KEY TAKEOUTS

• It is widely believed that the decline of the PGM sector is due to – among other factors – the growth of the electric vehicles market, which continues to compromise demand for internal combustion engine vehicles.
• However, the rapid transition to a greener world economy could provide an opportunity to improve the demand prospects for PGMs used in evolving green technologies, particularly in the production of green hydrogen.
• Demand from green hydrogen production will mean increased demand for one of the main components in this production, the electrolyser. This improves the outlook for PGMs such as platinum and iridium, which are used in the production of electrolysers.

The decline of the PGM sector – made up of platinum, palladium, rhodium, iridium and ruthenium mining – continues to dominate headlines, with talk of falling prices and related company layoffs causing increasing anxiety levels within the sector and among PGM investors. It is widely believed that this decline is due to – among other factors – the growth of the electric vehicles market, which continues to compromise demand for internal combustion engine vehicles.

However, what if the sunset on this vehicle industry is actually presenting an opportunity for growth in the PGM sector? We explore what this changing environment means across the board below.

A dearth of demand

The substitution of internal combustion engine (“ICE”) vehicles by battery electric vehicles (“BEV”) – which is currently dominating the evolution of the automobile industry – is rising globally but is particularly prevalent in China. The main reason for this is that ICE vehicles require a significant amount of PGMs in their production (Rhodium and Palladium constitute 85% and 95% of ICE PGM demand, respectively), whereas BEVs do not make significant use of PGMs across the sector. This reduced demand for PGMs in electric vehicle production leaves the market without an alternative industry or sector to take up PGM demand.

However, the rapid transition to a greener world economy could provide an opportunity to improve the demand prospects for PGMs used in evolving green technologies, particularly in the production of green hydrogen. In exploring the PGM opportunity, we need to unpack the shift from ICE vehicles to BEVs that is currently largely negatively impacting PGM demand, but also consider the inevitable rise of BEVs (despite potential supply constraints in the materials used to manufacture batteries such as lithium) and some of the newer green hydrogen technology, which will support the use of PGMs as the demand for green hydrogen takes off. 

The cooling off of ICE vehicles

HSBC forecasts that ICE vehicles are expected to peak at 75.1mn vehicles in 2023, followed by declines of 2% year-on-year in 2024e and 3% in 2025e. Further evidence that the cooling off of the industry is already occurring in 2023 is illustrated by a recent Johnson Matthey research report, which shows that automotive PGM consumption will see only marginal gains and world automotive PGM demand is forecast to rise by just 1% to 12.2 million oz, with BEVs expected to capture all the growth in light vehicle production this year.   In addition, the rollout of increased and stricter emission reduction regulations from major vehicle manufacturing countries across the globe will further squeeze the manufacturing of ICE vehicles, impacting the cost of compliance as each new standard rolls out.

What if BEV demand and supply doesn’t increase significantly enough?

According to a recent Bloomberg report, 23 countries have already reached a 5% tipping point for BEV sales of new vehicles and, citing historical context for other new technologies, once this tipping point is reached, growth normally becomes exponential. While there seems to be no stopping the demand for BEVs in the foreseeable future, there may be downside risk on the supply side from one of the key minerals for the manufacture of batteries, namely lithium.

The HSBC research indicates that the use of lithium batteries for energy storage across many industries and equipment extending beyond BEVs means that lithium is unlikely to see a supply constraint based on growth in the mining of lithium and it being in super-cycle territory. However, short-term supply constraints may arise due to bottlenecks in refining capacity, which will only come online in the medium- or long-term. Lack of sufficient battery supply may result in a slower adoption of BEVs, which would positively support the demand for the palladium and rhodium market, given that their demand is heavily driven by use in ICE vehicles.

Electrolysers to the PGM market rescue?

As a signatory to the Net Zero Asset Managers Initiative, our base case is that the global economy will ultimately transition to net zero by 2050 or sooner. In this net zero scenario, the below graph shows how the various global energy authorities expect the demand for green hydrogen to increase significantly, albeit differing in forecasts over the medium- and long-term:

Regardless which, if any, of these forecasts is correct, the fact remains that demand from green hydrogen production is bound to significantly increase, which, in turn will mean increased demand for one of the main components in this production – the electrolyser. Without going into a detailed analysis of the technology and the different types of electrolysers involved, Citi’s recent research report, Citi GPS: Global Perspectives and Solutions – A reality check on the hydrogen craze, into green hydrogen predicts a huge increase in the production capacity of electrolysers across the world by 2030, a trajectory that is shown in the below graph:

Considering the massive increase in the number of electrolysers being produced, it is worth assessing how many of the different types of electrolysers use PGMs in their production. According to Johnson Matthey, the Proton Exchange Membrane electrolyser uses both platinum and iridium. Using these PGMs for an electrolyser, given their unique combination of catalytic activity and chemical stability, improves energy efficiency and productivity, and maximises an electrolyser's lifetime. While still relatively new technology versus other kinds of electrolysers, PEM electrolysers could take a market share of 40% and achieve an installed capacity of over 1,000 GW by 2050, given the increased supply of green hydrogen, particularly in the US and China, (based on the Hydrogen Council scenario and Johnson Matthey analysis).

So, to conclude, ongoing research is showing that the decline of PGMs may still be arrested by a slower uptake of BEVs if lithium supply constraints occur – this is despite some of the production of PGMs such as rhodium and palladium indeed being in structural decline due to waning ICE vehicle production. In addition to this, the future for PGMs such as platinum and iridium looks very bright if PEM electrolysers play a big role in the production of green hydrogen.  The global transition to a green hydrogen economy, driven by the need to decarbonise various sectors, is looking increasingly likely to drive the development and deployment of PEM electrolysers, which, in turn, will positively impact PGMs. As governments and industries invest in green hydrogen infrastructure, the future for demand for PGM-based catalysts is looking rosier than we might have previously anticipated.