Platinum prices have plunged since the Volkswagen emissions scandal broke, as investors have shifted into its sister metal palladium – with the latter’s price rising 17 per cent. But some investors are expecting the price of platinum to stage a comeback.
Both metals are employed in the production of catalytic converters, but platinum is primarily used in diesel engines and palladium for petrol-powered vehicles.
In mid September, it emerged that Volkswagen had deliberately misled regulators over the level of emissions from its diesel cars. Vehicles were fitted with “defeat device” software that could detect when cars were undergoing testing by sensing speed, air pressure and the steering wheel’s position.
The device would limit the engine emissions while testing and raise them when it sensed testing was over.
The news caused a sharp divergence in sentiment towards the two metals. Platinum has dominated palladium in price terms for the last 11 years, according to Yahoo Finance, but now its premium over palladium has fallen to a 13-year low. Platinum has been the worst-performing precious metal over the last month, as investors expect there will now be increased demand for petrol powered vehicles, which use palladium in their catalytic converters.
Seventy per cent of palladium use is for catalytic converters, and it has received a further boost from China. Premier Li Keqiang has announced plans to accelerate the roll-out of electric car charging facilities – which investors read as positive for greener, gasoline cars.
“While in reality palladium has no role to play in electric cars, the government’s commitment to clean energy was bolstered, aiding the pollution abating metal,” explains Aneeka Gupta of ETF Securities.
DEATH OF DIESEL
Some experts believe the Volkswagen scandal has hastened the demise of diesel vehicles, by making consumers less keen on buying diesel-powered cars. The European market is predominantly diesel, and a gradual shift towards gasoline cars alongside rising car sales in emerging markets, where gasoline dominates, will be bearish for platinum. “Post the Volkswagen controversy… the demise of diesel has been brought forward,” said Goldman Sachs in a note. The investment bank has a negative outlook for platinum but says palladium is increasingly attractive.
STAGING A COMEBACK
But some experts think the market’s bearishness towards platinum is overdone. ETF Securities’ Gupta says platinum prices have been “unduly impacted” by the emissions scandal. Platinum has other uses besides cars, with only about 40 per cent of the metal going into catalytic converters.
“Despite an improvement in the demand outlook for platinum from jewellery and investment, negative sentiment for platinum continues to weigh on its price,” says Gupta.
Future supplies of platinum may also be lower as Lonmin, the world’s third-largest producer, is to cut production.
While short-term platinum prices may remain weak, Gupta argues there will be a pick-up. “The onset of the festival season in India and China, alongside moderate speculative investment appetite against the backdrop of cuts in production bodes well for platinum’s long-term demand outlook.”
For investors interested in adding exposure to either metal, both ETF Securities and iShares have dedicated physically-backed products. Both are similarly priced, with total expenses of around 0.4 per cent. For mixed exposure there is the ETFS Precious Metals fund, with a currency hedged option too.