aberdeen standard physical platinum shares ETF PPLT
April 25, 2019 - 1:51pm EST by
2019 2020
Price: 83.77 EPS 1 1
Shares Out. (in M): 1 P/E 1 1
Market Cap (in $M): 1 P/FCF 1 1
Net Debt (in $M): 1 EBIT 1 1
TEV (in $M): 1 TEV/EBIT 1 1

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I recommend buying platinum, most easily through PPLT.  The ETF trades at ~$84, which corresponds to a spot platinum price of $880. This trade is best for longer-term holds that can weather any volatility over the next 12 months, after which the price is very likely to be higher. My reasoning is as follows:


Platinum is weak due to demand destruction relating to Dieselgate.  However, this will normalize over time.  The demand structure for platinum is roughly as follows: 40% jewelry, 20% general industrial, 15% heavy-duty truck diesel, 5% passenger gasoline, 20% passenger diesel.  This 15% is definitely at risk and is shrinking as we speak. However, there are several areas for substitution gains which are likely to transpire if the current price structure persists.


Gain share from palladium in gasoline engine autocatalysts.  Historically, palladium traded at a wide discount to platinum.  This made it worthwhile for auto OEMs to invest in the technology to substitute palladium for platinum in catalytic converters.  Currently, palladium has most of the gasoline engine autocatalyst market. However, palladium is now at $1,400/oz with platinum < $900.  More importantly, palladium was > $1,600/oz last month with most industry observers calling for an extended shortage. This shortage is real, as can be seen by the palladium ETF (PALL) going from 3MM oz to 700K oz, due to industrial users buying the ETF and taking delivery of the metal.  Auto OEMs thus must consider not only the price differential but the risk of a supply shortfall in planning their autocatalyst usage for future models. This substitution will take some time but will almost certainly occur. For example, this is what happened in 2000:




That said, it won’t be instantaneous.  “It’s not a flick of a switch for us,” Rahul Mital, global technical specialist, diesel aftertreatment at General Motors, said in a panel discussion at a London Bullion Market Association meeting in Boston Monday. “Any time you want to make a substitution like that, it is at least 18 months to a two-year cycle if we’re going to switch. We have to be careful that by the time we do all that,” price changes don’t negate the benefits, he said.


“If palladium pressure continues, you will see those results.”



Gain share from gold in jewelry

Currently, 2.3MM oz of platinum are used in jewelry (https://www.platinuminvestment.com/files/853432/PQ_Table_Q4_2018.pdf). However, 75MM oz of gold are used in jewelry (https://www.gold.org/goldhub/data/gold-supply-and-demand-statistics.  If only 1% of jewelry demand shifted from gold to platinum, this would absorb all of the lost autocatalyst demand.  I think this is not particularly far-fetched. In many cultures, platinum is perceived as a premium product to gold (Amex Platinum Card, e.g.), and it would only take one large jeweler to start pushing platinum (premium product, lower price) to make a meaningful dent.  


The supply side

Currently, platinum producers are doing fairly well.  However, in most environments, most of the industry would be losing money with platinum < $900/oz.  Today, higher palladium (and to a lesser degree, rhodium) prices are making the production basket (for South African mines, roughly â…” platinum and â…“ palladium) profitable.  However, this may not persist.


First, some cost curves:



Most of the industry is barely profitable at $900, assuming normalized palladium and rhodium costs.  Additionally, the 2017 cost curve overstates profitability due to ZAR weakness.  With most platinum production in South Africa, this has a huge impact on the costs.  After a long run of a weakening ZAR, the currency has flattened out in the last few years, and has actually strengthened since last fall.  


The bigger issue for South Africa, though, is higher labor costs, with a government that is dedicated to improving workers’ conditions and economics.  For example: https://www.bloomberg.com/news/articles/2019-04-09/world-s-biggest-platinum-miner-braces-for-tough-wage-talks

Some mines have already shuttered: https://www.coinworld.com/news/precious-metals/2018/08/south-african-platinum-miner-shutters-mines.all.html

Electricity availability is also a real issue for platinum, as roughly 5% of costs are power: https://www.bloomberg.com/news/articles/2019-04-08/power-shortages-in-south-africa-could-get-a-whole-lot-worse


In the medium term, stricter emissions standards are likely to lead to more platinum and palladium demand, especially in China (https://www.kitco.com/news/2017-10-12/Q-amp-A-Platinum-apos-s-discount-to-palladium-sparking-thoughts-of-substitution-JM.html).  Long-term, there is risk from electric cars, though I would note that fuel cells use a lot of platinum, and that fuel cell technology isn’t dead yet!


Finally, there is a nice “heads I win, tails I win” aspect to the palladium price.  If palladium increases in price due to the ongoing physical shortage, then platinum supply will continue unabated as the overall economics will remain favorable.  However, the incentive to substitute will increase dramatically, meaningly benefiting platinum demand. If palladium instead declines, then the overall profitability for South African mines will drop, leading to further closures and supply cuts, which would also serve to support the platinum price.


I expect platinum to increase ~20%, to $1,000-$1,100 in the next six months, as it becomes clear that both supply and demand are responding to current realities.

I also expect that $800 is a reasonable floor here, so perhaps buying a half position at current prices and adding to it if the metal drops to near $800 (10% lower) would be a reasonable approach.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


announcements of substitution from jewelers or automotive users

large moves in the palladium price

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