Platinum, one of the rarest elements in the world, is among the most popular commodities for investors and traders. As a member of the precious metals family, platinum offers a compelling long-term hold as a safe haven and can also be used as an effective trading instrument given its high liquidity and volatile supply chain.
Platinum is generally obtained as a by-product of nickel and copper mining and annual production is only a fraction of the gold and silver mined, making the metal more coveted and far more rare. Just how rare is platinum? It is estimated that all of the platinum in the world could fit into a cube that is roughly 20 feet on every side. As this hard asset continues to grow in popularity, we take a look at four price drivers that demand attention from traders and investors alike [see also The Ten Commandments of Commodity Investing].
- The South Africa Effect: Like so many other commodities, the production of platinum is primarily based in emerging markets. But this metal is a special case in that its production is almost exclusively limited to South Africa, a rather volatile emerging market. The nation has historically been responsible for 75% of the world’s annual platinum output and is also home to roughly 95% of the globe’s proven reserves. South Africa is, therefore, the biggest player in terms of this precious metal. With a volatile market that is still trying to break into developed territory, trends in South Africa can have a major impact on the prices and trends of platinum. Mining strikes, economic downturns, and other disruptions will be crucial factors for platinum traders [see also Powerhouse Producers: Cocoa, Platinum, Rare Earth Metals].
- Health of the Auto Industry: About half of the supply of platinum goes towards emission control devices for automobiles; as a catalyst, it allows for the combustion of unburned hydrocarbons from the exhaust into carbon dioxide and water vapor. Because the automobile industry accounts for a significant portion of global platinum demand, the price for this metal can be impacted by the health of this sector of the economy. Greater automobile production generally equates to stronger demand for platinum, while tough times for the industry can put a dent in prices. Keep an eye out for recessions as well as any news impacting the major U.S. producers who have seen their fair share on financial trouble in the past.
- Technological Developments: As automobiles continue to evolve, the supply side of the platinum pricing equation has been put into question. A rise in electric cars might translate into reduced demand for catalytic converters, which in turn adversely impacts the need for platinum. It should also be noted that platinum is extremely expensive, so to the extent that auto producers can avoid incorporating this element into their cars, they will. This will be more of a trend to watch rather than sudden news, but as technology evolves over time, platinum’s uses (or lack thereof) will be a major driver of its underlying price.
- Replacements: Working off of the cost side of the equation, some vehicle manufacturers are substituting palladium for platinum since the former is cheaper to obtain. Historically, only platinum has been able to be used in diesel catalytic converters, but relatively new technologies allow about 25% palladium to be used in the devices. Experiments have shown that that percentage may go as high as 50%, further limiting platinum demand in the process. It should be noted that platinum is widely regarded as the least reactive metal so it may never be completely replaced. But a reduction in its presence in the automobile industry could certainly put a damper on prices (though it would create lucrative opportunities elsewhere) [see also 25 Things Every Financial Advisor Should Know About Commodities].
Disclosure: No positions at time of writing.