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Heraeus Precious Appraisal

  • Edition 40 - 16. November 2020

More than a record rhodium price needed to motivate additional PGM supply

High PGM prices have raised producers’ profits this year. PGM producers’ revenues in South Africa have risen sharply in 2020, driven by record rhodium and palladium prices and a weaker rand against the US dollar. Despite much higher unit costs in the first half of the year as a result of lower production volumes, all PGM producers have made strong profits. With many operations now back at or close to 100% capacity and South Africa reducing the Covid-19 alert level to level 1 as the country moves into summer, it is likely that 2020 full-year unit costs will be lower than in H1’20.

With high metal prices and strong cash flow, producers should be incentivised to increase output. That is happening to a small degree as production at existing operations is optimised. However, while there are several closed mines and delayed projects in South Africa that could potentially be restarted, there are also impediments to restarting them. If the mines were closed for reasons beyond low metal prices, such as a poor orebody, then the current exceptional palladium and rhodium prices may not be sufficient to motivate a restart. The rhodium price is volatile and producers will be reluctant to rely on the rhodium price staying at historically high levels to justify the investment in restarting a mine that could be in production for a decade or more. This is particularly the case when the price is being boosted by Anglo American Platinum’s (AAP) refined production shortfall as a result of smelter problems. Platinum would contribute the most ounces in any restart and an increase in platinum production in an already very oversupplied market could depress the price even further, hurting overall returns.

There is likely to be a gradual supply response over time, although projects to maintain current production levels will be easier to motivate than projects to expand PGM output in South Africa. Supply may be more responsive to high prices in the Northern Hemisphere because of the higher proportion of palladium in the region’s orebodies. Gasoline lightvehicle sales will recover and emissions legislation is tightening so the rhodium and palladium markets are expected to experience widening deficits which should keep their prices elevated.

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