Platinum prices to rebound as global chip crunch eases

The semiconductor chip shortage of 2021 perfectly demonstrates the degree to which global supply chains are interconnected, and the problems that can arise when production a chokepoint ruptures. Taiwan accounts for 63% of the global semi-conductor market by value, followed by South Korea with 18% and China on 6%. A surge in demand for semiconductors from electronics manufacturers, coupled with the worst drought in over half a century (chip makers require enormous amounts of water to clean the wafers) snarled chip production from the country. The typical lead time between ordering a chip and it being delivered increased from around 3 months pre-pandemic up to around 5 months by mid-2021.

Manufacturers of automobiles and other electronic products that are heavily dependent upon semi-conductors have faced nine months of shortages. Their plight has been made worse as they underestimated how strong demand would be, figuring that the demand shock from covid-19 would be akin to the Great Financial Crisis over a decade earlier. In anticipation of a shocking orderbook auto manufacturers cut chip orders, but then when demand surged weeks later they didn’t have sufficient chips in stock to restart production lines. According to estimates by JP Morgan, semi-conductor related production cuts by auto manufacturers amounted to 1.9 million vehicles in the second quarter of 2021.

The return of rainfall since late June has helped to replenish reservoirs in Taiwan, enabling its chip manufacturers to start work on meeting automobile demand. In the past couple weeks Taiwan Semiconductor Manufacturing Co (TSMC) announced that a rebound in chip output in the third quarter would result in an annual output increase of 60% over 2020 levels. Despite the improved manufacturing conditions, JPM still expects shortage related production cuts to total 0.4 million vehicles in Q3.

A shortage of new cars for sale during 2021 naturally increased demand for used vehicles. The US Manheim Used Vehicle Index rose by 25% between January and May 2021 (~50% up on May 2020). Over the following two months prices have dropped by around 5%, perhaps the first tentative signs that the demand for used cars had been met. Mid-May also marked the peak in Google global search volumes for ‘semiconductor shortage’, while they also marked the low point in the share price for TSMC.

One of the key commodities to have been affected by the auto manufacturer shutdown was platinum. Prices increased by 60% between November 2020 and mid-February 2021 on the expectation of strong vehicle demand. But the extended chip delays punctured any hope of that materializing leaving prices retracing three-quarters of the earlier jump.

Roughly 40% of platinum demand is from the automotive sector and so changes in vehicle production have a significant impact on platinum fundamentals. Platinum is typically used in catalytic converters fitted to diesel cars while petrol powered cars generally use palladium. With diesel cars typically using platinum in its catalytic converter auto demand trends in Europe can have a big impact on platinum demand.

Related article: Platinum prices: The top 10 most important drivers

With signs that the worst of the semiconductor shortage may now be behind us we might see auto production accelerate over the next few months. As manufacturers have found out to their cost, relying on a small geographical area to supply an essential component can be foolish. Moving from ‘just-in-time’ to ‘just-in-case’ has put pressure on countries to diversify their chip supplies, even making the case for building capacity nearer to their manufacturing bases. The semi-conductor shortage will also scare manufacturers into the risks present in other essential components – platinum for example is even more concentrated with South Africa accounting for some 70% of global mined production. That might now mean that auto manufacturers consider security of platinum supply much more important than price.

Manufacturers may also be looking further down the horizon to a potentially huge competitor for their platinum supplies. The precious metal is at the forefront of two key technologies that could unlock a zero-emissions hydrogen economy – electrolysers and fuel cells. While the so-called ‘hydrogen economy’ has seen booms, and busts before the decline in renewable electricity costs and the political will behind hydrogen may mean that demand for platinum is already increasing in anticipation of green-hydrogen becoming a reality.

Related article: The hydrogen economy and the battle for zero-carbon supremacy

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