The Experts Weigh In
Recently, I had the privilege of moderating and participating in a global webinar regarding the auto catalyst value chain. Some of the analysts, refiners, and fellow processors that I respect most were on the panel. Dr. Jonathan Butler, Head of Business Development for Mitsubishi Corporation, kicked off the webinar with an excellent presentation on the entire auto catalyst value chain followed by a Q&A session from the panel. The webinar can be viewed in its entirety on YouTube by searching the title of this article. I want to share some of the take-aways that I think most recyclers will want to hear as it pertains to the availability of cars and the value of their scrap catalytic converters.
The Impact of the Pandemic on Economic Growth
Jon Butler made a powerful statement by saying that the COVID-19 pandemic represented “the steepest and the deepest economic contraction in living memory, perhaps ever. With unprecedented simultaneous collapse in both the supply side and demand side of the economy.” The recovery shape of the world’s three largest markets, China, the US, and Europe, is still unknown. Whether a v-shaped, w-shaped, u-shaped or L-shaped is still to be determined. Governments are stepping in with stimulus incentives trying to kick-start economies. Unemployment is at an all-time high. Interest rates will continue to be held down. The likelihood of future inflation is high. All these macroeconomic factors bode well for precious metal investing.
Supply and Demand
In March, the mining supply due to COVID-19 caused the major South African mining companies to declare force majeure, or an inability to meet contracts and obligations due to unforeseen circumstances. This disruption will most definitely affect the supply of Platinum (Pt) and Rhodium (Rh). Nearly 80% of the world supply of the Platinum Group Metals (PGMs) comes from mining, primarily in South Africa, Russia, Canada, and the United States. Wilma Swarts, Head of PGMs for Metals Focus, stated that the likely permanent restriction of supply will most definitely have a tightening effect on the market. South Africa producing the lions share of Pt and Rh and the fall in supply has actually helped to support prices.
Demand for the PGMs will be mixed. Sixty-five percent of the world’s demand for these metals comes from automotive. Butler stated that global cars sales are expected to fall by 15–25% in 2020 but demand across the major three markets of China, US, and Europe will differ. China has a pent-up demand for car buying and is already experiencing higher sales pushing demand up. China 6 emissions standards that requires the use of more PGMs, and which were due to go into effect, have been delayed due to the pandemic and thereby reducing demand. “On the light duty side, China and India are also moving to Euro6 equivalent legislation which generally means tighter control of oxides of nitrogen or NOX and the other regulated pollutants– especially unburnt hydrocarbons, which means more Pd used in oxidation. Since Rhodium is a superior catalyst for the chemical reduction of NOX, this move is likely to mean significantly higher Rh loadings per vehicle,” Butler said. The US could experience a rebound in car sales with credit being cheap, positive for demand, but the record unemployment levels may discourage the purchase of large-ticket items like vehicles. Light vehicle sales were up in the US in May. Car sales across Europe have been abysmal so there the outlook is not bright. As Europe has moved away from diesel vehicles which use mostly Pt to greener vehicles which also uses Pt, the net effect on the metals will be neutral. Mark Caffarey, President of Umicore USA, stated that the impact of COVID-19 and the lower oil prices has little impact on the introduction of the electrification of vehicles into the market. Furthermore, Caffrey said that government incentives are likely to push the OEMs even more toward battery and electric vehicles.
Since Platinum is now 40% of the cost of Palladium, there has been a keen interest from the OEMs in substituting the majority of precious metals from Pd back to Pt in auto catalyst as it was in the 1990s. Craig Ostroff, Global Sales Manager for BASF Corporation, stated that in March, South Africa’s Sibanye-Stillwater along with Impala Platinum (Implats) had partnered with the chemical company BASF to develop a new tri-metal auto catalyst allowing the partial substitution of palladium with platinum. Given the economic downturn, OEMs may not want or be able to pursue the substitution given the cost of redesign at this time. Long term it is thought that the substitution will take place.
For the past few years both Palladium and Rhodium have been in a deficit while Platinum has been in a surplus. Lower demand and lower supply of Pd, coupled with the increased long-term use of Pt for newer technologies and substitution, and increased demand for Rh to control NOX emission, does have the ability to bring the metals into a closer equilibrium than before COVID-19.
As this audience knows all too well the volume of scrapped vehicles has fallen with fewer people buying new cars to replace the old. Butler says he expects auto catalyst recycling to fall by a fifth or 20% due to the general auto market slowdown, disruption to collection networks, disruption to logistics, disruption to some refineries due to workforce shortages, transport, and financing issues. Oliver Krestin, Managing Director of Hensel Recycling, stated that closed dealerships, closed steel mills, lockdowns across borders in Europe, less accidents due to driving, have hit the automotive recycling community especially hard in the short term. Caffarey also noted that in the financial crisis of 2008, governments pushed car scrappage schemes, such as Cash for Clunkers, which is highly likely to happen again in order to stimulate recycling rates. Krestin added that the incentives will likely push battery and electric vehicles increasing the recycling stream but would not be good for PGM demand, hybrids would be neutral if not slightly positive due to the loadings and electric vehicles have no catalytic converter at all.
Dr. Jon Butler summarized his thoughts on the PGM prices. Platinum has lost 40% of its value this year and fallen to 20-year lows on demand concerns. Palladium has been on a downtrend since the global COVID crisis intensified in March, as its main demand area (auto catalysts) has been damaged. Rhodium prices have been extremely volatile, shooting up on supply tightness and then falling rapidly on demand destruction. That being said, in an environment of negative real rates, this makes precious metals look more attractive as an asset class—and we have seen record levels of investment into gold exchange traded funds so far this year, platinum was also at a record high but fell in the general fire sale in March of this year. Overall, the two analysts were bullish on Rh, and fairly optimistic on Pt and Pd, citing the 800s for Pt, 1900s-2000s for Pd, and 8000s—possibly 9000 for Rh.
One Way. Assay.
In life there is more than one way to do most things. This is not true with converter recycling. There is a specific amount of precious metals in each converter. There is a cost to recycle it. There is a price for each metal that is sold. You’re either in the real game or you are not. You are either getting treated fairly or you are not. Remember, keep selling into the market on assay. Don’t take unnecessary risks. Play the long game.
Becky Berube serves the recycling community as United Catalyst Corporation President, she writes a monthly educational column for the industry, serves as co-chair of the ARA Annual Convention Educational Programming Committee, is on the administrative team for the ARA Peer Mentoring Program, and is an Executive Committee member of the IPMI. She can be reached at 864-834-2003 or by email at firstname.lastname@example.org.