Economic and industrial factors affecting PGMs

In early December 2022, Institute of Scrap Recycling Industries (ISRI) Chief Economist Joe Pickard noted Federal Reserve Board Chair Jerome Powell spoke at the Brookings Institute, saying the Fed has not seen “clear progress of slowing inflation.” Powell mentioned smaller rate increases could start in December of last year and that the Fed’s monetary restrictions will be kept in place.

“We are tightening the stance of policy in order to slow growth in aggregate demand,” he said. “Slowing demand growth should allow supply to catch up with demand and restore the balance that will yield stable prices over time. Restoring that balance is likely to require a sustained period of below-trend growth.”

As of early December 2022, the anticipation of smaller interest rate hikes in that month and at the beginning of 2023 has caused the yield of inflation-adjusted Treasury Bills to drop, the U.S. dollar has pulled back against other major currencies and the U.S. equity markets have reacted negatively to the better-than-expected jobs numbers. All these factors bode well for the precious metals complex in the near to medium term both as a risk/inflation hedge and in terms of industrial demand.

Industrial demand

As summarized in a Nov. 11, 2022, weekly PGM report from Butler, the European Commission finally announced its long-awaited Euro 7/VII emissions standards for light-duty and heavy-duty vehicles. These will take effect July 2025 for cars and vans and July 2027 for heavy-duty vehicles. It is widely thought to represent the final generation of emissions rules before the phase-out of internal combustion engines in the 2030s. On our initial reading of it, the new standards are neutral to mildly positive for PGM demand:

• In light-duty diesel vehicles, it brings the NOx limits into line with those of gasoline vehicles, which is mildly positive for demand, though many NOx control systems use non-PGM-containing selective catalytic reduction (SCR) and, in any case, the light-duty diesel market remains in decline.
• It introduces emissions limits for ammonia for the first time (which might require a small amount of platinum to reduce ammonia slippage from diesel SCR catalysts).
• It introduces tighter NOx, particulate and CO₂ limits for heavy-duty vehicles—this is perhaps the most positive development from a PGM standpoint, though the implementation date is not until 2027.
• It removes conformity factors for gasoline and diesel light-duty emissions, so emissions limits have to be met under all driving conditions. However, in reality, many automakers already were working to achieve emissions targets without the inflated conformity levels in the light of Dieselgate.

Long term, as the adoption of EVs rises, the demand for and use of PGMs will decrease, ultimately softening the price most markedly for palladium, which is set to be poised for a first-time surplus in coming years.

However, the rules are less stringent than initially expected, with no changes to existing Euro 6 limits on NOx and particulate numbers for gasoline vehicles, and the new rules only really apply under extreme driving scenarios and therefore do not represent a broad-based change to loadings in the way that Euro 6 and previous generations of emissions standards did.

The auto industry has lobbied hard against the imposition of tighter standards in light of material supply, inflation and customer affordability issues. In the end, the rules as published do not please environmental groups, which argued in favor of tighter standards, nor the auto industry, which claims Euro 7 will divert investment away from electric powertrains. They also might be somewhat academic in a market where consumer choice is moving toward electric vehicles (EVs).

In the U.S., some pent-up demand for new automobiles remains. The global microchip shortage continues to limit auto production to a 40-year low, leaving cars on the road longer to an all-time average high of 18 years. Auto scrappage rates have dipped in the short term because of the limited supply and increased cost of end-of-life vehicles and the shortage of labor to process the vehicles.

In the medium to long term, cars will continue to be scrapped, resulting in higher amounts of palladium-rich catalytic converters coming into the secondary supply. Long-term, as the adoption of EVs rises, the demand for and use of PGMs will decrease, ultimately softening the price most markedly for palladium, which is set to be poised for a first-time surplus in coming years. If the long-haul fleet vehicles begin to make use of hydrogen, you can expect higher demand and increased price for platinum, which is the primary PGM used in hydrogen-based fuel-cell applications.

In the short to medium term, expect more of the same. The PGM outlook for 2023 is that the new Euro 7/VII emissions standards for light- and heavy-duty vehicles will be neutral to mildly positive for PGM demand. PGM mined and recycled supplies have decreased in 2022 along with auto production. Supply and demand are not set to soar any time soon with inflation concerns.

Edward Sterck, director of research for the London-based World Platinum Investment Council, says “the [platinum] market is moving into a meaningful deficit” and “the availability of above-ground inventories is severely restricted and unlikely to offset that deficit in the rest of the world excluding China. Within China, it is only likely to be offset if we see significantly higher platinum prices than we have today, which would then attract that inventory back into the markets. So, [there will be] a meaningful deficit in 2023.”

In the long term, as we move toward a hydrogen economy, continue to watch platinum.

Becky Berube serves the recycling community as president of United Catalyst Corp., Fountain Inn, South Carolina, a member of the Automotive Recycling Association Educational Programming Committee and a past president of the International Precious Metals Institute. Visit https://unitedcatalystcorporation.com for more information on United Catalyst Corp. For daily updates on the PGM markets, subscribe to the company’s daily e-newsletter or get PGM prices texted twice daily to your phone by texting “Daily” to 844-713-PGMs (7467).