The days of the regular combustion engine vehicle (CV) that we all drive are numbered. Globally, governments have put in place strict regulations to significantly reduce vehicle CO2 emissions or in some instances, even reduce to zero. Such an expectation will be realised with the advent of electrical and fuel cell vehicles replacing today’s normal CV. How long this replacement will take is the million-dollar question and this is why platinum shares are presenting themselves as the investment of a generation.
SA platinum mines produce 54% of total world supplies. Currently, CVs use 40% of total platinum supplies. Therefore, one could safely conclude that replacing CVs with electric vehicles (EV)s will end the need for 40% of the world’s platinum. This is why the Platinum price is at a 12-year low and share prices are at 10-year lows. It would not be a stretch to consider that existing platinum share prices indicate that most mines will eventually shut down.
Although we do believe there is a chance that CVs will not be produced at some stage (20 to 30 years’ time), our research and analysis shows that the demise of the CV over the next ten years is likely to be a lot slower than prevailing market hype. Therefore, demand for platinum is likely to increase for at least the next ten years as EV growth is slower than expected, CV CO2 emissions continue to reduce and the possibility of hydrogen vehicles succeeding that use 3 to 4 times more platinum then a CV, continues to grow.
Let’s look at the outlook for EV and CV
The most aggressive forecast for electric vehicles (EV) is for them to grow to 25% of the total global car market by 2025. That translates into 30 million EVs sold annually from a current 1 million and normal, petrol (combustion) vehicles (CV) sales, to remain flat at 90 million.
There are significant headwinds to this target being achieved and a more likely forecast is 10% market share by 2025, which equates to 12 million EVs and 108 million (+20%) CVs in 2025. And, there are significant reasons for this.
Reasons why EVs are unlikely to have more than 10% market share by 2025:
- The purchase price of a EV is, on average, 25% more than a CV. Certainly, this gap will narrow over time, but restraints are significant, and a new breakthrough in battery technology is needed.
- Re-sale prices of EVs are also much lower than CVs due to the current high battery replacement costs.
- There is a supply constraint on the amount of lithium and cobalt necessary to produce the number of required batteries for EVs.
- EVs do not have sufficient driving range to compete with CVs and this leads to driver anxiety.
- There are not enough recharging facilities and it takes several hours to achieve a full charge.
- EVs need to further adapt to operating in extreme temperature conditions.
- Electricity capacity is unlikely to cope with the electricity demand for 30 million EVs by 2025.
- A decline in vehicle producer profitability. Although there is widespread support by producers for EVs, lower initial profits may reduce the rate of EV production.
- Lower oil prices, due to a drop-in demand, could also delay the demand for EVs.
- Some ambitious EV sales targets such as Tesla’s and Nissan/Renault’s, have already been missed.
Still, there may be a place for hydrogen vehicles and hybrid CVs
Fuel cell technology is the major competitor to EVs. This incorporates the use of hydrogen to drive engines. These engines use approximately 3 to 4 times more platinum than a normal CV. A massive amount of money is being invested by major vehicle producers in developing this technology. Already in China, a bus fleet of 300 is currently run by hydrogen engines.
The hybrid EV is popular, has far lower CO2 emissions than a regular CV and, is likely to play a significant role until battery technology is 100% competitive. Hybrid EVs use as much platinum as normal CVs.
The CO2 emission targets are forcing CVs to use even more platinum in their catalytic converters.
Still lots of platinum demand over the next ten years
It’s more likely that EVs will have a 10% or at best 15% market share by 2025. The jury is out on Hydrogen vehicles, but, a strong view is that these vehicles will dominate the long-distance market (trucks, busses, some cars) in years to come. It is likely that more platinum will be needed in CVs and hybrids by 2025 to meet reduced CO2 emission standards. Therefore, current platinum vehicle annual demand of 4300Koz is more likely to increase by 2025 than decline. The increase could even be significantly higher than in previous years.
Constraints on platinum supply are to boost platinum prices
With the current low platinum price, the average mine is operating at a loss. This is reducing their funding resources and preventing new, much needed investment to establish new areas to extract platinum once the current areas are exhausted. It takes approximately 3 years to develop new capacity at a massive cost that most mines cannot afford. Therefore, unless the platinum price goes up significantly to at least $1200 per oz (from current $950 per oz) to make mines profitable, mining capacity will continue to decline and supply will drop sharply. Current estimates are, that by 2025, platinum mine output will drop to 3800Koz per annum assuming an inflationary increase in the platinum price.
Medium-term supply shortage a concern and reduced demand not realistic
It is highly likely that there will be a major supply shortage over the next 10 years unless the platinum price starts to increase. This would result in an eventual big spike in the platinum price.
It is difficult to predict when the broader market will realise / believe that platinum demand will not decline in the next 10 years. This myopic view is being overshadowed by all the hype around the new era of EVs such as Tesla. However, some producers have started to worry about the platinum shortfall. Toyota recently paid a $200m deposit to Amplats to lock-in offtake when platinum supply constraints start.
A huge gap between supply/demand outlooks makes for an interesting investment opportunity
According to John Biccard, Fund Manager of Investec’s Value Fund, Impala Platinum provides the best investment opportunity in a very long time. He calls it “the Buy of a Generation”. The share is 90% off its 10-year high at R35/share. At a platinum price of $1500oz and Rand/Dollar of 13, Impala should earn R10 per share, placed on a P/E of 10, this equates to a value of R100 per share. This is a 200% return. The top-rated industry analyst in the country, values the share at R135 per share.
A good way of gaining exposure is through the Investec Value Fund which holds 23% in Platinum (Impala 11%, Amplats 10% and 2% Other). Coronation and Allan Gray are also major shareholders in Impala.
It’s all about timing and patience
It’s difficult to predict when the platinum price will recover given that all this information regarding supply and demand is known by the market. Ultimately, it comes down to when the market realises that the switch to EVs will not reduce platinum demand within the next 10 years. Another catalyst, unfortunately, could be the closure of Lonmin if the Platinum price stays below $1000oz. This would reduce annual supply by 9%, putting the market into a major deficit.
Investing in Impala Platinum is classic value investing. A price-to-book value of 0.5, a healthy balance sheet and, waiting for eventual market growth to boost earnings. Timing your investment is difficult and will require patience but returns are potentially huge.
Coronation article
Coronation Fund Managers produced a very interesting piece on this subject titled: Disruption in the automotive industry. They also addressed the growth in mobility service, such as Uber. The effect of this we included in a lower vehicle growth assumption of 3%.
Although the article was published a year ago, the author/analyst has confirmed that their view has not changed since then. Please click here to read the article
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