices collapse in the next decade as a result of accelerating EV penetration, it would paradoxically make fossil fuel vehicles more competitive and likely slow the adoption of EVs.
So, even if demand growth for platinum is flat looking out to 2030, this is not necessarily negative taking into consideration that supply growth remains severely constrained at present. Taking into account development expenditures, current platinum prices already trade below replacement cost, so one can assume that the worse-case scenario may already be largely priced into the metal at current levels. One example of the negative sentiment towards platinum at present is reflected in the gold/platinum ratio, which continues to trade near a historic low.
On a final note, if the platinum or PGM industry is indeed doomed to extinction in the next decade, the implications for South Africa (NYSEARCA:EZA) would be quite severe. Apart from the job losses and associated loss of economic benefits, PGM exports still account for between 10% and 15% of the country's total export revenues. It would prove extremely challenging for the country to compensate for these lost export revenues with any other mineral export, given that South Africa is simply not a large primary producer of metals such as copper, cobalt or lithium, which are the key inputs into the manufacture of electric battery powered vehicles. Although we cannot offer any certainty on how fuel cell technology and associated demand for platinum will develop in the next decade, we can say with certainty that South Africa's currency, the Rand, is a long way from fully discounting the implications of an end to the PGM industry in the next decade.
In summary, the downside for platinum prices from current levels, even taking into account the disruption that may come from the widespread adoption of EVs in the next decade, appears limited. This is particularly true for Rand-denominated platinum prices. Given ongoing cost inflation in South Africa's mining industry of between 5% and 10% per annum, a sustained decline in Rand-denominated platinum prices from current depressed levels will simply not prove sustainable. So, perhaps long-term investors should already now be looking to accumulate platinum at these depressed prices.
Nevertheless, for now, it may be wiser to focus any investment on the metal itself and avoid the various PGM mining companies. Most of the major South African PGM companies also produce substantial amounts of palladium as a by-product (up to 40% of overall PGM production in some cases). If we are correct in our view that palladium demand may end up being more severely impacted by the widespread adoption of EVs in the next decade, it will further undermine the profitability of these companies, even if the platinum price does not decline further from current levels.
Indeed, a large decline in the palladium price (back to say $200 per ounce) as a result of the widespread adoption of EVs would probably lead to the rapid curtailment of platinum production, given that the average basket price received by PGM miners in South Africa would decline by around 30%, even if platinum prices remain steady at current levels. 80% of the PGM industry in South Africa and Zimbabwe (accounting for 80% of global mined platinum supply) would likely be loss-making even before capital expenditures in such a scenario.
Disclosure: I am/we are long PPLT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.