In November last year, federal, state, and local law enforcement partners across the United States took down a national network of thieves and dealers involved in stealing catalytic converters and selling them to a metal's refinery.1 A catalytic converter is a pollution control device in gasoline, diesel, and hybrid-powered vehicles that reduces tailpipe emissions to an acceptable level. Catalytic converters for diesel-powered vehicles contain platinum, while gasoline-powered vehicles contain palladium.

Theft of the devices has risen dramatically: Connecticut saw 1,184 "exhaust component thefts" in 2022 compared to only 82 in 2019.2 When turned into scrap recyclers, the devices fetch anywhere from $50-$300. The recyclers, in turn, remove the platinum or palladium powder and resell it, putting supply back into those respective metals markets.

New laws will not only make these illegal metals trade more difficult, but it may also make it nearly impossible to conduct legal recycling. Although there are national bills in some stage of progress, a few states, including Connecticut, have passed their versions early.3 There, a catalytic converter must still be attached to the vehicle for a metals recycler to accept it. The law prevents the recycling of a stolen device and thus virtually eliminates the illegal component of automotive recycling from hitting the platinum and palladium markets. The larger issue is that by requiring recyclers to verify the source of the catalytic converter before being accepted – a virtually impossible task, it has chilled even legal recycling activity.

Given that recycling has been the source of 25-30% of automobile demand for palladium since 2018 and 48-60% of platinum demand since 2018, it is essential to view a disruption in illegal recycling as akin to a contraction in mine supply.4 Both can result in market deficits of the metals and stress supplies from traditional primary sources.

Mine supplies in question

As it stands, South Africa and Russia are the two largest producers of platinum and palladium–yet their ability to maintain output levels is in doubt. South Africa has an intractable electricity supply issue that led to 200 emergency shutdowns last year that will take years to resolve. Russia, meanwhile, has been under constant threat of expanding sanctions since its invasion of Ukraine last February.

These issues have led the WPIC (World Platinum Industry Council), an industry promotion group, to forecast a nearly 1 million-ounce platinum deficit for 2023.5 Whether South Africa is experiencing electricity outage issues is not up for debate nor is it up for debate that the new laws governing scrap metals will reduce both the illegal and legal recycling supply of platinum and palladium, that is a matter of public record.

Keep an eye on prices

In light of these supply issues, it may be wise to watch platinum and palladium prices–especially if you also believe Chinese economic weakness is overstated. Palladium is trading near $1400 an ounce, where the rally stalled in 2019, and well off the March 2022 level of $3171. Platinum is trading near $900 an ounce, also where a price rally stalled in 2019, and well below $1305, where it traded in February 2021.6 Uncertainty on the macroeconomic outlook is front page news daily. But we cannot ignore issues on the supply side. There are fundamental changes that threaten to halt platinum recycling responsible for 50% of total supply, there are ongoing electricity issues in South Africa responsible for 40% of mine supply, and the precarious nature of Russian supply responsible for an additional 40% of mine supply continues. With significant bullish catalysts from multiple supply side sources, platinum and palladium may be primed for upside as the new information is digested by market participants.

2 and
Bloomberg data Jan 1, 2019 to June 19, 2023


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ETF002046 6/14/24