Platinum and palladium are grouped together with the precious metals, and they certainly enjoy a modest level of demand from investors looking for the diversity of a tangible asset. However, these two commodities are also appropriately classified as industrial metals—the primary industry using them being the manufacture of automobiles.
The two metals have been among the best-performing assets so far this year. Yet this rally may soon be stopped in its tracks due to changes in the auto industry, namely a groundbreaking announcement by the industry titan Toyota.
New Catalytic Converters
Toyota is set to debut a new catalytic converter design that the company vaunts as requiring 20% less platinum and palladium—both by weight and volume—while still "maintaining the same exhaust gas purification performance." In other words, these new devices are believed to be equally effective at reducing the potency of car emissions while cutting overhead by using less of the costly precious metals.
Unlike similar innovations that other car companies have come up with in the past, Toyota says its new catalytic converter, the Flow Adjustable Design Cell (FLAD), is ready for mass production. The first model that will feature the FLAD is the Lexus LC 500h model, expected to be released later this year. The addition of the cost-cutting FLAD to other models will follow, according to Toyota spokespersons.
There are at least two compelling reasons that this could become a big deal, creating strong headwinds for Platinum Group Metal (PGM) prices: Toyota is neck-and-neck with Volkswagen for the title of world's largest automaker, selling some 10 million vehicles in 2016. Down the road, this could potentially be many millions of cars using less platinum and palladium. Moreover, such a technological trend is likely to be copied by Toyota's competitors in the future.
Interestingly, in the wake of last year's Volkswagen scandal involving doctored emissions tests, VW's use of PGMs has been expected to rise for its "Clean Diesel" vehicles.
Particularly in the current economic environment of uncertainty, big firms like automakers are looking to reduce costs any way they can. Compared to fuel cell cars (like the ones that will feature the FLAD), traditional gas or diesel engines use far less precious metal: 2 to 4 grams of platinum and palladium compared to a full ounce in fuel cell engines. Nevertheless, consumers have strongly demanded fuel-efficient and, increasingly, environmentally-friendly automobiles.
About three-quarters of palladium demand comes from autocatalyst manufacture, while platinum's portfolio of industrial uses is more balanced.
There will still likely be much more precious metal, perhaps half an ounce, in tomorrow's fuel cell cars than their traditional counterparts, even as Toyota pushes technology that reduces this need. Moreover, uptake of the new innovation will not be instantaneous.
Still, growing environmental concerns will keep emissions reduction and fuel efficiency at the forefront of the car industry.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.