Elemental Analysis

There’s nothing like a stew consisting of mortgage foreclosures, an ongoing war, currency uncertainty and banks in crisis to do wonderful things for the prices of precious metals.

Spice that with unemployment and add a dash of skyrocketing fuel prices, and recyclers suddenly find themselves competing with crooks for everything from catalytic converters to copper. Sprinkle in a solid helping of real demand for precious metals, and there is no telling what the markets will cook up.

Gold prices continue to set records, and silver follows its lead. Platinum and palladium prices are so good that they tempt thieves to steal catalytic converters from parked cars, targeting SUVs because their parts are so easily accessible.

In broad terms, the value of many precious metals has tripled in the last five years. Gold has gone from trading for $325 per ounce to trading in the $900 to $1,000 range. Silver has increased from a steady $5 to nearly $17 per ounce.

The spot price for platinum is hovering around $2,000 per ounce. Even major players like specialty chemical company Johnson Matthey, based in London, had to be surprised. Just a year ago, the company was projecting platinum prices near $1,200 per ounce. The company conceded that the price "could reach $1,400 per ounce over the next six months."

However, Johnson Matthey underestimated its palladium prediction, expecting support between $320 and $420, as palladium wandered in the $450 to $470 range in April, but, that pricing was down quite a bit from the $500-plus prices (as high as $560) the metal reached in late February and early March.

Those prices helped to bring out material, and it keeps coming.

"Flow is good," says Jim Taggart, president of ECS Refining in Santa Clara, Calif. As prices jump, he has seen increases in his company’s business for everything from precious metal scrap to electronic components.

With a facility in Terrell, Texas, also involved, ECS Refining purchases a variety of electronic scrap, including printed circuit boards, obsolete computers and peripherals, manufacturing and test equipment, as well as photo processing residue and most of the other items from which precious metals and other metals can be gathered. "We handle lower grades than, say, Johnson Matthey does," Taggart says. Still, ECS is doing well.

"Our business has grown at 50 percent per year over the past three years," he says. Much of that growth is unrelated to market prices, Taggart adds. The big computer companies like Apple, Dell and HP have put programs in place to recycle their computers. States, notably California with SB-20, now mandate recycling of electronic equipment. Under SB-20, the state collects a fee upon the purchase of new devices and then pays processors at the end-of-life to recycle the equipment.

"The value of all of these metals—copper included—has improved the value of computers," Taggart says. "A couple of years ago, we paid 65 to 75 cents a pound for computer motherboards. Now, we are paying $2.50 to $3 a pound."

The reason for that increase, of course, is that the underlying value of the metals has jumped.

"People are definitely aware of the higher prices," Taggart says. He notes that there is less legacy material, like silver table settings, in the market. One question is how much more of that kind of material sits on the shelf in light of the consistent upward trend in values.

Keep an eye out on the increasing importance of secondary supply of platinum group metals (PGMs), advises Ashok Kumar, venture manager at A-1 Specialized Services, Croydon, Pa.

"The recycling of platinum group metals was once dismissed as an inconsequential source of excess material. Today, this essential resource of much-needed supply would rank as the third largest ‘producer’ of both platinum and palladium and continues to close the gap with industry leaders Anglo Platinum of South Africa and Russia’s giant mining firm Norilsk," he says. The contribution of PGMs reclaimed from spent autocats will only increase in importance as South African miners struggle to increase output of new metals, he continues.

The price of platinum soared by more than 50 percent in the first quarter of 2008, reaching a record high of just above $2,300 an ounce, as investors responded to reports of significant losses in the South African production of PGMs, a consequence of energy-related mine closures, periodic shutdowns for safety inspections and other operational difficulties. To offer some perspective, South African miners, who deliver about 75 percent of the world’s annual platinum supply, have recently lowered 2008 production targets once again to an estimated 4.6 to 4.8 million ounces, dramatically below estimates of the 5.4 to 5.5 million ounces of platinum brought to market in 2006.

"The threat of additional deficits in supply deliveries from South African producers due to further risks to power deliveries from Eskom has kept the market tight and at relatively high price levels," Kumar says.

The South African government’s underfunding of Eskom throughout the past decade has left the national power generator, which produces 95 percent of South Africa’s energy, unable to keep pace with the nation’s growing energy needs, particularly for its large and expanding mining customers, Kumar says. Additionally, the eventual success of a number of developing junior mines and planned expansion programs at steady state mine sites will be predicated on the ability of Eskom to improve existing capacity and to build new infrastructures, which may take five years or more to accomplish.

"Record high prices for the PGMs, specifically for rhodium and platinum, along with the greater efficiencies inherent in the maturing U.S. and European Union salvage autocat markets, have resulted in a steady increase in the flow of recycled converters in recent years," Kumar says.

In addition, the enactment of recycling initiatives such as the End-of-Life Directive in the European Union, which mandates that manufacturers are responsible for the collection of scrap autos, has markedly boosted awareness and recovery rates.

In Europe, converters were first installed on autos in 1992, and these cars have only become available for reclaim in large quantities in the past few years.

Kumar says A-1 estimates that total PGMs recovered from recycled autocats will grow at a 14.5 percent compound rate for the five-year period that will end in 2008, for a total of 2.27 million ounces this year, following an 11.3 percent growth rate in the prior five-year period.

Palladium has seen the largest gains in recovery in recent years, as those converters manufactured in the late 1990s and containing higher loadings of the metal have now become available in greater numbers as scrap.

The developing markets in the East, most notably China, India and Russia, have been sharply increasing domestic auto production in recent years and should continue to expand further throughout the near to intermediate term. These and many other developing nations are adhering to emissions limits as outlined under Euro 3 standards, requiring increasing amounts of PGMs.

However, despite this substantial growth in vehicle production and PGM demand in China and other developing countries, Kumar sees no significant contribution to recycling for perhaps the next decade or until a meaningful number of scrapped autos becomes available.

For calendar year 2008, A-1 estimates that palladium recycled from spent autocats could total 1.08 million ounces, up about 95,000 ounces from 2007 levels; recycled platinum could rise to 980,000 ounces from last year’s 920,000 ounces; and rhodium recovered from salvage converters could reach 215,000 ounces (190,000 ounces previously).

Most recyclers in the United States naturally look at the prices of gold, silver and platinum from an American-dollar point of view. However, the dollar has lost value relative to most other world currencies. While traders based in the Euro and Asian currencies have seen precious metals rise, the apparent increase has not been as sharp as it has been for those valuing the materials in terms of U.S. dollars. As the dollar sinks, the apparent worth of gold or palladium rises, even if there are no other increases in the underlying value of the materials.

Yet, there is a continued increase. Although Detroit automakers are suffering, the world market for automobiles is growing—and with it the demand for everything from precious metals for catalytic converters to more mundane metals like lead for car batteries.

"The effects of a widespread slowdown in the global economy will act to moderate somewhat the demand for the metals," Kumar says. The International Monetary Fund and others have now estimated that global losses from the subprime mortgage debt crisis could surpass $1 trillion when all related securitized mortgage products and other lower rated collateralized debt obligations are appropriately valued, he adds. But there is brighter news, too.

An old rule of thumb said that it was profitable to extract gold when prices were above $300 per ton. Since the biggest single cost of mining an ounce of gold—or any other material—is energy, that figure surely has increased in the recent past with the run-up in energy prices. But even with the sharp run-up in the costs of all sorts of energy, the bottom end for an ounce of gold is still in the $400 or $500 range. That means today’s prices assure there is a lot of incentive for commercial mining companies to open new operations or to re-open less efficient sites.

Eventually, production capacity will increase, and prices—both of primary metal and of recycled metals—will feel downward pressure. Every recycler and every player in the market has an opinion about where the precious metals market will go.

"I’m a believer in the market and what it tells us," Taggart says. Right now, he indicates, the market is telling us what the "correct" price should be.

"Given the current economics and how much they already have risen, it is hard for me to imagine that the markets will continue to rise," Taggart says. "If I had to bet on what would happen a year from now, I’d bet that they will be below where they are now, rather than above."

"Whether the U.S. economy is currently in a recession or nearing one is more a matter of definition," Kumar believes. "But the longer-term secular growth experienced in the Far East is likely to continue to consume greater amounts of raw materials for some time."

The growth in new vehicle production from the emerging economies of the East is projected to more than offset declines in Western sales, despite some measure of contraction in worldwide economic expansion. Moreover, the adoption of broad emissions standards by most developed and developing countries continues to necessitate increasing amounts of platinum, palladium and rhodium in order to achieve compliance.

"The current high prices in the PGMs are demonstrating that the primary producers of these metals are no longer able to keep up with soaring consumer demand," Kumar says. "The supply of recycled PGMs from salvage autocats has now become an integral part of the supply/demand equation on which the markets depend in order to function. One can only imagine how much higher market prices would be for these metals if this above-ground stock of secondary material was not made available to consumers."

The author is a Cleveland-based contributing editor to Recycling Today. He can be contacted at curt@curtharler.com.