Of Elephants and Yams: Thoughts on PGM Liquidity, Demand and Recycling in India

Which can be roughly translated as: when discussing major issues, don’t worry about the details. This article is not designed to examine the finer points of PGM demand in India – the ‘yams’. Rather it will concentrate on some of the macro trends – the elephants – that will strongly influence the flows of PGMs in this part of the world in the future.

Demographics and Disposable Income

Demographics is our first elephant, and is very much the dominant bull of the herd.

Chart 1 compares the total populations of India, China and the US (the bars) and their respective per annum growth rates (the dots). As the bars indicate, India has around 1.1 billion people, China, roughly 1.3 billion, and the USA some 300 million. But there is an interesting difference in the growth rates –India’s is currently 1.6% p.a. compared with 0.6% in China.

The age structure of the populace is equally as important – Chart 2 shows how many more people under the age of 14 there are in India than in either the US or China. That means that India’s working age population – the economically active, in other words – is set to grow at a healthy rate for at least the next 40 years.

So whilst China’s working age population will start declining from 2020 onwards, India’s will increase until at least 2050. Today, China’s working age population dwarfs India’s by 230 million, but by 2050 the position will have reversed. Largely due to its one-child policy, China is aging faster than any other country in history and is in danger of growing old before it has grown rich.

It is not just the fact that the number of people in India is increasing that is significant – it is also that they are getting steadily wealthier. The noteworthy items in Chart 3 are not really the large gaps that currently exist between the developed and developing nations, but the huge potential for future wealth creation and spending in the developing countries. At its current growth rate, India’s purchasing power parity is set to overtake Japan by 2025 to rank third after the US and China – a prediction that came from none other than Governor of the Bank of Japan, Toshihiko Fukui.

Electronics

Electronics is the second component of our elephantine analogy. Rapid growth in disposable income leads to rapid growth in consumer spending. IT is riding the crest of this wave of money – Chart 4 illustrates how low in per capita terms sales of personal computers and mobile phones currently are in India. US annual sales of PCs are equivalent to almost one for every four people – in India the figure is more like one for every 160. But this disparity is shrinking: the chart illustrates the phenomenal rate at which sales of IT hardware are expected to expand, particularly mobile phones.

The speed at which the telecoms companies are adding new mobile phone subscribers is extraordinary – more than seven and a half million new subscribers in September alone, with the total number expected to reach 250 million by the end of the year – an increase of 85 million in one year. Of course this translates into growth in phone sales, which are expected to top 115 million a year by 2010. PC sales are on a similar, though not quite as dramatic, upward trajectory, growing at almost 30% p.a. on average over the last seven years (Chart 5).

With rising electronic product sales comes rising domestic manufacturing: India is now a large and expanding centre for electronics manufacturing services companies. In this the industry is supported by a strong government desire to reduce the country’s import dependence in high tech sectors of the economy.

In 2006 the value of electronics production in India amounted to roughlyvUS$15.6bn, which sounds high but is a small proportion of national GDP compared to some other Asian countries. Again, however, it is the speed at which the sector is projected to grow over the long term that is of note – the Electronic Industries Association of India forecasts that annual growth will average at least 20% for the next eight years.

All that growth equates to a lot more demand for platinum- containing hard discs, palladium- based capacitors and ruthenium resistors (not to mention gold bonding wire and connectors, and silver pastes and solders).

The other side of the electronics coin for precious metals is scrap. Here, too, there is substantial growth potential in India. The country currently generates only around 200,000 tonnes of scrap a year compared to around 8 million tonnes a year in the EU. However, if Indian production and sales of electronic goods match the growth rates forecast, then it follows that e-scrap production will also increase almost exponentially over the next few years, rising by a factor of approximately 10 by 2012.

In addition to being a source of e-scrap in its own right, India has also become a major centre of e-scrap imports and intermediate processing (whole component removal, shredding of printed circuit boards, etc).

The industry, if it can be called that, is still largely unregulated and operates very much outside the mainstream economy. There continues to be substantial illegal landfilling and incineration of scrap; the sector is highly inefficient, resulting in low overall metal recovery rates; and it continues to be plagued by serious health and safety problems.

But the situation is changing on a number of fronts, as the combined pressures of legislation, public opinion and profits are brought to bear. Over the next few years we expect to see a substantial reduction in the volumes of waste being illegally buried or burned, and a steady modernisation and consolidation of the informal scrap sector, leading to better metal recoveries and increased precious metal scrap flows.

The Automotive/Platinum Sector

Our third pachyderm – the automotive sector – is a restless and rapidly growing juvenile. The total car pool in India is low but is expanding at double-digit percentage rates, though the rate of growth is lower than in China.

Comparisons of per capita car ownership highlight the future potential (Chart 6). One interesting point is that, unlike China, which remains a predominantly gasoline car market, diesels are rapidly gaining ground in India. One of the key reasons is that diesel fuel is substantially cheaper than gasoline in India, typically costing 30% less per litre because of government price controls, versus an approximately 8% differential in China. The growth in the Indian light duty diesel market is strongly supportive of platinum demand.

Sometimes infrastructure concerns or overcrowded roads are cited as possible drags on the vehicle market in India, with congestion in Mumbai often highlighted. But in the same way that downtown Shanghai is not representative of China, downtown Mumbai is not representative of India. Chart 7 plots not just per capita car ownership (the dots), but the number of passenger cars per km of paved road (the bars), which barely registers on the scale.

That is not to say that everything is rosy for the growth of automotive platinum demand in India – it clearly isn’t, and there are some major infrastructural obstacles (as well as other complications such as restrictions on capital flows, import duties and taxation, and excessive regulation).

But the situation is improving and serious money is being spent. For example, according to Agence France-Presse, nine trillion rupees of investment in roads is planned over the next five years, earmarked for the improvement and expansion of more than 50,000 kilometres of highways.

Importantly, the spending is coming not just from the government but increasingly from the private sector. The Indian Infrastructure Development Finance Company has already established a $1 billion investment fund with the 3i private equity group and established a second investment fund in partnership with Citigroup and Blackstone towards the end of last year. Ernst and Young expect private investments in infrastructure projects in India to cross the four trillion rupee (US$101 billion) mark in the next five years.

This article is adapted from a speech given at the 2007 LBMA Conference

Petrochemicals

The petroleum refining and petrochemicals business can be considered the matriarch of our group: a little mature but after a lengthy gestation period about to produce several offspring. Currently India has 19 operating petroleum refineries with a combined capacity of around 149 million tonnes per annum (m. tpa). Around 71 per cent of this capacity is under state control.

In theory there is plenty of spare refining capacity in India to service the domestic market. In practice, however, because the local market is distorted by government price controls on gasoline, diesel and LPG, those refineries in public ownership predominantly ship products to more lucrative export markets – the US (gasoline), Europe(diesel) and elsewhere in Asian (gasoline, diesel and kerosene).

The degree to which the various refineries can handle different crude qualities also varies widely. Generally speaking, average crude oil quality is decreasing – it is becoming more sour (higher sulphur) and heavier (requires more cracking/refining to attain end products).This gives a distinct advantage to modern refineries, such as Reliance Industries’ Jamnagar complex, given their flexibility to handle lower quality, lower cost crudes.

In considering the potential growth of this sector, structural issues in the domestic market are less important than potential export markets. In its latest five-year plan, the Indian government has targeted the promotion of the country as an export-oriented petroleum hub for Asia, with the goal of a 58% expansion of refining capacity to 235m. tpa by 2012 (Chart 8). This may seem ambitious and perhaps a little unrealistic given the cost inflation that the sector has seen recently and the bureaucratic maze that has to be navigated – however, construction has already begun on additional crude refining capacity of 57m. tonnes.

Along with this is coming very substantial growth in downstream production capacity of polymers – the basic building blocks of plastics – reflecting the rapid growth in demand in both the domestic and local export markets. For example, detailed planning for and construction of new paraxylene capacity at Jamnagar, Paradip, and Haldia totalling in excess of 3.5m. tpa is already well advanced.

Despite the rapid cost inflation in the sector, the trend in refining margins is supportive of investment in new capacity. Margins are expected to moderate a little from recent levels but should remain relatively firm in the Asian region until at least 2012.Comparing the margins seen by Indian refineries makes clear the advantage of targeting export markets rather than the domestic market – Reliance Industries consistently enjoys margins that are at least $5 higher than state-owned Indian Oil.

In October last year, Indian Oil estimated that it was losing around 1 billion rupees a day from selling fuels below cost in India. Although it is compensated in part by the government’s issuance of oil bonds, the compensation has been reduced in value by the rapid increase in the price of crude over the last 12 months. And there is no relief in sight: in mid-November, the Indian Oil Minister Oil Minister Murli Deora said that the government saw “no need for an immediate fuel price increase…” and the committee that sets prices took no action at a recent meeting in January. Escalating costs (amongst other factors) have resulted in the cancellation or indefinite postponement of several major refinery projects recently in Turkey, UAE, Indonesia and South Korea. This raises the questions of whether a window of opportunity for India has been opened – and if so, whether the country can take maximum advantage of it.