Light at the end of tunnel for platinum group metals with US rate-cutting cycle

South Africa’s platinum group metals (PGM) sector has been hammered by a collapse in prices triggered by factors ranging from Chinese fibreglass manufacturers using less rhodium, to hype around the rise of electric vehicles, to high interest rates in the US. 

Read more in Daily Maverick: On the sly, Chinese chemists have eroded SA’s PGM industry

But there may be light at the end of this tunnel and the first flickers are the prospects of US interest rates being cut this year. This matters for South Africa because PGMs account for about 10% of South Africa’s exports by value and the sector is the biggest employer in the mining industry.

“The prices have flattened out, so there is no further deterioration. And I think we’ve found the bottom, but there is a high degree of uncertainty,” Northam Platinum CEO Paul Dunne told Daily Maverick in an interview on the sidelines of the PGMs Industry Day organised by Resources For Africa.

According to Johnson Matthey data, the price of platinum fell to $891 an ounce in mid-February from $1,007 at the start of the year, a drop of  11.5%. It has since rebounded to close to $990.

Over the same period, palladium fell by more than 21% to $880 an ounce and has since risen to $1,102, just a bit lower than where it started the year.

“The interest-rate cycle turn is really important for all metals. The indications are that the US Federal Reserve will cut this year — it’s now a question of when,” Dunne said when asked what would help to sustain the bounce in the short term.

The Fed has signalled it expects 75 basis points worth of cuts this year from the current 5.25%-5.5%, but the sustained strength of the US economy has economists questioning both the timing and depth of this loosening of monetary policy.

More uncertainty on this front emerged on Wednesday with the publication of data showing that US inflation picked up pace in March, raising the prospect that US interest rates will remain high for longer.

Critical

This is critical for the PGM markets as the primary demand for these metals is for emission-capping catalysts in petrol and diesel vehicle engines, and new vehicle demand in the US and elsewhere is highly sensitive to interest rates.

“Just the reversal will be very important. It’s an affordability consideration because of the interest rates, so consumers hold off on the purchase of a new car,” Dunne said.

“For many people, this is the second-most important asset they buy in their lifetimes, or even the most important if you don’t own a home yet.”

Beyond the interest rate cycle, other factors that will determine PGM prices include shifting demand for battery electric vehicles (BEVs), which don’t require PGMs in their mix.

“Customers are very discerning and some of the disadvantages of BEVs are becoming very apparent,” Dunne said.

Tesla’s first-quarter vehicle deliveries fell by 8.5% compared with the same period in 2023, and the expected demise of the internal combustion engine (ICE) has shifted into a lower gear. This does not mean that BEVs will not eventually overtake ICE vehicles, but the road ahead is far from clear.

In the longer run, PGM producers are looking for opportunities in the emerging hydrogen market, but that outlook is also unclear.

For now, much will hinge on the pace and timing of US interest rates. DM