PLTM - PGM: South Africa's Electrical Crisis Could Spike Platinum Prices

2023-05-19 08:30:19 ET

Summary

• A new threshold of demand for platinum is emerging as the developed world shifts its massive heavy transport sector from diesel to hydrogen.
• South Africa - the primary supplier (78%) of the metal - is facing the worst crisis in its electricity sector in three decades, crimping much of its mining productivity.
• PGM is an effective way to play this potentially explosive trading setup.

The iPath Series B Bloomberg Platinum Subindex Total Return ETN (PGM) should see a bid this summer. A power crisis in South Africa could crimp global supply of platinum just as the U.S. Department of Energy rolls out a new hydrogen hub network, which will bring a whole new threshold of structural demand for the metal.

The Bushveld Complex represents about 75% of the world's annual production of platinum, but its miners are extremely dependent on a single public utility - Eskom - for their electricity. The utility is responsible for 93% of South Africa's electricity, but decades of poor planning have left it ill-equipped to shoulder that responsibility.

On May 18th, Eskom warned of record outages and load shedding in the coming months. In April, for the first time in its history, it instituted Stage 8 load shedding. To compound the issue: the utility is facing a contentious labor dispute. On May 12th, the NUM -a union that represents the largest number of Eskom's workers-held firm with a double digit pay hike, demanding a 12% increase in wages .

Precious metal miners in South Africa are reacting to these limits of the existing grid with reduced production. A Bank of America report sees platinum rising to $1,500 an ounce by the end of the year -- up 28% from its present price of $1,058 -- citing South Africa's load shedding issues as a supply constraint.

Ironically, platinum demand is expected to jump considerably this year. Because of its high melting point and resistance to corrosive chemical attack, platinum is being used more and more by the hydrogen fuel cell industry. The platinum is used in fuel cell cathodes to strip the hydrogen of electrons to produce electricity. The metal is at the heart of most proton exchange membrane (PEM) designs -specifically as an interface used for splitting water into its constituent parts, hydrogen and oxygen -- as the metal ably withstands chemical corrosion.

Whereas a gas-powered car would only use about 5 grams of platinum (for its catalytic convertor), there is between 40-50 grams of the metal in the fuel cell needed to power a hydrogen vehicle. Last month, the WPIC (World Platinum Investment Council) projected that the hydrogen industry might be the biggest segment of platinum demand in the late 2030s, especially as hydrogen related fuels and fuel cells are expected to replace diesel for heavy transport, trains, and shipping.

The ETF and its "Pure Play" Competitors

Unlike the other two pure play ETFs, the iPath Series B Bloomberg Platinum Subindex Total Return ETN does not hold physical metal. It is structured as an exchange traded note or ETN, trading in futures contracts. It tracks Bloomberg's Platinum Subindex, with its segment benchmark being the LBMA platinum Spot Price.

In comparison, both abrdn Physical Platinum Shares ETF ( PPLT ) and GraniteShares Platinum Trust ( PLTM ) are grantor trusts, which means that they hold the physical metal in vaults, acquiring and disbursing the supply on behalf of the trust's owners.

It has the best expense ratio - .45% versus PPLT's .60% and PLTM's .50% - and appears to outperform its two competitors year-over-year, despite a minuscule daily volume:

Big Picture

It is important to realize that platinum is still 48% off its July 2011 highs of $1,913 an ounce. It clearly bottomed from 2016 to 2020 and now looks like it is on the march to $1,200 as new demand in the energy space arises.

Ultimately, this is the kind of technical "mean reversion" and fundamentalist supply/demand dynamic that translates into a great trading setup long term.

This fall, the U.S. Department of Energy will choose "seven to ten" regional public/private hydrogen hubs throughout the country. These "H2HUBs" as they are being called will be dispersed a total of $8.5 billion in subsidies in 2024. Platinum demand in the United States could explode by an order of magnitude over the next three years as this new operative driver cascades through the system.

In contrast, South Africa -the primary supplier of the metal-appears to be limping into an infrastructural endgame as electrical outages seem to get worse every year. The corruption allegations have become so public that it could conceivably take down the ANC as a political establishment.

Again, just yesterday, the country's only public utility warned of "record power cuts" during its June, July, and August months -technically its winter-and the highest season of use for consumers, but assured the world it would avoid a total collapse of the national grid .

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