In 2017 we wrote an article entitled “Platinum: the investment of a generation ”. At that time, the price of the Impala Platinum share was R35. It is now R240. What can we learn from this great benefit and what prospects does the industry now have?
Investment opportunities of this magnitude are manifested when there appears to be significant uncertainty, leading to a misappropriation of assets. This was the case with platinum stocks four years ago. Surprisingly, the platinum industry has not changed materially since then in terms of metal supply and demand, which is the key driver of metal prices and associated stock prices.
What has changed is that the price of the metal basket (PGM – Platinum Group Metals – Platinum, Palladium and Rhodium) has tripled as supply constraints for Palladium have materialized and the Rhodes. Although these supply constraints were anticipated four years ago, the view was that by switching between metals, prices would remain more balanced. However, this replacement has not yet taken place, which will lead to very high palladium and rhodium prices, with a PGM basket price rising from R15000 / oz to R45000 / oz.
What is the future of Platinum shares?
The key determinant is what will the price of PGM be in three or five years? Currently, based on Platinum stock prices, the market implies that PGM prices will decrease significantly (from 30% to 50%) in the coming years. Impala Platinum (R240 / share) is currently trading at a P / E out of about 5 times more profits. If the market believed that PGM prices would not fall significantly, the share would be at least 50% higher.
So what do the experts say?
We build on a recent report from Ninety One, which says that “we maintain a bullish (i.e., positive) outlook for PGM prices in the short term.” The key is to predict the future supply and demand of PGM.
Supply is expected to remain limited, as 55% of PGM’s global supply is exploited in South Africa, where over the last decade there has been limited investment in mining and production profiles. decrease.
Demand forecasts are more uncertain, predicting mainly the growth of electric vehicles (EV) and the disappearance of the internal combustion engine (ICE), in gasoline and diesel vehicles. Autocatalytic converters used in ICE account for about 60% of PGM demand. In a global push to reduce carbon emissions to zero by 2050, some countries have very ambitious plans to reduce / ban ICE over the next 10 years. The UK plans to ban the sale of ICE in 2035. See global vehicle sales forecasts below:
If sales of ICE vehicles have peaked and the adoption of electric vehicles is accelerating, then why are PGM prices staying at all-time highs?
- For at least the next five years, the use of PGM in catalytic converters (loads) should increase to reduce emissions.
- Demand for post-COVID cars has been stronger than expected and is expected to continue in the short term.
- Increased use of hydrogen to support a green economy has significant potential use of platinum. So much so that the use of hydrogen cells in heavy vehicles can offset the decline in ICE vehicles by 2040.
If you believe that PGM demand is sustainable over the next few years and that basket replacement does not materially alter prices, Platinum shares are cheap.
Platinum shares are now held in most unit trusts, which was not the case in 2017. Our portfolios hold overweight positions in the sector.
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