Summary

Many, many authors have tried to call a bull market in platinum.

I'm going to call it now.

We have finally gotten to the point where Pt/Pd substitution makes sense.

This substitution will take awhile to occur. In the while, fundamental investors will provide support.

Some trades have the reputation of "widow makers." These are trades that seem to make sense from a value standpoint, but keep going the other way for years. Probably the best known one is shorting Japanese bonds, which has blown up some boldfaced hedge fund names. Going long platinum is another. A quick search through SA's archives will lead you to many long Pt calls, both outright and against Palladium (Pd) and Gold. So, I'm going to get into this soup as well. I am long April 2019 Pt futures, and plan to roll my position for maybe years. Here's why...

Background

Pt is an industrial metal. Its primary uses, as with most platinum-group metals, is as a catalyst for various chemical processes. These are in the chemical industry, the petroleum industry, and in the tailpipe of internal combustion engines. There are cheaper catalysts, but the platinum group is extremely good at catalysis. Moreover industry has gotten expert at thrifting the amount of Pt-group needed. For example, even a US-size car has only about six grams of Pt-group in its catalyst. At current prices and a Pd to Pt of 5:1, that's about $413 per car.

There's a fair bit of substitution possible among the metals. Gasoline engines used to use Pt-based catalysts, but manufactures moved to high percentages of Pd about 15 years ago. Pd was cheaper, and it's easier to control its byproduct reactions at high temperatures. Because of this it can be mounted closer to the engine, which improves performance. Pt is used more intensively in diesels. But they can be substituted.

A side note: about two years ago, I wrote a bullish article on Rhodium (Rh). Rh is needed to help catalyze oxides of nitrogen. It's on a tear, and I do not see where the needed Rh will come from. Could the world auto industry be stopped by a minor metal? It's possible.

There's also a residual demand for Pt in watches and jewelry and as a store of value. But Pt jewelry demand has been falling for years. The Asian consumer, who is about 80% of Pt jewelry demand (and most of the total luxury goods market at this point), is increasingly preferring gold. I would like to think that Pt will regain its old position as the "rich man's gold", but don't count on it.

The long term chart of Pt is pretty depressing. Here's a ten year chart from tradingeconomics.com:

Even more amazing is how it has diverged from Pd. After all, one would think that substitutes would move together, at least over the long term. Not so:

Why I think the time is ripe

The Pt for Pd substitution argument has been around for awhile, and it hasn't happened. There are a number reasons for this:

- Until recently, Pd was only about $500 / oz. more than Pt. At six grams per car, that's only $96 per car.

- As mentioned, Pd works better at high temperatures.

- Pt is mined mostly in S. Africa and Russia. Much Pd is mined in N. America. This reduces the political risk.

- Changing catalysts is not just a matter of adding a new ingredient. A new converter has to be designed. A lot has changed in the last 15 years, and the old designs cannot be used. Since the auto industry is highly regulated, the new device will have to go through a long series of durability tests. There are legal issues relating to fires that the manufactures have to have confidence in protecting themselves against. Not something you can do in a few months. Think about a two year process.

But the recent blowoff in Pd has changed things. The difference is now $261 per car. So what can we look forward to. In the short term there is a possibility of slightly increasing the Pt/Pd ratio in diesel converters. But real change is still more than a year away.

This gets to the heart of the article. I am going to argue that the delay will not be a problem. Investors know about the long-term Pd shortage and are willing to make long-term bets on Pt.

One place you can see this is in commitments of traders in the futures market. Since July 2018, managed money has taken on over a 2.5 million oz. long position. Some of this is just CTAs following the recent minor uptrend, but the size makes me think there's more to it than that.

Another datum is the inflow into the main Pt ETF, PPLT. Over the past year, this has grown by $100 million, or 15%. Looking at all Pt ETFs, the increase in 2019 was .933 million oz. Since the price had been fairly steady until quite recently, I believe this is long-term patient money.

When will the deficit occur?

The platinum market has been in surplus for years. Here's a table from Johnson-Matthey on Pt supply/demand (2020 and 2022 are my forecasts). All data are in tonnes.

	2016	2017	2018	2019	2020F	2022F
Supply - Mine	190	190	190	193	190	190
Supply - Recycling	60	64	65	69	68	70
Supply - Total	250	254	255	262	263	260
Demand - Total	258	252	243	265	265	300
Of Which - Investor	19	11	2	26	15	0
Actual Use excl. Investor	239	241	241	239	250	300
Total Supply Minus Actual Use	11	13	14	23	13	(40)

Looking at the last row, you see that Pt has been in surplus for a number of years. So what will be the increase in demand at current prices. Here's what I'm guesstimating:

- Autocatalysts used 295 tonnes of Pd in 2019. I believe that over a quarter of this could switch to Pt. That's 46 tonnes. I believe this switch is already underway.

- The chemical, electrical and dental industries used a total of 50 tonnes of Pd. Switching here is a little less practical, but let's say 10% or 5 tonnes.

- As I said above, I doubt that Pt jewelry will make a major comeback. However, it is at a sizable discount to gold. I have noticed that a number of watch manufactures have been issuing more Pt items. So I'll say that this decline will stop.

I also see little change in supply. Miners in S. Africa are obviously concentrating on Pd-heavy and Rh-heavy deposits. OTOH, there are some new mines that have Pt as a byproduct.

This gives a shortage in 2022, when the conversions have occurred, of 40 tonnes. More important, this will persist, at least until, or if, battery EVs take over the market.

One final fundamental. Some investors are hopeful that Pt-catalyzed fuel-cell cars and trucks will provide a new demand for Pt. I think it is highly unlikely. There simply isn't enough Pt for this. There may be some incremental demand from specialized machines like inner-city locomotives or indoor transportation, but it will be small.

How to Trade it

The Pt market has two conflicting features: a near-term oversupply and a long term shortage. At points in time, one or the other will be on investors' minds. So I expect a bumpy road up. I've got a long-term core position and a shorter term trading one. I'm also using futures rather than ETFs because of the tax treatment.

This brings me to another issue that needs mentioning. I am nowhere close to being a tax expert, but I do know that some Pt investment vehicles are taxed as collectibles. This is a higher rate than many readers pay. So inquire about this before you buy an investment. As always, this is not tax advice; it's just a head's up to find out about it for your situation.

Sometime in the next month, I will have access to updated supply/demand statistics. When I do, I'll publish an addendum.

Back in Vanadium

In Jan 2018, I published a post in Seeking Alpha explaining why I was bullish on Vanadium. I recommended two stocks, Largo Resources and Advanced Metallurgical Group. The timing on the recommendation was just about perfect. Vanadium pentoxide skyrocked from about $8 / lb. to eventually over $35. Later in the year I wrote another piece that was decidedly less bullish. I wound up makeing good money on the trade, although I scaled out far too soon. It would have been a home run, but such is life.
I'm now back in. The V2O5 price fell to about $7. This was a blow off bottom in my view. This time I'm concentrating on Largo. It's not a perfect company, but it is a pure play, and it will soon be debt-free. I scaled in from C$ 1.75 to C$1.6. So we will see.

Cobalt Part Two

The last post put Cobalt into a general value area. Now let's look at the supply/demand. This is tricky since it depends on a forecast of electric vehicle demand. Here's my best estimate. Just remember that this is subject to wide ranges.

'000 tonnes of refined metal equivalent

	2017	2025
DEMAND
Batteries	38	117
Superalloys	35	44
Tools etc.	21	14
Others	42	48
Total	136	223
SUPPLY
Existing Mines	120	110
New Glencore/ERG		44
Other New Mine		11
New Artisanal		12
Recycling	13	22
Total	133	199
BALANCE	-3	-24

So there's about 24 K tonnes that has to be satisfied by new mines or additional recycling that have not yet been committed. I think that this can be done without a major price rise. OTOH, it's hard to see the price go down much unless there is a change in the EV outlook. If it did, the necessary new supply would evaporate.

My best guess is that Cobalt will move in a wide band for the next few years, with no major bull or bear market. We are probably near the bottom of the range.

More on Battery Metals

This is the second in a series of posts about battery metals. By battery metals I mean:
Lithium
Cobalt
Graphite
Nickel

This post will be about cobalt (Co).

The bull argument was that increased demand from electric cars and grid storage systems would raise demand for all these metals to a new plateau. There is actually some truth to the argument. Previously, all these metals were used in other applications. Cobalt and lithium are used primarily in the chemical industry, nickel in steel. The new source of demand should force producers to go out further on the cost curve.

But everything has its limits. The above narrative soon became a mania, with the usual suspects (retail, southwestern family offices) piling in. In cobalt,there is even a streaming company, Cobalt27. Nothing attracts retail like streaming.

There are a lot of counter movements.
- Technological improvement. Volkswagen plans to reduce the Co content of its EV batteries from the current 12% to 4%. Li ion batteries are a relatively new technology. There's plenty of improvement yet to be made. It's true that the basic science is known, but there are a lot of improvements that can be made incrementally.
- Recycling. Right now very few Li ion batteries get recycled. That is obviously not a long term solution. The whole point of EVs is environmental, so why create a poisonous landfill problem? This matters to the kind of person who will buy an EV and to the regulators who set the rules. I have seen estimates that 20% of Co demand will be covered by recycling by 2030.
- New mines. Right now the Democratic Republic of the Congo (DRC) is by far the world's largest supplier. I can't think of a less stable source of supply. But Co isn't that rare. New mines are being considered in Australia and the US. These are probably only marginally economic at current prices, but might be worthwhile for security reasons.

OK, enough generalizations. Let's get specific about cobalt. I'm starting with this because I feel it has the best bull case and it's investible.

When looking at any new commodity investment, I always start with long term value. Here's a graph I like to use (BTW, I keep these graphs for about 200 commodities.)

For those of you who haven't seen this type of chart before:
- The X-axis is the real price of vanadium (inflation and currency adjusted) $ /tonne.
- The Y-axis is the 10-year forward price appreciation/depreciation in inflation adjusted dollars.
Right now, the price is about $34,000. So the graph is forecasting about a 20% real price appreciation in the next ten years. That's 1.8% per year, not good enough to cover cost of carry.

But what about the argument that the new source of demand will push Co production out the cost curve? For that we have to build a supply/demand model.

Gotta run. More later today or tomorrow...

New article on Seeking Alpha

I just posted an article on Seeking Alpha, https://seekingalpha.com/article/4264315-new-chinese-tariffs-looking-numbers
I believe it's free for everybody for now.

The Bust in Battery Metals

When markets go into bubble mode, the bust is often worse than you thought possible. Often, the reason is that during the bubble, speculative stocks of the commodity get built up. In some commodities, these stocks may not be visible. They may be the result of producers accumulating inventory or work in process, or consumers accumulating inventory. When the bust comes, it may take quite awhile for these stocks to be liquidated.
This is the story in "battery metals", a group that includes lithium, cobalt, graphite and some others.
Now that we are in the down cycle, let's look at whether there is a long term opportunity here.

I am going to write a series of posts on this. At the end, I'll put it into an article that I'll publish on one of the large financial websites.

For now, here's a graph of cobalt deflated to 2019$. As usual I am using the PCE deflator. I am also adjusting the price for the value of the $US against a broad index of other currencies. You can see that the price has declined to a reasonable, but not dead cheap, level.

An Aside: How to Negotiate

I have no inside information on what is going on with the China trade deal. I only know what I read on the screen. Here's a personal story that may be relevant.

When I was younger I sold my first house. The buyer was antsy, and it was hard to come up with a price both sides could live with.  We finally did, and met to sign the deal. At the signing, the buyer came up with another demand. He told me that after relooking at the house, he wanted a discount for some issue (forgot what it was). Since he had previously had an engineer go over it, this seemed pretty fishy.
My father said that this was a typical although somewhat sleezy negotiating tactic. One side figures  the other has become psychologically invested in the deal, and will be willing to give a little more to get it done. He recommended I say no. I did. A couple of days later we signed the deal. I gave him a very small discount (I think about 0.1%) to sooth his ego. In return part of his down payment was made non-refundable, to sooth mine. The deal went through smoothly.

Sound familiar?