Increased regulation around NOx emissions from motor vehicles is expected to support the prices of platinum group metals (especially platinum and palladium) in 2016 by boosting demand for catalytic converters, according to commodity-based exchange-traded product provider ETF Securities.

Nitesh Shah, Director – Commodities Strategist at ETF Securities.

Last year tighter emission standards were rolled out in Europe, a move that is expected to follow in the US and India. In Europe there are more diesel cars than gasoline cars – diesel cars use higher platinum loadings compared to palladium in their autocatalysts. Teamed with the global economic recovery boosting auto sales, this could be a boon for the platinum group metal markets over the medium term.

Nitesh Shah, Director – Commodities Strategist at ETF Securities, commented: “While autocatalysts are not the primary technology to abate NOx emissions, according to Johnson Matthey, platinum group metals optimise the process. As a result, in 2015 platinum group metals loadings increased by 7% due to the roll-out of the legislation. Platinum demand in 2016 is likely to increase as a result of the higher loadings in European cars introduced in September 2015.”

In the US a number of states have already started implementing tighter emissions standards. In California and a number of other “green” states regulations are being brought with the aim of reducing fleet average emissions by 70-80%. LEV III regulations will be implemented between 2015 and 2025 model years and Federal Tier 3 will be rolled out between 2017 and 2025. T

Shah added: “In 2010, India had rolled out an emission standard that was the equivalent of Euro 4 in 14 states. That is to be enforced nationally by 2017. However, such is the desire to improve air quality that this year India decided to scrap the equivalent to Euro 5 regulation roll-out and leapfrog to the equivalent of Euro 6 regulation by 2020. India is thus quickly catching up with its developed country counterparts in emission standards. With emerging market car sales growing rapidly this bodes well for platinum group metals.”

Although caught up in a protracted bear market since 2011, so far this year precious industrial metals have experienced a change of fortune with silver, platinum and palladium rising 14%, 11% and 7% respectively (to 22 March 2016).

Part of their recovery reflects a historically high correlation with gold (silver and platinum monthly returns have been 70% and 57% correlated with gold since 1993) which experienced a significant price rise on the back of heightened market volatility at the start of the year. However, industrial output remains an important factor in the demand for these metals with ETF Securities noting that more than 50% of silver’s, nearly 70% of platinum’s and over 90% of palladium’s use is in industrial applications and automobile components.

The case for a bullish market in these metals is further strengthened by reports from China which suggest that industrial output may have found a base. “While China’s industrial output growth fell from a high of close to 20% year-on-year in mid-2010, it appears to have found a base, after growing at 6% year-on-year in almost every month in 2015,” notes ETF Securities in a latest research report.

Investors in these industrial metal ETPs may also see returns derived from supply constraints over the medium term. “All three of these metals have been in a supply deficit in the past three years,” said Shah. “The deficit is likely to continue. South Africa, which produces 80% of platinum and close to 40% of palladium habitually has labour and energy security problems. The depreciating South African Rand has insulated its miners from the price weakness of the underlying commodity for some time. However, as the South African Reserve Bank is determined to stamp out inflation by raising interest rates and regaining strength in its currency, miners will no longer be as insulated as they used to be. Miners are likely to continue to pare back on activity.”

Investors seeking exposure to these metals through an ETF investment may wish to consider the:
ETFS Physical Silver (PHAG)
ETFS Physical Platinum (PHPT)
ETFS Physical Palladium (PHPD)

Each fund contains a total expense ratio of 0.49%.