When considering future markets for a metal we must, just must, include recycling into our estimations. If we don't then things just aren't going to make sense. We all know that most gold ever lifted is still extant, circulating around the economy. We also know that booms or busts in primary production of gold don't make all that much difference to the global gold price - it's just not the big and significant factor in supply. It's the marginal in fact, it has an effect, yes, but it's not that main driver.

This is true of other metals as well. Some 50% (each, and only by some estimates) of gallium and germanium consumption is provided by scrap recycling for example. That's mostly industrial scrap, true - offcuts of material from factories processing it - but there is still an industry that collects and recycles used material as well. That blast furnaces all over the industrialised world are closing is because we now recycle scrap steel in electric arc furnaces. Trying to predict iron ore usage by looking at steel consumption just does not work any more given the huge volume of recycling that goes on.

This is true of other markets too and we need to be aware of this.

My colleague Gold Panda has done an excellent run down on Platinum Group Metals here. I'm not going to repeat that analysis. What I want to do instead is add something. The effect of recycling on the two paymetals that are vital to the project, palladium and rhodium.

This is crucial because the two most important metals for Platinum Group Metals are palladium and rhodium. They are mainly used in catalytic converters and were in a structural deficit for several years due to tightening emissions standards around the world.

That's entirely true. Rising standards - or demands for rising standards - led to greater consumption.

Even if most developed countries somehow avoid a recession and motor vehicle production picks up, I think palladium and rhodium prices are unlikely to ever recover to their April 2021 levels as electric vehicles are gaining market share fast.

The major markets of China, Europe and the US are all committed now to no new internal combustion engines by 2030 to 2035 sort of time scales. That removes the demand for new catalytic convertors of course - and no, that trucks might be later than that doesn't help palladium. Diesel engines use platinum, not palladium and rhodium. At which point there's an ever declining stock of cars using catalytic convertors, there's still a replacement market but that shrinks over time as even the worst jalopy does have a lifespan on the road.

So, the market for palladium (and rhodium) in catalytic converters is going to go into terminal decline just as - if it were funded right now - Platinum Group Metals is to come online. That doesn't raise huge confidence in their market price projections of course.

My point here is that the situation is worse than this for the palladium price. Yes, of course, the metal has other uses. It might even be true that the hydrogen economy becomes viable (I think it will in fact, but via a technological path that doesn't include palladium) and the storage capabilities of palladium become important. But that's all rather hoping to get the Moon on a stick as far as current price predictions are concerned.

But what's the balance of those other uses as against primary supply? More importantly perhaps, what's the balance of supply when we include secondary (i.e., recycling) as well as primary supply and then compare with demand without catalytic converters?

This is old analysis, 2019 era, it's also from Norilsk, who we may or may not believe all that much, but it does illustrate the point I'm making here.

In 2019, primary refined palladium production increased by 3% to 220 t.

In the jargon of this little part of the world "primary" means newly mined and refined.

The main sources of recycled palladium are scrapped auto catalytic converters, as well as jewellery and electronic scrap. In 2019, recycled output grew by 12 t to 109 t as demand grew for catalytic converter scrap on the back of increased prices for palladium and steel scrap.

In 2019, industrial consumption of palladium increased by 20 t (up 6%) y-o-y, hitting a new all-time high of 357 t.

In 2019, palladium consumption by the automotive industry increased by 25 t, hitting a new all-time high of 294 t.

So, catalytic converters are 294 tonnes of usage out of 357 total. Recycled material reaching the market is 109 tonnes. We're saying that demand for new cars carrying a catalytic converter is going to be zero from perhaps 2035 onwards, there will be a replacement market for cars still on the road but one that inevitably shrinks over time. At some point the recycling of those old cats coming off old cars will be able to supply the entire market with no need for primary production at all.

Now, that's not how markets do work, of course it isn't. Lower palladium prices will reduce recycling (they'll certainly reduce the thefts of cats from parked cars). There will always be a mix of recycled material and primary hitting the market. And of course once that stock of cats on ICE vehicles has been recycled somewhere around 2050 to 2060 then there's that need for primary production again to feed the other industrial uses.

But this is what I mean by the gearing to primary production prices in a market with high recycling rates. Recycling material is near always cheaper than producing new primary material. That second depends upon moving millions of tonnes of rock after all. So we would expect, to some extent at least, the recycled material to continue to be produced even as the price falls, at the expense of that primary production.

The other way of making much the same point is that as demand falls then the price craters, not just falls, given the existence of that recycled material availability. This isn't straight, one for one, as lower prices will reduce the incentive to recycle. But the effect is there all the same.

Without the catalytic converter market the recycling of those converters will provide more than enough material for all other uses. There's no even need for any, let alone more, primary production. That's to put it in terms so stark as to be wrong - the replacement market for cats is going to continue, even if shrinking, for decades yet.

But those market dynamics are going to sink that palladium price.

Also, all of what is said here holds true for the rhodium market too. Perhaps even more so, given that a subsidiary market (and stock of material to be recycled) is in oil cracking catalysts and we're supposed to be using less of that in the future too.

The argument against this is either that net zero doesn't happen, or that some other new use for palladium and rhodium arrives. For the PLG economics do seem to depend upon those two prices and if they fall substantially then so does the project.

But of course it is possible that we don't have the EV revolution, that another use is found.

At which point I agree with my colleague, Gold Panda. It seems unlikely that PLG will get funded. Not because all of the above is wholly and entirely true - there are possibilities which will make it untrue - but because the banks and other equity funders can do the same calculation we've just done up above.

If - if - the current trajectories persist then the palladium market could be filled by recycling alone. Starting not long after PGL would come online and lasting for a few decades. That's not when folk are likely to fund a project dependent upon palladium revenues.

Thus I think it unlikely that Platinum Group Metals is going to become a funded project.

Everyone's entirely at liberty to differ with this analysis. But to do so it is necessary to come up with a reason why the palladium market isn't going to move into oversupply soon enough. Further, as to why what demand there is won't be fueled by the recycling of the now discarded technology - catalytic converters.

Prices for use this year aren't going to be impacted by this. But prices past 2030 almost certainly will be. So, what's the reason the palladium price will hold up? That's the argument that has to be made to believe in PGL.

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.