How the Chip Shortage is Impacting the Precious Metal Industry

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Over the last few years, there has been a sharp increase in the number of gaming consoles, laptops and other electronic products being bought by consumers, as well as significantly higher demand for cars than expected by industry experts. This has led to a shortage of semiconductor chips, meaning that businesses are being forced to compete with each other for supplies of chips to continue making their products.

This chip shortage has had a knock-on effect, where outputs of vehicles have slowed drastically which has in turn been impacting the prices of some of the most traded commodities. The slowing of car manufacturing has meant that precious metals such as palladium, platinum and rhodium that are used in vehicle exhausts to attempt to reduce their harmful emissions are in lesser demand, which has sent their prices plummeting.

This shortage of chips has meant that there are increased delays for car deliveries and a shortage of home appliances, as well as an increase in the prices of electronic devices such as smartphones.

International Trade Issues

To further this crisis, the recent sanctions that have been brought in against Chinese technology companies by the American government have meant that suppliers outside of China are particularly stretched thin. With a huge number of companies that rely on these semiconductor chips for the production of their products panic buying stocks, the shortage has become even more apparent and significantly increased the costs of every component found in microchips, resulting in an incredibly expensive final product.

PGM

The shortages of semiconductors have led to a drop in demand for automobiles, which is putting increasing pressure on Platinum Group Metal (PGM) prices.

Back in the second half of 2021, the prices of PGMs suffered a quick decline before crashing in November and December as the chip shortage continued to have detrimental effects on the production of passenger vehicles. Between the 1st of October and the 10th of December, the prices of platinum fell from $972/toz to $954/toz, palladium dropped from $1,904/toz to $1,813/toz and rhodium followed a similar pattern. This trajectory is expected to continue throughout the year following the drop in passenger vehicle demand.

In 2021, there was a forecast of 7.3mn oz of platinum to be used, and a whopping 36% of this is used by the automotive industry, coming to around 2.7mn oz. Rhodium, on the other hand, is significantly more in demand from the automotive sector, with 89% of the 1.06mn oz of rhodium forecast to be used in the industry, coming in at 940,000oz.

The Impact on the Automotive Industry

A report had revealed that the shortage of semiconductor chips was likely to decrease global light-vehicle production by around 9.6mn units in 2021, and stay this way throughout 2022 and possibly even into 2023, with the chip supply shortage unlikely to be over by then.

This has been going on for several years now, with Volvo Cars reporting that their production had dropped by around 50,000 units over the summer of 2021 compared to the same time the previous year. Volkswagen also reported that internationally there is an expectation that around 1mn units will be lost due to chip shortages.

The drop in demand from the automotive sector, unfortunately, came at the same time as a drop in demand from investors. Traders appear to have taken a safer route throughout the pandemic of the last several years by investing in precious metals over more traditional commodities. The World Platinum Investment Council (WPIC) estimates that the precious metals market rose by almost a quarter in 2020, however, since then the demand has fallen again, with the WPIC estimating an 86% drop year on year.

Increase in Supply Forecast

It is looking likely that throughout 2022 the supply of PGMs will be on the rise again, with most of the major producers estimating a rise in both the mined and refined supply.

Tharisa, a producer of chrome and PGM from South Africa has predicted a 7% increase in 6E PGMs, and Impala Platinum is forecasting a 44% increase in production.

Hope for the Hydrogen Economy

Although there is a significant weakness expected in the demand, there is a hydrogen economy which is growing and predicted to boost the demand for PGM, potentially even long term. This will particularly be for metals such as iridium and platinum which are used in the catalysts for hydrogen fuel cells. These are so far still essential components within the fuel cell. The US has included both iridium and platinum to its ‘critical minerals’ list, taking them out of a broad PGMs classification to pay tribute to their critical role in the future of energy transition.

The International Energy Agency states that the catalysts involved in a proton-exchange membrane electrolyser (PEM) need around 1t of iridium and platinum per GW combined. The demand for hydrogen is predicted to reach around 105mn t by 2030, which would, in turn, grow the demand for PGM to 63,000 t/yr if all electrolysers are PEMs.

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