As auto industry stumbles, what’s in store for platinum?

30th April 2009 By: Irma Venter

The world goes to war, and up goes the gold price as investors clamour for a safe haven. This is a textbook example where one event is linked almost inextricably to another.

Being more of an industrial metal than an economic bomb shelter or beauty pageant winner, the cause-effect scenario pans out differently for platinum-group metals (PGMs).

The price does not necessarily move when the US invades Iraq, but it does drop rather swiftly every time a Japanese vehicle manufacturer announces that it has discovered the holy grail of vehicle emissions technology: an auto catalyst that uses much less of the pricey platinum, palladium or rhodium.

With between 50% and 60% of the world’s PGM production finding its way to the automotive industry, the impact of any such technological breakthrough carries the potential of unravelling market fundamentals.

Inevitably, when someone sneezes in technology-hungry Tokyo, South Africa, as the world’s largest PGM producer, could catch a cold.

But how close are vehicle manufacturers really to hauling new emissions technology from the laboratory to the production line, and should miners and investors really fret about the impact of this on the PGM market?

And, perhaps, even more importantly, should platinum-miners not be altogether less concerned about emerging emission technologies, and more concerned about the current steep decline in vehicle sales and, therefore, auto-catalyst demand, as the global economic crisis deepens?

More than 100 years after the invention of the motor vehicle, there are other issues to consider rather than just emissions reductions.

For example, how will the predicted demise of the internal combustion engine, and the subsequent rise of new drivetrain technologies, such as the electric vehicle, diminish the demand for auto catalysts?

EMISSION (ALMOST) IMPOSSIBLE


A simple explanation would be to say that auto catalysts are used in the exhaust systems of vehicles to reduce emissions to the environment, such as carbon monoxide.

Petrol-fuelled vehicles typically use a three-way catalyst, so-called because it converts three pollutants, carbon monoxide (CO), hydrocarbons (HC) and oxides of nitrogen into carbon dioxide, water and nitrogen. Conversion rates of over 90% are possible.

Diesel engines require a diesel oxidation catalyst to remove CO and HC, and can also reduce particulate matter (PM) by up to 50%.

More effective PM removal is achieved with diesel particulate filter (DPF) systems.

PGMs form the active components in all of these auto catalysts, as platinum, palladium and rhodium offer remarkable resistance to high-temperature corrosion and oxidation.

PGMs were first employed in catalysts in 1974, in preparation for the US’s Clean Air Act. Back then, these catalysts primarily used platinum.

Europe only began using auto catalysts in the early 1990s, as the debate around global warming and the contribution of harmful vehicle emissions to this phenomenon intensified, and emissions regulations tightened.

Today, around 90% of all new petrol cars being built contain auto catalysts, also called catalytic converters.

However, as diesel passenger cars have gained in popularity, their power trains have also become subject to increasingly stringent emissions regulations.

At first, it was not that expensive to use platinum in catalyst production, until the price of the precious metal started to rise from around $360/oz, in 1999, to more than $1 980/oz, in 2008. The current price is around $1 200/oz. (Platinum recycling from catalytic converters already started in the late 1970s, as soon as escalating prices made it economically feasible.)

It didn’t take the automotive industry’s research and development departments long to seek a cheaper substitute, which they found in palladium.

The current palladium price is around $240/oz. The substitution of platinum for palladium was one of the first moves to shake the PGM market.

Palladium is already a full-on substitute for platinum in petrol auto catalysts, but still only a partial substitute in diesel auto catalysts.

Today, vehicle manufacturers worldwide are working towards cutting the use of all types of PGMs in catalytic converters to the bone, and to find a less expensive substitute. Gold is one such option. At around $870/oz, the yellow metal is much cheaper than platinum.

In December 2007, the World Gold Council, which aims to improve global gold demand, announced that it had agreed to a long-term partnership with US company Nanostellar to enable the introduction of gold in the auto catalyst market.

Nanostellar has developed a product that uses gold, alongside platinum and palladium, in an auto catalyst. This can reduce emissions by up to 40% more than the platinum catalysts used in diesel-engine applications.

However, platinum punters argue that this technology still requires platinum and palladium, adding that gold remains much more expensive than palladium.

THE MANTRA IS ‘LESS’

To vehicle manufacturers, it’s all about cutting vehicle production costs. In 2007, the Nissan Motor Company, in Japan, announced that it had developed a petrol- engine catalyst for its Cube compact car, which uses half the platinum, palladium and rhodium than existing technology.

Nissan developed the technology in collaboration with French vehicle manufacturer Renault.

The same day the platinum price for immediate delivery dropped $27/oz, and the palladium price, $5/oz.

In 2008, yet another Japanese company, Mitsui Mining & Smelting, said it had developed a new catalyst for diesel-engine cars that replaces platinum with silver – yet again the argument being one of cost. (In 2008, the cost of PGMs used in catalysts equated to around $200 a car.)

By substituting platinum with silver, the cost of precious metals in the production of auto catalysts can be cut by more than 90%, said the company.

Mitsui said it believed emissions regulations for heavy (diesel) vehicles would become increasingly tighter from 2012, creating a tantalising market for its innovation.

Silver currently trades at around $12/oz – but, for how long should silver become a PGM substitute?

Again, shortly after the announcement, platinum for immediate delivery dropped by $7,50/oz.

In early 2009, it was Mazda’s turn.

The Japanese car manufacturer said it would launch the first market application of single-nanocatalyst technology in automotive catalytic converters later this year.

This, the company said, would reduce the use of PGMs in auto catalysts by 70%.

Earlier, other vehicle manufacturers, such as Honda, used something called perovskites to replace PGMs; however, this move experienced some durability problems. (Perovskites are a large family of crystalline ceramics that derive their name from a specific mineral known as perovskite.) Daihatsu Motor Company is working on developing a platinum- free fuel cell car.

NOT YET, AND MAYBE NOT AT ALL


The local platinum-mining industry seems less perturbed by recent technology developments than jittery investors. The industry appears to be betting on the strong emerging markets of China and India, where vehicle ownership is rising, but emissions legislation lacking, to counter any potential drop-off in demand.

“The long-term outlook for PGM demand in the automotive industry is one of strong growth for all three metals,” says South Africa’s Impala Platinum investor relations executive Bob Gilmour.

Already the PGM industry has survived a 50% cut in the use of these metals in auto catalysts. It is a rought estimation that between 5 g and 10 g of platinum was used in an auto catalyst in 1980, declining to between 3 g and 4 g today, says Gilmour.

“[Future] demand will be driven by the tightening of existing emissions legislation and the adoption of legislation in the developing regions of the world,” he adds.

“The extension of legislation to cover retrofit, off-road vehicles and motorcycles will further boost demand.” Already the use of platinum has doubled since the start of the decade.

Gilmour says the automotive market takes up around 55% of global PGM supply, 60% of palladium, and 85% of rhodium supply. He notes that the automotive industry has tried doggedly for the last 30 years to find alternatives for PGM-based catalytic convertors.

“They have been unable to do so due to PGMs’ unique catalytic properties and superior durability while operating in the extremely hostile environment of an internal combustion engine.”

Equally, Gilmour is not worried about any threat sprouting from new technologies vying to replace the internal combustion engine. The main thrust of global environmental legislation is to lower emissions, he explains.

“Electric vehicles do not achieve this as they simply move the emissions from one source to another. Electric vehicles emit no emissions; however, power stations have to generate more electricity and, thus, generate more emissions to power the vehicles.”

Chemicals giant and auto catalyst producer BASF also sees no immediate threat from the rise of the electric vehicle. BASF has a 43% share in the Asian auto-catalyst market.

BASF Mobile Emissions Catalysts global product manager Dr Marius Vaarkamp tells Mining Weekly that the prediction for the penetration of the electric vehicle by 2020 ranges from 5% of the global market to 20%, depending on oil price developments, and incentives and policies to encourage the introduction of these vehicles. (The higher the oil price, the stronger the argument for electric cars, which use no fuel.) However, he adds, over the same timeframe, the total number of [internal combustion engine] cars produced is expected to grow by more than 50%.

“Hence, for the next decade the use of catalytic converters is expected to grow,” says Vaarkamp.

“For gasoline- and diesel-power- ed combustion engines BASF does not expect any technology to overtake the catalytic converter.” Hybrids do not present too much of a problem either, adds Gilmour.

“Hybrid vehicles use a combination of a battery and a standard internal combustion engine, [and] the use of a combustion engine requires the use of a catalytic converter.”

In fact, says Gilmour, in many cases the catalysts used in hybrid electric battery/internal combustion engine vehicles use more PGMs.

Owing to the on-off nature of the engine – the battery takes over when it can – the engine may experience a few cold starts, and most emissions occur when the engine is cold.
Hybrids and alternative engines are gaining traction worldwide.

For example, Toyota aims to sell one-million or more hybrid vehicles a year as early as possible in the 2010s. Gilmour says the “only true emission-free technology” is the fuel cell – which uses a platinum catalyst.

“This technology converts hydrogen and air into electricity and water using a platinum catalyst.

“This technology currently uses considerably more platinum than a conventional catalytic converter.”

A fuel-cell uses a whopping 100 g of platinum (compared with less than 5 g in an auto catalyst).

However, Gilmour says fuel-cell technology is not about to appear on showroom floors any time soon, owing to the lack of hydrogen refuelling infrastructure for these fuel cells, as well as issues regarding cost, and the limited driving range.

As such, he adds, Impala Platinum does not foresee new vehicle technologies having any impact on the South African mining industry.

WAIT AND SEE


Apart from being the world’s biggest PGM producer, South Africa also manufactured 13,5-million auto catalysts in 2008. The country has an estimated 14% market share in the global catalytic converter manufacturing industry. South Africa’s automotive industry is cautious to laud any ‘breakthroughs’ in auto-catalyst technology.

National Association of Auto-motive Component and Allied Manufacturers executive director Roger Pitot notes that a wait-and-see attitude may be prudent with respect to catalyst technology breakthrough announcements, which are being made at an increasing rate. He refers specifically to the Mazda announcement.

“There have been a number of these ‘breakthroughs’ in the past 20 years, but all the others have proved unsustainable for one reason or another.

“It remains to be seen whether this one will be reliable and cost effective.” He also notes that Mazda’s technology, for example, may be restricted to the Japanese car maker.

“Some part of the technology might be patented and other OEMs (original equipment manufacturers, or vehicle manufacturers) may not be able to copy it in the medium term, even if it does prove successful.”

In general, he adds that “the predicted global growth in catalytic converter volumes is huge, more than doubling over the next ten years as China, India, and small vehicles in many other countries respond to clean legislation”.

These additional numbers may then pick up the slack in PGM demand possibly created by Mazda’s or other vehicle manufacturers’ technologies.

Pitot does expect PGM prices to drop should less of these metals be used in future catalysts, which he describes as “good for cars, but bad for the mines”.

THE BAD NEWS

PricewaterhouseCoopers (PwC) Automotive Institute senior analyst Calum MacRae has some potentially bad news.

“Already we’re seeing platinum being substituted for palladium, gold and silver as nanotechnology research is increasing, which will mean far less demand for precious metals if successfully mass-produced,” he notes.

Given the need for the industry to continually ratchet down costs wherever possible, and the potential for new technologies to enter the catalyst market, there are notable risks to platinum’s dominance, adds MacRae.

However, he says the tightening emissions standards in countries such as China and India, lagging European standards by a generation or two, do provide some counterbalance for the substitution threats platinum is facing.

However, given that emerging markets are more price sensitive and OEMs there are more margin pressured, it’s possible that OEMs will want to make the direct leap to the new-generation, lower-priced catalysts, explains MacRae.

He adds that the PGM substitution problem is a long-term challenge the global automotive industry is facing. For the moment, though, there are more pressing short-term issues, such as rapidly declining vehicle production, taking the demand for PGMs with it.

The Detroit-based PwC Automotive Institute forecasts global light vehicle output of 54,9-million units in 2009, the lowest level since 2001.

This is mirrored in the South African catalytic converter manUfacturing industry, producing 13,5-million automotive catalysts during 2008, down 17 % compared with figures for 2007.

It is only when comparing production volumes in the fourth quarter of last year – when the global economic crisis set in – with third-quarter production volumes that the numbers become even more significant. Here the drop is even more dramatic, at 45%.

The automotive catalyst industry is South Africa’s premier automotive component manufacturing sector, comprising around half of all automotive component exports.

Export sales of catalytic converters from South Africa reached R18,3-billion in 2007.

“Due to the platinum market’s large reliance on the auto industry for its volumes, it’s difficult not to think that a forecast of low vehicle production volumes in 2009 will not effect the platinum market,” says MacRae.

“On the positive side, the cash conservation requirements for automotive companies – indeed all companies – in the present circumstances could provide the platinum industry with breathing space as research and development expenditures are being pressured.”

MacRae’s prediction proves true. A drop in vehicle production has most certainly influenced PGM demand, and will continue to do so in 2009, creating something of a more immediate problem for the industry than that of technology innovations.

Precious metals consultancy GFMS estimates in its newest platinum and palladium survey, published at the end of April, that 2008 demand for platinum in autocatalyst applications fell sharply by 8% to around 120 t, while demand for palladium contracted by 6% to just over 137t.

For platinum, the bulk of the loss was attributed to the slump in global vehicle production, combined with the continuing effects of thrifting and its substitution by palladium in both diesel and petrol applications.

The most pronounced drop GFMS recorded was in the embattled North American automotive industry, where demand for platinum plunged by 25%. A substantial decline was also recorded in Europe, the world’s largest market for light diesel vehicles, with demand falling by 6%, despite the increased fitment of DPFs ahead of the implementation of Euro V emissions standards.