Automakers Flash Warning over Supplies of Critical Metals / Commodities / Metals & Mining

Whilemotorists continue to enjoy the benefits of a longstanding supply glut in crudeoil, car manufacturers are becoming increasingly worried about shortages. Notin liquid fuels, but in metals.

Theautomotive industry requires certain strategic, rare, and precious metals.Without them, batteries for electric cars wouldn’t function and catalyticconverters for gasoline engines wouldn’t work.

Manyof the metals that play a critical role in both conventional and electricvehicles now face potential supply shortfalls.

Electricvehicle maker Tesla warned recently of “looming challenges for the metalcomponents used to make EV batteries.” Specifically, supplies of lithium,cobalt, copper, and nickel are failing to keep pace with exponential demandgrowth for batteries used in cars, solar power systems, and handheld devices.

Producersof conventional gasoline and hybrid vehicles are concerned about supplyscarcity in another critical metal: palladium.

Palladium’sSupply Deficit Expands

Automakersuse palladium (and/or its sister metal platinum) in emissions controldevices known as catalytic converters.

Inrecent years, most car catalytic converters have been engineered for palladium.It made a lot of sense to favor palladium when prices were low and suppliesseemed plentiful enough.

Nowthe auto industry’s dependence on palladium is backfiring. Since 2016, pricesfor the specialty metal have more than tripled as supply deficits have widened.

Theglobal palladium market ran a deficit of 600,000 ounces in 2018.

Thedeficit is expected to rise to 800,000 ounces this year as palladiumconsumption reaches 11.2 million ounces while mining production lags and iffyRussian stockpiles dwindle.

Sinceautomobile production accounts for close to 80% of total palladium demand, theindustry can’t expect thrifting from other industries to close the deficit.Some industry leaders have suggested investing directly in the metals miningsupply chain in order to ensure adequate supplies of palladiumand other metals.

Atpresent, just a few politically turbulent countries have near total control ofthe market for some key “energy” elements: China (rare earths), DemocraticRepublic of Congo (cobalt), South Africa and Russia (palladium and platinum).

Becausethese markets are so region-specific, industry-specific, and thinly traded bythe public, they are difficult to forecast. The decision of a single largecompany could drive an entire boom/bust cycle.

Thisactually happened to the palladium market when it surged from the late 1990sinto 2001 (hitting a record high that stood until 2018) on stockpiling by FordMotor Company. Ford brought forward so much future demand that palladium prices spiked, then crashed.

Inretrospect, it was a dumb move by the automaker. But fears of shortages andhigher prices could again drive companies to make rash decisions.

WhichEnergy Metal Will Provide the Best Catalyst for Investors?

Thequestion for long-term investors is which metal represents the best value.Which is cheapest on a fundamental basis, has the greatest opportunity toappreciate, and has the least likelihood of crashing?

Betweenpalladium and platinum, the one that stands out clearly as being undervalued isplatinum.

Sinceboth metals have similar properties, are similarly scarce geologically, andperform the essentially same function in auto catalysts, we shouldn’t expectpalladium to sustain a large premium over platinum.

ThisJuly, the palladium price rose to a historically large premium of 2 times the platinum price before retreating.

Formost of their history, palladium has sold at a discount to platinum. Platinumis used more in jewelry and is generally regarded as a more prestigious metal.

Whatultimately matters for relative price trends, though, is whether the autoindustry begins switching back to platinum.

Platinum’sRoad Less Traveled

Cancheaper platinum simply be substituted for pricier palladium? Yes…and no.

Intheory, yes, platinum can be used instead of palladium in catalytic converters.But in practice, making such a substitution would require big up-front costs.And in some cases, larger quantities of platinum would be needed perretrofitted device than the quantities of palladium now used.

Catalyticconverters in electric and hybrid vehicles also require higher quantities ofpalladium than traditional cars.

Someproponents of electric vehicles imagine that lithium and cobalt will be themetals of the future, with battery technology rendering catalytic convertersunnecessary.

However,there is a big problem with that scenario – namely, that electric vehicles areuneconomic versus gas-powered vehicles. Worse (from the standpoint ofenvironmentalists), studies have shown that higher-cost EVs leave an evenbigger environmental footprint. Rising costs for battery metals will onlyexacerbate their disadvantages.

Moreover,hybrid gas/electric vehicles actually require more palladium/platinum, onaverage, than gas-only vehicles!

Palladiumis projected to remain in a supply deficit for at least three more years.During that time, a price spike is possible.

Overa longer timeframe, the forces of supply and demand will likely work in favorof platinum. Patient investors who buy assets while they are historicallyundervalued and hold for the long run tend to do better than those who chasehot stories.

Stefan Gleason isPresident of Money Metals Exchange, the national precious metals company named 2015"Dealer of the Year" in the United States by an independent globalratings group. A graduate of the University of Florida, Gleason is a seasonedbusiness leader, investor, political strategist, and grassroots activist.Gleason has frequently appeared on national television networks such as CNN, FoxNews,and CNBC, and his writings have appeared in hundreds of publications such asthe Wall Street Journal, Detroit News, Washington Times, and National Review.

© 2019 Stefan Gleason - All Rights Reserved

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