February 20, 2015 / 5:46 PM / 4 years ago

Recycling, war on diesel threaten platinum producers' price hopes

LONDON/JOHANNESBURG (Reuters) - Platinum producers struggling back from South Africa’s longest-ever mining strike are now contending with threats to a long-awaited price recovery, notably Europe’s emerging dislike of diesel engines.

The world’s largest platinum miners, crippled by a five-month stoppage in 2014, have said their companies will do better this year, largely because they expect a strong price recovery from six-year lows XPT=.

But growing concerns about diesel engines, which use platinum to limit emissions, are denting demand while increased recycling of platinum is eating into the miners’ market share.

Amplats (AMSJ.J) said it can hit the profitability target set by its parent company Anglo American (AAL.L) in three years if prices rise as it expects.

Its rival Lonmin (LMI.L), having plunged into the red last year, also expects higher prices, betting the European Central Bank’s move to print more money to revive a flagging economy will stimulate car sales.

Investors and analysts beg to differ.

“Producers are in denial,” said Investec portfolio manager Hanré Rossouw. “They are forecasting a strong recovery in prices but with manufacturers relying more on recycling and Europe starting to turn against diesel engines, there isn’t any indication prices are going to rise.”

Europe promoted fuel efficient diesel over gasoline engines for decades, aiming to cut carbon emissions.

Catalysts in diesel cars can use roughly 4 times more platinum than those in gasoline cars and have been the major source of demand growth for the white metal.

More recently however, health researchers, including the World Health Organisation, found diesel cars are not that environmentally-friendly after all: they emit less carbon, but higher levels of other pollutants such as nitrogen oxides which have been linked to asthma, cancer, lung disease and respiratory illnesses.

Late last year, Paris announced plans to ban diesel cars from the French capital by 2020 to cut air pollution, while London mayor Boris Johnson plans to double charges for diesel cars in congested areas.

Diesel engines might be in part replaced by direct-injection gasoline cars, which use more platinum than regular petrol vehicles. But catalyst-free electric cars and hybrid cars — mostly powered by gasoline engines — are set to steal a large chunk of market share.

“The EU carbon regulatory ratchet is tightening so much that car makers will have to push electric vehicles harder from here,” Liberum analyst Adam Collins said in a note.

Autocatalyst producers, such as Johnson Matthey and Umicore, are hedging their bets by focusing on battery business for electric and hybrid vehicles.

RECYCLE AND CONQUER

To cut reliance on mined platinum, catalyst makers are growing their recycling capacity.

BASF (BASFn.DE), one of the largest, is expanding its Cinderford autocatalyst recycling operation in the United Kingdom, for example.

“In line ... with our expectation for increased volumes of scrapped autocatalysts coming to market in the years ahead, we would also expect to increase our use of recycled platinum,” a company spokesman said.

Recycling today represents more than a quarter of the platinum metals groups that come to market — ranking as the second largest source of supply behind mining. That percentage is expected to grow to more than one third by 2020, he added.

Other factors such as scarce availability of energy in South Africa are also contributing to create “the perfect storm” for the platinum industry, said Paul Smith at Chinese-backed platinum mine developer Wesizwe (WEZJ.J).

With some 50 percent of platinum mines losing money, he said output cuts might be the only way to boost prices — a view shared by other industry observers.

“The simple fact that the huge strike last year didn’t move prices tells you just how much oversupply there is,” said Nik Stanojevic at British wealth manager Brewin Dolphin.

“People are going to have to close mines. Until that happens I can’t see things getting better.”

Additional reporting by Nina Chestney and Clara Denina in London; Editing by Veronica Brown and Ruth Pitchford

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