September 24, 2015 / 6:31 AM / 4 years ago

VW scandal could end platinum's price supremacy over palladium

LONDON (Reuters) - Platinum’s price dominance since 2001 over sister metal palladium could come to an abrupt end if Volkwagen’s (VOWG_p.DE) auto emissions scandal spills over into Europe, where diesel cars account for about 45 percent of total sales.

The logo of German carmaker Volkswagen is seen at the Volkswagen (VW) automobile manufacturing plant in Puebla near Mexico City September 23, 2015. REUTERS/Imelda Medina

Fears of falling platinum demand after the United States accused the German firm of using software for diesel cars that deceives regulators measuring toxic emissions pushed prices for the metal to a 6-1/2 year low of $925.30 an ounce on Wednesday.

Diesel autocatalysts, which help make cars more environmentally friendly, account for about 40 percent of global platinum consumption estimated at around 7 million ounces a year.

“This is really going to leave a bad taste in consumers’ mouth about diesel automobiles,” said Michael Sheehan, senior portfolio manager at U.S.-based Orion Commodities Management.

“If Volkswagen were doing the same thing in Europe and if there is more to come, it would be really bearish for the platinum market. At some point platinum and palladium prices will go to parity ... my guess would be between $700 and $850.”

Palladium, mostly used in catalysts to make gasoline-powered cars, is trading around $640 an ounce.

The last time palladium prices were higher than platinum’s was around 14 years ago, when palladium surged to $1,094 after a U.S. carmaker accumulated an unusually large hoard, anticipating higher demand and fearing unpredictable supplies from Russia, the world’s largest miner.

The platinum/palladium price ratio of 1.44 is the lowest since early June after recovering from 1.43, its lowest since 2002. The ratio first broke above parity in July 2001.

“There seems to be panic in the (platinum) market, so another $100 an ounce fall is possible,” said MW Consult’s Michael Wagner, a former metals manager at Volkswagen.

About 17,000 ounces of platinum are used for 100,000 diesel-fueled cars. Falling demand for diesel-fueled cars in the 9-million unit European market would take a serious toll on overall platinum demand.

“Over the longer term, we believe that diesel’s market share may fall somewhat in Europe and fail to advance in North America, a bearish development for platinum but a more positive one for palladium, which should benefit from greater sales of gasoline-fueled vehicles,” Mitsui analysts said in a note.

A 22 percent price fall this year adds to platinum miners’ pressure to divest assets and cut production. Around two-thirds of the industry, which is still recovering from an often violent five-month strike last year, is loss-making at prices below $1,000 an ounce.

The strike in South Africa, accounting for 80 percent of global output has put serious pressure on producers including Longing and Anglo American Platinum (Amplats), which have seen their shares plunge 90 percent and 24 percent respectively this year.

Amplats, the world’s biggest platinum producer, took a big step towards its goal of becoming a low cost miner by selling its labor intensive Rustenburg mines this month, a move that should shrink output but help to boost profit.

Reporting by Clara Denina. Additional reporting by Jan Harvey; editing by Pratima Desai and David Evans

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