Low Platinum Prices Show How Banking on Miners Could Threaten the Energy Transition

Plunging prices for platinum and other critical metals could derail mining investment needed to develop new supplies, posing a significant threat to decarbonization targets set by countries around the world.

Platinum is used to make the electrolyzers that produce hydrogen and the sharp down cycle in South Africa’s platinum mining sector demonstrates how low prices and a lack of investment could slow the energy transition. Last week, Johannesburg-headquartered Impala Platinum started offering voluntary redundancy to staff in a bid to drive down costs. Sibanye-Stillwater, another South-Africa based miner, said in October that it would shut four mine shafts, putting more than 4,000 jobs at risk. 

The supply-side moves in South Africa have been driven by a sharp fall in revenue from platinum group metals, also known as PGMs. Platinum futures have fallen nearly 20% this year after hitting decade highs just 18 months ago. Prices for other commodities have also fallen, while miners have been complaining of rising costs and seem to be limiting their capital expenditures. A drop in investment can have longer-term consequences as it often takes billions of dollars and years, if not decades, to get new mines up and running.

Governments have established ambitious goals to increase the share of renewables in their energy mixes, but a shortage of the materials miners extract could hold back those plans. PGMs are critical to the energy transition and demand for platinum and iridium are forecast to rise sharply, as both are used to make electrolyzers, a critical technology for producing low-emission hydrogen.

“The scale and duration of the [PGM] price fall—together with the subdued macro-backdrop is enough to deter investors in the mining space,” says Tom Price, mining analyst at Liberum Capital. “History shows that if global growth is ever at risk, supply-side growth comes under pressure.”

For the mining sector, cyclical returns are nothing new. PGM demand jumped after emissions regulations tightened in the U.S., China and Europe around late 2021. Those rules drove record-high prices for platinum, rhodium and palladium, metals used in catalytic converters to lower the greenhouse gas emissions of combustion engines. Soon after, the Covid-19 pandemic, a semiconductor supply shortage and more recently automaker strikes caused a slump in auto production, which slashed demand for the metals. 

“We’ve just exited a period of absolute record profitability for the sector. Times have never been as good,” Emma Townshend, executive of corporate affairs at Implats, said at a recent industry conference. “But you also see very clearly that over a six-month period times have got very bad very quickly.” Prices have fallen just as interest rates and input costs have risen along with government pressure to invest in new projects to increase supply for the coming transition.

“We are being asked constantly as producers how are you going to respond, what are you going to do next, what happens now?” Townshend said.

The current down cycle could stop dealmaking and stall mine exploration in the sector, said Raj Ray, director of metals and mining research at BMO Capital Markets. Ray said many South African PGM miners are now selling their output at close to the cost of production, eating away at profitability. “To the extent that PGM prices stay at current levels, I would not be surprised to see more supply-side reaction,” Ray said. 

At the peak of the 2007 to 2008 boom, miners invested about 60% of cash flow on average, mostly to develop mines to boost production volumes, but in the 2021 to 2022 peak, average capital expenditure was about 34% of cash flow, according to Metals Focus, a consulting firm focused on precious metals.

“The nature of the response is probably going to surprise people for people who like to think miners like to dig, dig, dig themselves out of a hole. I think you’re going to see a far more cautious approach,” Implats’s Townshend said. 

Implats and Sibanye-Stillwater didn’t respond to requests for comment.

Write to Yusuf Khan at yusuf.khan@wsj.com