Ready and Waiting

Recyclers who like thrill rides at amusement parks can save a few bucks in 2009. If 2009 is like 2008, simply link the dire fortunes of many corporations to precious metals and watch everything take a wild ride. The price of platinum throughout the past couple of years has been enough to put anyone’s heart in his mouth.

"The sharp contraction in the growth of the global economy over the past year has had a significant impact on values of investment and industrial assets, with further declines anticipated for the New Year," says Ashok Kumar, director at A-1 Specialized Services, Croydon, Pa. He notes commodity prices fell dramatically in 2008 as fear of a deepening worldwide recession reduced demand for a broad array of raw materials. Crude oil, which may be the most commonly quoted commodity, decreased by more than $100 per barrel in 2008.

LESS PRECIOUS

"The PGMs (platinum group metals) suffered a similar fate," Kumar notes. Platinum fell by as much as 67 percent to a recent low of $750 per ounce from its March 2008 high of $2,300; palladium is off 73 percent to $161 per ounce from nearly $600 during the same period. Rhodium lost 90 percent of its record value in less than six months from its June price of just over $10,000 an ounce.

Meanwhile, it is crunch time for automotive catalytic converters, which is the principal sector of demand for the PGMs—using 50 percent to 60 percent of available platinum and palladium and as much as 85 percent of rhodium.

Roughly 70 million new vehicles were produced worldwide in 2007, as cited by CPM Group, New York, for a compound growth of 3 percent throughout the past five-year period. This reflects strong gains in the Far East, particularly China. But for at least the next six-month period, or until early indications that the current economic contraction may be concluding, declines in U.S. and E.U. car and truck sales could far outstrip the marginal expansion anticipated for China and India. The resource-based economies of Russia, Brazil and the Middle East also may continue to post modest gains in vehicle sales, but these markets represent only a small fraction of global demand. Global vehicle sales could slip by 3 percent to 5 percent in 2008 and by an even greater differential into next year before some stability returns to the world economy and auto sales begin to show improvement.

"We haven’t seen that many cars coming through in the last three months," says Alan Cohen, manager at Pull-A-Part, Atlanta. But, in a strange twist, the company might be getting almost as many converters as it did when things were strong. With the prices of converters in the dumper, many jobbers no longer take the time to pull them off the autos. "We see a higher percentage of vehicles with the converters on them," he says.

"The collapse in vehicle sales, particularly in the larger, developed markets, has eliminated a sizable portion of demand for these metals, a situation which is not likely to improve in the foreseeable future. U.S. auto sales dropped by 16.3 percent in 2008, with a staggering decline of 36.7 percent for November 2008 vs. November 2007," Kumar says. During most of the last decade, U.S. and E.U. passenger car production each averaged near 16 million units. For calendar 2008, however, total vehicle sales in the U.S. will probably fall just shy of 13 million units, with similar totals in the E.U.

"If monthly sales figures continue to decline by recent monthly rates of 30 percent or more, car sales in the U.S. could enter 2009 at an annualized pace of 10-11 million vehicles," Kumar notes. That bodes poorly for the future.

Shorter term, Cohen says, "The bottom dropped out of the whole scrap car market." He also places much of the blame on the decline in new car sales. Fewer trade-ins and extended vehicle life cuts into the number of cars he sees.

Platinum prices are a major reason for the death spiral of converter numbers. Platinum bounced along in the $1,250 range through most of 2007 (up modestly from 2006). Then, at the end of 2007 and through the early months of 2008, it shot straight up by about $1,000—hitting a breathtaking $2,276 early in March 2008. All of the jump came in the first quarter, as prices went from $1,500 to $2,200.

Then came the dive.

The price of palladium was on a wild ride, too. The price moved up in tandem with platinum in the first quarter, jumping from the $360 range to nearly $600 in early March before quickly dropping off to the $450 range, where the price coasted for much of the summer. When it hit the $588 mark in March, palladium recorded its highest price since 2001. June saw a modest upturn to the $470s, and then the bottom fell out as prices fell to the $175 range in October before perking back up to the $200s in November.

Gold was a kiddie ride by comparison, starting 2008 around $860, breaking $1,000 in mid-March and rocking between the mid-$800s and mid-$900s for the summer. It fell back into the high $700s in October, recovered briefly, then continued to drift lower as Q4 wore on.

"In this market, you’ve got to focus on the short term," says Bill Rockett, vice president of M&K Recovery Group, North Andover, Mass. "The changes alter the purchase price and the recovery value. But historically, this isn’t that terrible; $780 gold is still pretty strong," he adds.

Silver was simply up and down in 2008. It started the year around $15 per ounce, was at $20 by the start of March, and pretty much stayed around $17 to $18 for several months before falling to $12.82 in mid-August. Mid-September saw silver in the high $10 range, while mid-October pricing was in the $9.70 range before leveling out again around $10.

"At $18, silver was out of sight," Rockett says. With silver a touch below $10, he says he is not overly concerned.

Platinum supplies, mainly because of a host of problems in South Africa, were off by 6.28 million ounces, says Johnson Matthey, a London-based specialty chemicals firm. Part of this was because of an interruption in production early in 2008. Mines produced almost nothing during February and never caught up. That, of course, explains the skyrocketing price last February and March. Even by the end of the year, South Africa’s production was expected to be at 4.78 million ounces—the lowest since 2003.

"That loss of a significant share of primary supply from South African producers over the past two-year period has brought into focus the increasing importance of secondary supplies of PGMs, specifically those for platinum and rhodium. If it weren’t for this rising stock of above-ground supply, PGM prices would likely have risen noticeably higher than the record prices posted in the first half of 2008," Kumar says.

Demand was down, too, but not low enough to break even with the supply. Demand was projected to hit 6.5 million ounces. That’s down 155,000 ounces from 2007, according to Johnson Matthey, but still in excess of the output.

Overall demand for PGMs for catalytic converters was up by about 2 percent, thanks mostly to European and Chinese demand. However, if an analyst were to look only at domestic demand, the picture would be far different.

"It has now become evident that the substantial declines in steel and in component PGM prices have begun to noticeably slow the flow of available scrap converters," Kumar says. The smaller, primary scrap yards have less incentive to sell salvage auto cats and may instead decide to build inventories and await higher prices, he continues, adding that some reports say scrap converters have become unavailable even at higher, more competitive prices. Moreover, the value spread between various types of converters has narrowed considerably with the drop in metal prices, removing a trading advantage for some firms.

"PGMs are tougher to come by due to availability," Rockett says. He says pricing’s effect on M&K has been marginal.

Kumar says he feels that if auto sales in developed economies continue to decline, perhaps with a 6 million unit deficit in 2008 rising to 10 million in 2009, the number of end-of-life vehicles available as scrap in 10 to 12 years of average car life will effectively reduce reclaim totals. An absolute measure of lost scrap availability is difficult to approximate, however, as other factors, such as more restrictive recycling legislation, improved efficiencies in the reclaim process and a potential recovery in metal prices, will likely offset a good portion of the theorized loss.

Demand for palladium was expected by Johnson Matthey analysts to end the year around 7.2 million ounces. That is up from 6.93 million. Auto catalyst demand was up somewhat, thanks again to demand in China and Europe. The North American catalyst market was actually down 350,000 ounces.

Although supply was expected to fall by a whopping 12.5 percent to 7.51 million ounces, the palladium market still is in a surplus. That did not seem to faze the speculators who drove the market up and then watched it zip right through the $200 low of October 2005 and beyond before catching its breath.

Any recycler should keep an eye on what is happening in Russia to get a feel for the market (though the situation in Russia can change daily). The government had stockpiles. Johnson Matthey thinks much of that supply has been drawn down in August 2008. Even North American palladium output is forecast off.

Continuing demand in the catalyst sector will eat into the supplies of palladium. Vehicle emission standards are not getting any weaker anywhere in the world.

For calendar year 2008, A-1 estimates total PGMs derived from recycled material may now total 1.08 million ounces of palladium, up by about 95,000 ounces from 2007, or about 11 percent of total supplies; recycled platinum could rise to 980,000 ounces from last year’s 920,000 ounces (13 percent of supply); and rhodium recovered from salvage converters could reach 215,000 ounces (190,000 ounces previously, or 21 percent of available metal). In contrast, just five years ago, recycled PGMs accounted for a far smaller proportion of supply: 7 percent of palladium, 8 percent of platinum and 14 percent of rhodium.

But as shipments of salvage auto cats continued to decrease in the second half of 2008, the rate of growth anticipated for reclaim totals for 2009 adjusted downward. PGMs derived from the recycling of automotive catalysts could total 1.03 million ounces of platinum, 1.25 million ounces of palladium and 240,000 ounces of rhodium. Amounts of recycled material will likely improve again as evidence suggesting an end to the current recessionary period becomes clear.

"Prices (on scrap vehicles) ought to be good," Cohen says. He pins his hopes for a recovery in iron prices. More scrapped cars means more converters, means more PGMs in the recycling stream.

"Whether it recovers or not depends on how fast the stimulus package comes through," Cohen adds.

The substantial losses in revenue being recorded at many of the world’s metal producers, a result of the sudden collapse in commodity prices, has led to announcements of limited mine closures as some marginal operations become unprofitable. Palladium supply, for example, has seen a recent reduction of nearly 1 million ounces: Norilsk lowered its guidance for production through 2009 by 500,000 ounces; North American Palladium and Stillwater curtailed operations with 400,000 ounces less metal; and the closure of a number of smaller mines in South Africa added to further cuts in supply.

Kumar is more cautious. He notes total supplies in 2009 could be affected by lower-than-expected returns from the recycling industry. This self-correcting ability of the markets to bring supply more in line with falling demand should begin to limit additional price declines much below current levels.

"Any consistent uptrend in PGM prices will only be predicated on positive growth prospects for the global economy and a consequent rise in auto sales," Kumar says. "Recessionary periods in the U.S. generally last 16 months, on average, which would imply a possible turnaround in the economy commencing in the latter months of 2009, assuming that a recession actually began in early 2008.

"If this growth scenario comes to be, then metal prices may be expected to remain depressed at or near current levels at least through the first half of 2009," Kumar says. He says he expects speculative interest to take prices higher at the first sign of a recovery in the auto market in anticipation of stock re-building by automakers.

It is likely safety stocks were reduced over the past year to lower financing costs and to better match PGM supplies with declining auto production.

"As it has taken us many years of low interest rates and inadequate financial regulations to construct our current economic debacle, it will probably take several years for the global economy to fully stabilize before the next period of sustained growth can begin," Kumar says. "Global aggregate demand, and in particular the return of the consumer to the auto market, may remain lackluster for a time. As such, PGM prices may rise at a more modest rate in 2011 and into 2012."

The author is a contributing editor to Recycling Today based in Cleveland and can be contacted at curt@curtharler.com.