PPLT: 2025 will be a brilliant year for platinum

Summarize

1.In 2024, the amount of platinum under management in the abrdn Physical Platinum Equity ETF increased by 12%, but platinum failed to follow the upward trend of other precious metals.

2.The main reason is the weak demand for platinum from traditional cars as demand for electric vehicles grows, coupled with a decline in jewelry demand in China, which has led to poor performance of the platinum market.

3.Platinum is currently trading at a discount to the cost of mining for many of the big miners, which could mean that prices are close to bottoming and a sustainable rebound.

4.If higher prices spur a recovery in Chinese demand, the rebound could create a self-reinforcing virtuous circle. PPLT offers low-risk,high-return investment opportunities.

Over the past year, precious metals investors have looked to platinum for a recovery after years of underperformance, leading to strong AUM growth in the abrdn Physical Platinum Equity ETF (NYSEARCA: PPLT). However, platinum once again failed to meet market expectations and continued to fall relative to gold and silver. With platinum currently trading below the cost of sustainable mining for many large producers, 2025 could be the year that platinum gets its shine back.

PPLT provides exposure to spot platinum bars by storing them in a secure vault and charging a 0.6% annual fee. Despite platinum's recent poor performance, this fee continues to burden investors, but PPLTS remain a cost-effective alternative to directly holding physical platinum. It is important to note that the high volatility of platinum means that fees themselves are not the main driver of ETF returns. In 2024, despite platinum's poor performance, PPLT continued to attract significant inflows, with platinum ounces under management growing by 12%.

The automotive industry faces headwinds, but the potential for a hydrogen economy is huge

In my last article on PPLT in 2021, I noted that the automotive industry, which is the largest market for platinum, is likely to switch from palladium to the use of platinum in catalytic converters due to the huge price differential, and this trend has indeed happened. According to the WPIC, about 620,000 ounces of palladium will be replaced by platinum in 2023, up from 385,000 ounces in 2022. However, this change has led to a fall in the price of palladium, rather than a rise in the price of platinum, which has fallen 70% since its 2021 high and is now in line with platinum's price.

The rise of electric vehicles worldwide and the decline in diesel car sales is a trend that is unlikely to change, which is putting enormous pressure on global platinum demand. However, in the coming years, fuel cell electric vehicles (FCEVs) show great potential. According to WPIC data, the platinum content in heavy-duty fuel cells is eight times higher than that in diesel fuel cells. Demand for platinum from fuel cell electric vehicles is expected to account for about a quarter of the total automotive industry demand by 2030.

China's demand for gold jewellery may finally bottom out

A major reason for the decline in platinum prices over the past decade has been a fall in demand for jewellery in China, where consumers are increasingly favoring gold. The main reason for this trend seems to be that platinum is seen as a less reliable store of value than gold, a perception that is somewhat akin to a self-fulfilling prophecy. With this change in preference, the market demand for platinum has been significantly affected. However, the downward trend in platinum demand in China may be gradually bottoming out as the market adjusts and potentially reevaluates its value.

Platinum Jewellery Demand

Chinese consumers are gradually abandoning purchases of platinum, which partly explains why the metal has failed to follow gold's rise. Due to the monetary nature of platinum, its price has historically largely moved in line with the gold price, but in recent years this relationship has almost completely broken down. The chart below shows the platinum price, the gold price, the ratio of the two, and the 3-year rolling correlation between the two metals. As gold prices rose to new highs, platinum prices remained range-bound and even briefly showed a negative correlation in 2024.

If we start to see platinum prices recover and gold prices fall, there could be a selling recovery as Chinese jewellery demand recovers. The low price of platinum relative to gold suggests it could rise sharply if Chinese consumer sentiment towards the metal improves.

Tight supply should provide a floor for prices

Platinum has a relatively low inventory flow compared to gold and silver, which means its price is more sensitive to changes in supply. In theory, when platinum prices fall below the cost of mining, this should provide a floor for its price, as we see today. Production by the world's largest platinum producers has been falling in recent years, and with spot prices below the sustainable cost of production for many large producers, platinum production is likely to shrink further. As the World Platinum Investment Council (WPIC) explains in its report, the platinum market is likely to remain in deficit for the next few years as the world's largest mining companies cut capital expenditure on the back of falling metal prices.

A strong foundation seems to be in place

From a technical point of view, platinum prices are near the low end of their long-term range. Long-term support is around $830 / oz, which corresponds to around $77 on the PPLT. If the upward momentum starts to build, the $100 level of PPLT will become critical, and a break above this level could mark a break from the downtrend since the 2008 peak and could trigger further price gains.

Summarize

Platinum has disappointed investors in recent years, failing to follow the gains of other precious metals. In particular, platinum has underperformed relative to gold, which has partly created a self-reinforcing cycle as platinum jewellery demand in China has shrunk further due to falling prices. However, platinum is currently trading below the cost of mining for many of the big miners, meaning a bottom appears to have formed in the market. As sentiment towards platinum gradually improves, any price recovery could trigger a self-reinforcing upward trend. Therefore, PPLT, as a low-risk, high-return investment tool, deserves attention.