The controversy over the replacement of platinum and palladium for gasoline vehicles-not whether but when?

Application of platinum and palladium in automobile catalytic converter

1.1 the development of catalytic converter

The catalytic converter was invented in the middle of the twentieth century to purify automobile exhaust. This technique uses a relatively simple concept of combining platinum on base metal oxides with high specific surface area, then coating and sintering together on a porous ceramic carrier. Car exhaust is purified through this device. The technology didn't really come into use until the 1970s, when the Clean Air Act of the United States required new cars to be equipped with catalytic converters. In the following years, Europe and other regions followed the example of the United States by passing increasingly stringent emission regulations (Zhuang Xin Wanfeng, 1999) [1]. Almost every new car produced in the world is now equipped with catalytic converters (International Platinum Group Metals Association, 2018) [2].

These first-generation catalytic converters are oxidized or binary catalysts that can purify underburned hydrocarbons and carbon monoxide. But it was soon replaced by the so-called ternary catalyst, which can promote the redox reaction of nitrogen oxides, carbon monoxide and underburned hydrocarbons to produce carbon dioxide, nitrogen and water. These early catalysts used platinum as the active component because it was already a well-known catalyst for other reactions. The content of precious metals in these early catalysts was very high because advanced catalytic technology had not yet been fully developed.

Today, the typical exhaust system of a light gasoline vehicle contains about 3g of platinum group metals (mainly palladium, but also a small amount of rhodium), while the system of a light diesel vehicle contains about 4x8g (mainly platinum, but also a small amount of palladium and rhodium). The coating amount of platinum group metals varies from region to region, which mainly depends on the vehicle exhaust emission regulations of various countries, as well as the vehicle size and engine type. The higher the coating amount of platinum group metals is, the less the tail gas emission is, and the better the environmental performance is, so the overall global trend is to gradually increase the amount of coating.

1.2 Palladium has not always been the main platinum group metal used in catalytic converters for gasoline vehicles.

As mentioned above, the first generation of catalytic converters is based on active, familiar and mature platinum technology. However, by the late 1990s, social and legislative pressure forced the quality of fuel to improve. Lead, which makes catalysts toxic, has been widely banned, and now refineries are beginning to remove more sulfur from the gasoline and diesel fuels they sell. Sulfur is particularly toxic to palladium-containing catalysts, and reducing the sulfur content means that scientists can try to apply palladium to these ternary catalysts for gasoline cars. At that time, the relatively low price of palladium meant that the introduction of this metal was economically attractive, using or replacing platinum with platinum, thus giving birth to the first generation of palladium-based catalytic converters for gasoline vehicles. Due to technical reasons, platinum has been and is still the main precious metal in diesel exhaust aftertreatment equipment.

With the deepening of the research on the application of palladium in gasoline catalyst, the amount of palladium continued to increase at the end of 1990s, which greatly replaced platinum. The rapid growth in palladium demand and the supply disruption of palladium from Russia pushed palladium prices to record highs in 2000 and 2000. At that time, car companies were sensitive to the strong price of palladium and worried about not being able to buy it, so they changed the palladium-rhodium technology in many catalysts to platinum-rhodium technology over the next two years in order to control costs. As palladium prices fell, car companies and catalyst designers gradually reactivated palladium over the next few years to take advantage of its cost advantage.

Growing global car sales in recent years and increasingly stringent emission restrictions on gasoline vehicles have contributed to the continued growth in palladium demand, coupled with limited mine production, making palladium prices stronger relative to platinum. Last year, the price of palladium exceeded the price of platinum for the second time in history. Will this give automakers and catalyst makers a strong enough incentive to change their catalyst formulations and replace palladium with platinum as they did in early 2000?

1.3 Palladium demand is expected to continue to grow

Palladium is used in a wide range of applications, from dentistry to fertilizer manufacturing, but by far the most important application is as an active component in catalytic converters in the automotive field. This accounts for about 85 per cent of total demand in 2017, or nearly 8.6 million ounces of palladium (Zhuang Xin Wanfeng, 2018) [4]. Most of palladium is used for exhaust treatment of gasoline vehicles.

Demand in the automotive sector is growing rapidly and will continue to grow. In China, in particular, total car sales have surged over the past few years, driven by overall growth in the light vehicle sector. In other parts of the world, the growth in total car sales is not so significant, but it is also doing well. In any case, the demand for palladium in the automotive catalyst industry has increased in most countries. Consumers' growing preference for larger vehicles, such as SUV and pick-up trucks, has spurred demand for palladium, as vehicle size, or more specifically, engine size, is positively correlated with the size of catalytic converters and the demand for platinum group metals. Moreover, stricter exhaust emission regulations require an increase in the coating of platinum group metals in automotive catalysts, as an increase in the use of platinum group metals will reduce vehicle exhaust emissions.

In the future, sales of gasoline vehicles and gas-electric hybrid vehicles are expected to increase significantly. We predict that sales of pure gasoline vehicles will increase from 72 million in 2018 to 74 million by 2025. In addition, we predict that sales of electric vehicles will increase from 5 million in 2018 to 22 million by 2025. For example, the main scenario forecast of the International Energy Agency shows that the global number of electric vehicles will be between 40 million and 70 million by 2025. Most of these electric vehicles will be gas-electric hybrid vehicles. It is worth mentioning that these hybrid vehicles have the same platinum group metal coating and precious metal ratio as standard (internal combustion engine) gasoline vehicles, so the growth potential of palladium demand in the automotive field is huge.

Even if the model composition is different from our basic scenario forecast, it is hard to see a situation in which sales of light gasoline vehicles will not increase significantly, at least in the next decade. For example, according to Bloomberg New Energy Finance, sales of electric vehicles (including hybrids) will increase to only 11% of total light vehicle sales by 2025 (Bloomberg New Energy Finance, 2018) [5]. The proportion of diesel engines in the total number of internal combustion engine vehicles is declining, and annual production of gasoline vehicles looks likely to increase at least during this period.

Other things being equal, growing car sales and increasingly stringent emission regulations mean that palladium demand from the automotive industry and overall will continue to grow rapidly. If we assume that gasoline vehicle sales will grow at a rate of 3 per cent a year between now and 2030, and palladium is still the main metal in gasoline catalytic converters, this means that the total demand for palladium in the automotive sector will grow from about 8.6 million ounces in 2018 to 12.2 million ounces in 2030. So, if other conditions remain the same, can palladium supply keep up?

Analysis of supply and demand of palladium

2.1 Prospect of palladium supply

We believe that the total supply of palladium is unlikely to expand at the same rate as unlimited demand growth in the next decade. Palladium is mined mainly in Russia and South Africa. Although there are several reported plans to increase production in Russia's Norilsk region, the time required to build new mines and supporting infrastructure means that Russian production is likely to be flat over the next decade or so.

In South Africa, palladium is mined as a by-product of platinum. The low price of platinum has had a negative impact on the profitability of the platinum mining industry in South Africa in recent years. As a result, capital expenditure in the mining industry is limited, and in fact some mines have been rectified and closed. And, like Russia, it takes several years to develop a new mine, and we think it is more likely that South Africa's palladium production will decline rather than increase in the next five to ten years. Overall, it is difficult to see any potential expansion of global raw ore mining or refining capacity over the same period.

Of course, a considerable amount of palladium can be recycled from scrapped vehicles, which in many cases have been used for 15 or more years. This accounts for about 35% of the total palladium supply in 2017 (Zhuang Xin Wanfeng, 2018) [4]. We confidently predict that the amount of recovered metals will increase in the next decade, and the importance of the recovery of spent catalysts as a source of metals will also increase. However, we do not expect the total supply of palladium-including mined and recovered metals-to grow significantly to meet the above-mentioned unlimited growth in palladium demand driven by the automotive sector.

2.2 what happens if supply falls short of demand?

Supply may fall short of demand for a period of time. When this happens, according to simple economic principles, it usually leads to a rise in prices. In the same simple economic model, this either stimulates new production or loses some demand.

We expect palladium supply to remain basically at current levels in the next few years. Based on this assumption, we can establish the equilibrium model of supply and demand of palladium. If the demand for palladium in both the raw mine supply and non-automotive sectors remains the same as in 2018, and the demand for palladium in the automotive sector is growing at 3% a year (in line with the growth rate of gasoline and gas-electric hybrid vehicles mentioned earlier), then demand will greatly exceed supply. We don't think this will only last for a few years, because after years of palladium shortages, stocks on the ground are already very limited.

As we explained earlier, even in the best case, the actual situation of mine construction means that the number of new mines to be put into production in at least the next five years is very limited. This fully proves that palladium prices should rise, so there will be price sensitivity in some segments. In view of the importance of palladium demand in the automotive sector, we expect this price sensitivity to occur mainly in this terminal area.

2.3 what does restrained demand in the automotive sector mean for palladium?

If the automotive sector reduces the use of palladium, there are only a limited number of possibilities. Logically, the number of petrol cars manufactured should be reduced, or the average amount of palladium per vehicle must be reduced. As mentioned above, even though the sales of electric vehicles have increased significantly, due to the small base, we expect the production and sales of internal combustion engine vehicles to maintain year-on-year growth of at least 2025.

However, there are still a variety of technology paths to reduce the amount of palladium used per car. However, we do not think it is politically feasible for legislators to relax emissions regulations. As a result, automakers will have to minimize the use of palladium while meeting environmental requirements. For example, this can be achieved by electrifying and heating the catalyst, so that the catalyst can achieve better low-temperature activity, or use different raw materials to lighten the catalyst, or re-calibrate the engine; or even make the car lightweight. All these options require a lot of engineering investment and additional costs, so they are relatively unattractive.

If you only look at the catalyst, it may be possible to use one or two sister metals of palladium, rhodium or platinum, to replace part of the amount of palladium. At present, the price of rhodium is more than twice that of palladium, and although rhodium is more active, this change is economically undesirable. On the contrary, replacing palladium with cheaper platinum can save procurement costs while avoiding the risk of palladium supply shortages.

However, at present, the research of automobile companies on using platinum instead of palladium in the middle of the catalyst is still in its infancy. About 90% of the palladium consumed in the automotive sector is used in catalytic converters for light gasoline vehicles, while very little is used in other automotive segments. Since the demand for palladium for light diesel vehicles is very small, it means that the potential cost savings of replacing palladium in this segment will be very limited, so such substitution is unlikely to occur.

But do automakers and catalyst makers have a strong enough incentive this time to change their gasoline catalyst formulations and replace palladium with platinum as they did in early 2000? So how will the situation be different this time?

3 Platinum instead of palladium

3.1 Why is it more difficult to replace palladium now than it was at the beginning of 2000?

A simple answer is that there has been very little investment in the research and development of platinum-based catalytic converters in recent years. From 2002 to 2016, palladium was cheaper than platinum, so it was more economical to use palladium. The more research and development work on palladium is done, the faster the technological progress of palladium catalysts will be compared to platinum, at least in gasoline vehicles. This makes palladium more effective and harder to replace than it was at the beginning of this century.

Just because platinum is cheaper than palladium, it should be reused in gasoline catalytic converters, which is a pure trap. From a physical point of view, the weight of a palladium atom is only about 55% of that of a platinum atom, so it would be strange if the number of two metals required for the catalyst to reach a certain level of performance is the same.

In addition, ternary catalysts are actually more complex. It must promote the redox reaction of hydrocarbons, carbon monoxide and nitrogen oxides. Of course, each car's exhaust contains hydrocarbons with different levels of combustion, and each hydrocarbon reacts slightly differently. Therefore, palladium may be more suitable for some models and engines. However, the results of the study (Zhuang Xin Wanfeng, 2013) [3] show that the two metals of similar quality can achieve similar environmental effects.

Therefore, it is clear that the current price levels of these two metals create an opportunity for automakers to use platinum instead of palladium in at least some of the catalyst formulations to achieve cost savings. But is this the reality? will carmakers do this?

3.2 substitute barriers

One of the barriers to R & D is the current lack of engineering resources and budget to undertake such projects. At present, many engineers in the field of automotive catalysts are focused on developing hybrid engine technology or re-calibrating the engine according to real international testing standards.

Another factor is the cost of capital for testing and verification of new catalyst formulations. In order to recover this part of the cost, automakers will need enough catalyst batches to produce, and to maintain metal prices will always be conducive to their confidence to support this alternative project decision. At present, we believe that car companies working on new catalysts are unlikely to save enough money to cover the capital costs of this alternative work. Since a typical light gasoline vehicle contains about 4 g of palladium, as of August 13, if 4 g of palladium is replaced by the same amount of platinum, each vehicle can save about $12.

There are some pure technical limitations in using platinum instead of palladium. For example, palladium has good low temperature performance. This is particularly important for hybrid vehicles that start / stall more frequently (because the engine power switches between the battery and the internal combustion engine) and can meet real-world urban emission requirements. In addition, palladium is more effective than platinum in reducing nitrogen oxide emissions at high speed. In the short term, these technical limitations mean that the amount of platinum required to achieve the same performance may be slightly higher at a given amount of palladium coating. However, in the long run, we think that platinum is as effective a catalyst as palladium in principle. In the long run, we still believe that it is possible to replace palladium in gasoline catalytic converters with platinum.

There are also some non-technical barriers to substitution, such as pricing strategy. For example, car companies often purchase platinum group metals for 1-5 years in advance, frequently purchasing precious metals with spot forward pricing, or directly purchasing spot as inventory. As a result, many automakers do not care about short-term price fluctuations and tend to consider their purchasing decisions from a longer-term perspective. Therefore, there may be a serious response lag between price fluctuations and changes in purchasing strategies of automobile companies. Although the price of palladium exceeded the price of platinum for the first time since 2001 in 2017, platinum group metal coating formulations currently on sale on vehicles are usually designed at a time when palladium prices are 400 dollars / ounce or more lower than platinum prices. Car companies may also worry that the price difference between platinum and palladium may not be sustainable, making this alternative worth considering. In history, there has been only a short period of time when the price of palladium is higher than that of platinum.

Moreover, a common price risk hedging strategy adopted by many car companies is to use forward pricing instead of spot spot prices (spot forward trading, rather than spot spot trading, to reduce the risk of future volatility in platinum group metal prices). This is an important distinguishing indicator because platinum is a futures premium and palladium is a futures discount or spot premium. This means that platinum for immediate delivery is cheaper than platinum delivered one year later, while palladium is the opposite. As of August 13 this year, the one-year forward price of palladium over platinum had fallen to $45 / oz, while the premium between the real-time spot price was $83 / oz. As a result, car companies that focus on forward prices may be more reluctant to consider alternative metals than some car companies that buy platinum group metals at spot prices.

There are still some strategic decisions to be made. Car companies are now more worried about taking risks, given that a number of carmakers, including Volkswagen, have been accused of manipulating emissions data and affecting emissions performance in the "diesel throttle" scandal in Europe. They are no longer willing to risk higher-than-expected or substandard vehicle emissions. Once all possible measures are not taken to meet the emission regulations, it will bring great credit risk to the company.

And there is also a perception of first-mover disadvantage. If a large car company replaces a large part of its palladium demand with platinum, this may depress the price of palladium. So the company's practice of replacing palladium has not brought it any benefits. However, if the same inaction strategy is adopted by all other car companies, the company will also face the risk of rising prices.

We believe that at least some automakers may use platinum instead of palladium in some of their catalyst formulations to reduce the risk of rising palladium prices. We believe that this is the most feasible way for automakers to meet the growing demand for gasoline vehicles without reducing the total amount of platinum group metal coating per vehicle, as the method of reducing the total amount of coating may be more expensive than the alternative. Although it is possible to reduce the amount of palladium in the catalyst, the extent of reducing the amount of platinum group metals is limited, and the resources of optional active components with catalytic effect are also limited.

4 how long will it take to replace it?

As mentioned above, we expect that part of the palladium demand of light gasoline vehicles will be replaced by platinum. However, the replacement process will not be very fast, and mass production is unlikely to begin before the beginning of 2020. We believe that it will take at least 18 months from the start of the research and development of the new catalyst to the commercial use of the new catalyst. This includes the time required to develop and test the new formula before it is submitted to the relevant authorities for approval. However, the replacement of more catalysts takes longer and can be beneficial.

The use of resources will be a constraint.

Therefore, in the long run, we believe that this alternative will create a huge upward opportunity for platinum demand in the field of automotive catalysts. We believe that at least 25% of palladium demand in the automotive catalyst industry can be replaced by platinum at any time. The demand for platinum may increase by about 2.5 million ounces per year by the end of 2030, while the demand for palladium will be reduced by the same amount. This is almost the expected range that palladium will reach the balance of supply and demand after platinum is replaced by palladium, and we have no doubt that this replacement will take place in the automotive catalyst industry.

All in all, although the process of replacing palladium with platinum in gasoline vehicle catalysts is bound to be difficult, we think mass production will begin in the next five years. This is the most feasible way for automobile companies to meet the emission requirements of the gasoline industry. If palladium prices continue to rise, it will eventually be the most cost-effective solution for automakers. The widening price gap between the two metals will be the main factor affecting the timing and scope of substitution, as it will determine the profitability of carmakers after replacement.