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China's fuel cell push not seen stimulating short-term platinum demand

A push by the Chinese government to promote the development of fuel cells that could be used to power cars is unlikely to mop up the global surplus in platinum, at least in the short term, analysts say.

Globally, the precious metal has been in surplus since 2017, hitting 670,000 ounces in 2018, a 131% year-on-year increase.

China had previously said it was aiming to start mass producing hydrogen-powered fuel cell vehicles by 2020 and to hit one million units by 2030. Earlier this year, the country introduced a tightened policy governing subsidies around the new energy vehicle sector. It proposed cutting up to 60% of subsidies on electric battery-powered vehicles, but the new rules excluded their fuel cell counterparts. According to a statement published by four ministries, manufacturers can benefit from as much as 500,000 Chinese yuan per fuel cell vehicle produced, depending on the rated power of its fuel cell.

SNL Image

Workers of Toyota Motor assemble a Mirai fuel cell vehicle.

Source: Associated Press

Platinum is already used on catalytic converters to reduce normal vehicle emissions. Fuel cell electric vehicles use more than twice the amount of platinum in internal combustion engine vehicles. It usually takes around 0.5 to 0.6 of a gram of platinum to produce a kilowatt of power in fuel cells. Early adopters with commercially available cars include Toyota Motor Corp., Hyundai Corp. and Honda Motor Co. Ltd. The world's biggest platinum producer Anglo American Platinum Ltd. in 2018 forecast that if China hit half of its target number of fuel cell vehicles, that would translate to demand for 750,000 ounces of platinum.

Commodities analyst Rhona O'Connell, head of market analysis for Europe and Asia at financial services firm INTL FCStone, believes the potential demand growth for platinum in fuel cells from vehicles can double or even triple from the current 1,500-tonne estimate but it will take a long time for demand to materialize as the majority of car companies are still going down the hybrid route.

O'Connell said one of the biggest stumbling blocks that fuel cell vehicle manufacturers face is developing effective infrastructure for the delivery of hydrogen.

An auto analyst with Beijing-based Huajing Securities said the industry is still in the process of building a network in China of hydrogen filling stations to support the potential mass production of fuel cell vehicles.

The analyst concurred with a growing consensus among industry observers that fuel cell vehicles will be mostly used in long-distance commercial transportation applications, as opposed to private cars, due to the high costs of building a hydrogen fueling station. This means it will not account for a substantial market share in the automotive industry in the short term.

"Although the major automakers including BYD Co. Ltd., BAIC Motor Corp. Ltd., GAC Group and SAIC Motor Corp. Ltd. are expected to benefit from the new subsidies on fuel cells, it will take at least 15 years for them to enter mass production," the analyst said.

Intl FCStone's O'Connell also said car companies have started thinking about substituting platinum for palladium used on gasoline-engine catalysts, as the platinum discount to palladium reached a recent high, but she said it will take 12 to 18 months for it to affect platinum demand.

"It takes quite a lot of time to get approvals. You need to retool the catalyst and you need to recalibrate them. People were saying six months ago that you could expect to see a reasonable amount of substitution in 2019 and 2020. I would be very surprised."

SNL Image

In addition to the auto sector, O’Connell said she struggles to see any recovery in Chinese jewelry demand.

According to the World Platinum Investment Council, automotive demand accounted for 42% of the total platinum demand in 2018 and jewelry demand was the second biggest contributor, representing 32%.

China, which represents 50% of the global platinum jewelry demand in 2018, is expected to see a further decline of 8% to 12% in jewelry sales this year, according to fellow lobby group Platinum Guild International, or PGI.

Liu Zhenzhen, director of global corporate marketing at PGI, said platinum jewelry spending mainly depends on marketing, which has been falling since 2012. Without additional marketing investment, Chinese platinum jewelry demand is likely to continue falling this year, Liu said.

Liu also attributed the declining Chinese demand to slower economic growth and retail sales from the second half of 2018. "Store traffic dwindled noticeably. Therefore retailers are looking for high-margin categories such as diamond and karat gold jewelry, and sales of plain metal jewelry such as generic 24k gold and generic platinum was affected," Liu added.

As of June 10, US$1 was equivalent to 6.93 Chinese yuan.