Platinum Prices Under Threat From New Technologies?

Platinum group metals (PGMs) are coming under threat from new technologies. Those in the industry say they’re unconcerned. But they would say that, wouldn’t they?

So, let’s take out own look at this. Aside from being something to invest in, what is platinum used for? And why might new technologies drive down its price?

Platinum, palladium and rhodium are all used in auto-catalysts that filter out carbon monoxide and other emissions. Increasingly, governments are tightening emissions laws, making catalytic converters mandatory in cars. Last year the use of platinum in cars rose by 8%. The industry now accounts for some 60% of total demand. At the same time platinum prices have risen - more than doubling in two years. In March the price of an ounce sailed past the $2,000 mark to record new highs. But it has now fallen back to a more realistic $1,800 level.

Higher prices — good in the short run, less so in the long run

At these prices, the cost to carmakers for PGMs is around $200 per car. It is a Catch-22 situation. Against a backdrop of rapidly rising costs, high PGM prices are good for producers and investors. But they are also a clear incentive for car-makers to find alternatives. So, whether platinum producers like it or not, car makers are looking to reduce demand for their product.

The quest for alternatives is nothing new, of course. Although staying within the PGM fold, the car industry has already shifted from platinum to cheaper palladium for gasoline vehicles. Since most cars coming on stream in the developing world will be fuelled by gasoline, the recent uptick in the palladium price looks set to continue.

The move from platinum to palladium was led by the Japanese. And Japanese automakers are now leading the way again.

Moving away from PGMs altogether

The new buzzword is "nanotechnology". Nissan claims to have developed a catalyst for gasoline cars that cuts the use of precious metals by half. It reckons the technology will also be used by Renault from early 2009. The company has even held back from locking in a platinum price for the rest of the year.

Then Mazda claims its work on single-nanotechnology will axe platinum and palladium use by up to 90%. Platinum producers seem unconcerned. At first glance nanotechnology developments look detrimental to PGMs. But when you delve deeper the applications are somewhat limited. Many are still in test phase and a long way from commercial application.

Other automakers like Honda have used minerals called "perovskites" to replace PGMs. Honda did it in a minivan sold mainly in Japan. But those plans ground to a standstill - the minerals might be cheaper but they fail dismally on the durability front.

Other ongoing developments in hybrid cars, which use less platinum, could also take off. Toyota and Honda both expect about a tenth of their vehicles to be hybridised by the mid-2010s.

A bullish sign for silver?

Meanwhile Japan's Mitsui Mining and Smelting Co lays claim to developing a new catalyst that applies silver rather than platinum in diesel vehicles! Okay, so this is three years off, but if it materialises silver could be the new hot metal of the moment!

If platinum prices continue to rise, automakers will try harder to find alternatives. Still PGMs do have unique catalytic properties. And with 55 million cars sold globally every year that equates to about $10 bn of PGMs. And demand is still growing.

PGM demand has been growing. Other big takers are the jewellery industry and the phenomenally successful exchange trade funds (ETF), which must be backed by physical metal. Zurich’s Cantonal Bank's platinum ETF has soared by 45% since February.

All the same, while the impact on platinum off-take from all the new technology may be fairly muted for now, investors should bear in mind that technological breakthroughs do happen. And when they do, they can affect the value of your holdings.

Keep mining!

Erin and Isabel P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

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Platinum Prices Under Threat From New Technologies?

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