PGM prices face headwinds amid ongoing semiconductor shortage

The ongoing global semiconductor shortage disrupting the auto industry is not only contributing to a challenging market environment and drop in near-term global auto manufacturing but has also resulted in a platinum group metal correction, market analysts said.

The enduring semi-conductor shortage has meant that August sales in the light-duty vehicle sector in key markets like China, US and Europe fell 17% on the year, with the third quarter sales potentially decreasing 15-20% quarter on quarter, USB analysts said in a research note Sept. 20.

The Chinese auto market is the largest gasoline market in the world, with about 90% of the country's light vehicle sales being gasoline engines.

Semiconductors are an essential component of electronic devices, military systems, transportation, clean energy, among others. They are made of pure elements, such as silicon or germanium, or compounds such as gallium arsenide or cadmium selenide.

"We understand that the auto supply chain is not building material inventory and the impact on PGMs demand will be comparable to the decline in auto sales/production," UBS said.

"In our view, the weakness in auto sales data and the realization that the chip shortage is likely to extend well into Q4 2021 has reduced supply anxiety and triggered the sell-off in Pd/Rh [Palladium/Rhodium] prices from unsustainable levels," the bank said. It added that palladium and rhodium prices were down 30% and 60%, respectively, from 2021 peaks.

The S&P Global Platts New York Dealer rhodium price range fell to $9,500-$15,000/oz for the Sept. 10-16 period compared with $15,000-$16,800/oz the week prior.

Rhodium prices fell $3,650/oz for the week to Sept. 16 as selling from secondary recyclers intensified amid a lack of buying from automakers amid the chronic chip shortage.

Nearly 85% of annual palladium demand and 90% of rhodium demand comes from the global automotive industry, which uses the metals in catalytic converters to control polluting emissions.

Chip supply concerns

Heraeus Precious Metals -- one of the world's largest platinum group metals refiners -- expects the semiconductor supply shortages to persist till Q1 2022 and potentially extend into Q2 2022.

"Both Intel and Infineon, major semiconductor manufacturers, have warned that the issue may persist through the whole of 2022. If the situation in 2022 deteriorates, it could push the palladium market into surplus and increase rhodium oversupply," Heraeus said.

The refiner said the previous two times palladium reached a peak, in 2001 and 2008, the metal dropped two-thirds over the following 12 months.

Palladium is used in gasoline-powered vehicles, the kind most widely used in the US and China.

"Rhodium has a greater tendency for needle-like price movements, and after the last peak in June 2008, it dropped 85% in the first year," Heraeus said. The company added that the rhodium market was expected to be in surplus in 2021 for the first time since 2017, also due to improved output from South Africa following 2020's pandemic-related lockdown.

South Africa accounts for around 80% of global mined rhodium supply.

In a research note on global mining company Anglo American -- one of the world's largest producers of refined platinum and rhodium -- Berenberg analysts echoed the near-term demand weakness that was affecting prices of PGMs.

"While we see scope for this to act as a headwind for prices in the near-term, we believe that auto demand is being pushed out to 2022, and would expect global auto production to recover (+15% auto production growth year on year versus 2021) and this should support PGM demand," Berenberg said.

"We continue to expect deficit markets in 2021 for palladium and rhodium, and for those deficits to expand in 2022, providing price support," the analysts said.