Green hydrogen production and fuel cells could add another 25 tpa of platinum demand by 2040, equivalent to 40% of present Chinese consumption, the WPIC's director of research Edward Sterck said on Tuesday at the China PGMs Marker Summit held as part of Shanghai Platinum Week.

China, the world's biggest consumer of platinum group metals (PGMs), therefore, would benefit from creating a strategic reserve of platinum that would secure long-term supply for its nascent domestic green hydrogen economy amid forecasts of a growing global supply deficit going forward.

Chinese demand for platinum across the automotive, jewellery, chemical, petroleum, electrical and glass sectors stood at 2Moz in 2023, up by 16% from 1.7Moz a year earlier, according to figures from the World Platinum Investment Council (WPIC). The lion's share of this is met through imports, as recycling supply in China from automotive, jewellery and industrial applications contributed just 217,000oz last year.

Akin to how EVs rely heavily on battery metals such as lithium, nickel and cobalt, green hydrogen leans on platinum, iridium and ruthenium as catalysts for water electrolysis. The same three PGMs - plus palladium and manganese - are also needed in fuel cells that run on electricity generated from hydrogen.

China's green hydrogen sector is tipped for considerable growth over the next decade as Beijing looks to the zero-emission fuel to decarbonise sectors where emissions are either hard to abate, or direct electrification and other low-carbon options might not be technically or economically feasible.

China's green hydrogen output is on track to reach the equivalent of 200,000tpa by the end of this year, a full year ahead of an official target set by Beijing in early 2022, research consultancy Rystad Energy said last month. This output would be more than triple the 30,000 tpa produced worldwide via water electrolysis in 2020, as estimated by the International Energy Agency.

China presently consumes around 33Mt of hydrogen but the China Hydrogen Alliance, a government-supported industry group launched in 2018, has forecast demand to reach 35Mt in 2030 and 60Mt in 2050.

Meeting China's projected demand will require significantly more production, but building capacity will require additional metal that will be challenging for China to source. The WPIC anticipates China's platinum demand to grow by just 12% from 2023 to 2040 due to a potential shortage from constrained supply.

"Effectively, China doesn't have any material source of domestic demand supply. We've also got competition for material from the rest of the world, and you can see growth and demand continuing in the rest of the world as well as in China. This results in sustained metals deficits for the foreseeable future," said Sterck.

Strategic stockpiling could spread

The establishment of an official domestic platinum reserve would allow China to protect itself from future supply risks and ensure it has enough of the strategically important metal to maximise its hydrogen potential, according to Sterck. The holding could take the form of jewellery or investments products that would be made available for future national needs.

China already maintains state stockpiles of key commodities that include petroleum, strategic mineral resources such as copper and cobalt, and farm goods.

China has already been stocking up on platinum for more than a decade - this Chinese above-ground inventory is widely regarded as a black hole in terms of data, though one estimate put it at half of the 33Moz in existence. Some industry experts regard strong Chinese imports over and above identified industrial demand since the second half of 2020 as a strategic political investment decision by Beijing.

China is unlikely to be the only country with the need to build national platinum reserves given the importance of the future-facing precious metal.

"I think it will be interesting to see how developed world governments respond in terms of policy given they've missed the boat essentially on building new mines. I would expect to see [a] rebuild of strategic stockpiles," said Colin Hamilton, commodities research managing director at BMO Capital Markets, at the Shanghai summit.

"That of course is something that China has been doing. Arguably PGMs is one where China does still need to build a little bit more buffer, but expect to see the rest of the world start to add to the demand side without necessarily solving the supply side of the equation."

Risky business

Maximising metal inflows into China to build and grow a strategic reserve would require China to minimise transaction costs and improve market infrastructure, according to Sterck, who pointed to the availability of platinum exchange traded funds (ETFs) as an example in the rest of the world. He noted that more than 500koz of platinum flowed into ETFs in the UK from April to June.

"ETFs work in the rest of the world because of the ability to manage price risk on behalf of the ETF issuers by hedging with futures contracts. The ability to manage price risks has broader impacts on the platinum market as a whole - it improves cost visibility for fabricators with jewellery and investment products, which in turn minimises required product premiums and the buyback discount imposed upon consumers. Similarly, cost visibility helps domestic automakers and industrial end users in budgeting."

The lack of price risk management has undermined Chinese demand for platinum-based jewellery in recent years. Annual demand averaged 1.08Moz during 2004-2008 and then rocketed to 2.08Moz in 2009 before staying elevated at over the next six years amid a period of high prices for precious metals. 

Precious metal price drops in the following years forced jewellery manufacturers to hike both the premium charged for their products and the discount on buyback as their only way to manage price risk. That left a bitter taste for many consumers who sold at a lower price than what they originally paid, hurting confidence in platinum as an investment asset. "Ultimately that's resulted in the Chinese jewellery market eroding from that 2Moz-a-year market down to only 400,000oz a year," said Sterck.

Helping to address the present inability to manage price risk in China will be the forthcoming launch of the country's first platinum and palladium futures contracts by the Guangzhou Futures Exchange (GFEX).

The RMB-denominated new contracts will include 12 monthly contracts - rather than the quarterly contracts typically offered by other exchanges – to provide increased hedging flexibility and more frequent opportunities for settlement, according to Chen Xuanchuen, platinum and palladium futures lead at the GFEX's commodities products department.

One innovation the GFEX's new contracts are set to introduce is allowing the delivery of platinum and palladium in sponge - pure metal in powder form – as well as the traditional ingot form. No other exchange presently allows delivery of sponge, which the main form of platinum used by carmakers and other industrial users for manufacturing.

"The availability of domestic futures could potentially boost consumer confidence in both metals, increase the availability of recycled metal and further accelerate demand growth," said Chen.