Financial Sense "Going Platinum" by Elliott Gue 12/07/2006

Although platinum may seem at first blush to have absolutely nothing to do with energy, in fact, platinum is a crucial commodity that's intimately tied to the future of clean diesel fuel.

Diesel fuel is a fast-growing fuel worldwide. Diesel powered cars get as much as 40 percent more miles per gallon compared to similar-sized gasoline engines. Moreover, with the advent of turbo direct injection, diesel cars actually offer performance that's comparable to or better than equivalent gasoline engines.

Due to this fuel efficiency, diesel is picking up market share all over the world. In 2006, diesel cars accounted for more than half of the European car market - that's the first time diesel has been more important than gasoline in Europe. And diesel is also becoming a key fuel in fast-growing Asian markets -- in 2004 alone, diesel demand in China soared more than 350,000 barrels per day. Longer term, China’s diesel demand should grow between 100,000 and 200,000 barrels per day every year. Overall, growing demand in the EU, US and Asia represents as much as 650,000 barrels per day in annualized growth in demand for diesel fuel.

Then, of course, there's the US. Diesel has always had a less-than-stellar reputation in the American market. That's partly due to the fact that early diesel cars sold in the US market weren't of the best quality. Early models were plagued by poor performance, particularly in cold weather conditions. That turned an entire generation of Americans off diesel fuel. But diesel is predicted to make somewhat of a comeback; the US Dept of Energy believes that diesel could account for 8 percent of the U car market in 2030, up from around 2 percent today.

And diesel has always been the fuel of choice for trucks and trains in all markets. This is likely to remain the case.

But there is a problem with the increased use of diesel fuel; diesel produces a good deal of pollution. Pollutants emitted from diesel engines include sulphur dioxide, nitrous oxides and particulate matter (basically soot). Particulate matter is especially troubling for diesel cars; in China, burning diesel fuel is one of the main culprits for the major Chinese urban pollution problem. The Chinese government has expressed interest in controlling the nation's pollution problems; Chinese urban pollution has become so serious that it's actually impacting growth potential.

Most governments the world over are tightening environmental regulations for diesel fuel. This includes producing fuel with ultra low sulphur content and imposing limits and regulations covering emissions from diesel-powered vehicles. This is not just a developed market story; China and India are also cracking down on diesel pollution.

One of the offshoots of this environmental regulation is that diesel powered cars and trucks will need to be fitted with special filters that cut down on emissions of sulphur and nitrous oxides and particulate matter. The key component of diesel filters: platinum.

If you're like most people when you think of platinum, jewelry is probably the first product that springs to mind. But platinum jewelry accounts for only about one quarter of global platinum consumption. The autocatalyst market is far more important - more than half the platinum consumed globally goes into automobile and truck filters. It is far and away the most important and fastest growing use for the metal. Since Europe is now the world's largest diesel market, demand for platinum has been soaring there.

Europe now accounts for 37 percent of global platinum demand. Demand in Europe for platinum as an autocatalyst has grown from 500,000 ounces in 1997 to more than 2.25 million this year.

But Europe isn't the whole story. In North America, demand for platinum as an autocatalyst grew 130,000 ounces this year to total nearly 1 million ounces and emerging markets sucked down 650,000 ounces up from around 250,000 a decade ago. Demand is projected to continue accelerating as new tighter environmental regulations are phased in.

Of course, as with any commodity, there are two sides to the platinum story: demand and supply. And when it comes to platinum supply, South Africa reigns supreme; South Africa accounts for close to 80 percent of global platinum supplies. South Africa is also the only nation globally that has been able to significantly boost production in recent years. In other words, South Africa is a crucial piece of the global diesel market.

While the supply and demand balance in the platinum market is improving, the market still faces a deficit and is likely to remain in deficit again in 2007. In other words, demand for platinum exceeds available supply.

With demand for platinum rising rapidly, mine production will have to rise even faster to keep up with the demand. Most of the additional supply will come from South Africa 's prolific mines. This tight supply and demand balance is behind platinum's big rally over the past few years.

The world's largest platinum producer is South Africa 's Anglo Platinum sometimes called simply "Amplats" (OTC: AGPPY, London : ANP; Johannesburg : AMS). This company alone produces 40 percent of the world's platinum, close to 2.5 million ounces annually from mines located mainly in South Africa. The company is 75 percent owned by Anglo American (NSDQ: AAUK) but is traded separately.

Amplats is certainly benefiting from the bull market in platinum as it's one of the only companies in the world with the ability to actually grow supply of platinum to meet rising demands. Subscribers looking for a big cap play on platinum should definitely consider buying Amplats.

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