VW Scandal Pushes Platinum: Gold Spread Near Highest Level Since 1987

By  Paul Ploumis 30 Sep 2015  Last updated at  03:37:46 GMT

(Kitco News) - Platinum markets continue to suffer as the fallout from Volkswagen’s (VW) emission scandal continues to grow, with Switzerland being the latest country to ban the sale of some diesel model vehicles.

The scandal is also spreading to other companies as there is speculation that some Audi and Skoda vehicle models could be facing the same problems.

Analyst have been watching Europe’s reaction to “dieselgate” closely as this is the world’s biggest diesel engine market, and has the biggest impact on platinum prices. Platinum is the key component in catalytic converters, which are used to reduce harmful emission, in diesel engines.

At the start of the week, December platinum futures were well below $900/oz for the first time since December of 2008. As of Tuesday, Platinum futures have managed to move off its multi-year lows and last traded at $915.80 an ounce, down 0.73% on the day.

The VW scandal has caused platinum to be the worst performer among the precious metals. In a research note Monday, analysts at Commerzbank noted that during the worst of the selloff Monday, the price spread between platinum and gold hit $220, “its highest level since exchange trading of platinum began in 1987.”

However, the analyst noted that cheaper platinum prices compared to gold could be an advantage for the white metal, as they expect to see a pickup in jewelry demand.

“The considerable discount on platinum as compared with gold is likely to prompt the jewelry industry to resort increasingly to platinum, which should cushion any potentially lower demand from the automotive industry,” they said.

Although the jewelry sector could see a benefit, most analysts remained focused on platinum’s industrial uses as this is the biggest component of the metals market. 

Analysts at UBS said in a research note Tuesday that penetration of diesel vehicles in Europe is around 53% in Europe; the diesel market in the U.S. is at less than 1%. They estimate that dieselgate could cause the market share to fall to 45%. They added that this could lower physical platinum demand by about 77,000 ounces, a bearish scenario for the metal’s price.

“The near-term price impact on PGMs has so far been driven by sentiment and the prevailing view that the VW news would lead to lower demand for diesel engines and higher demand for gasoline engines. The reality is that it is difficult to explicitly quantify the impact on PGM demand at this stage. Much would depend on how VW chooses to remedy the issue and how the incident will affect consumer behavior and preferences going forward,” they said in the report.

Analysts at Deutsche Bank said in a note that they expecting to see a 5% to 10% decline in diesel engine market share by the end of the decade, but added that the scandal could quicken the pace of the fall.

“The most likely outcome is that diesel engines will lose market share to gasoline, hybrid and plug-in electric vehicles over the course of the decade,” they said.

However, some analysts have noted that the decline in platinum appears over-done and the metal could see a corrective bounce in the near-term.

“While there is a risk that some of the demand for diesel cars could be displaced by gasoline cars, we deem it unlikely that diesel vehicles will entirely fall out of use in the near future…” said Simona Gambarini, commodity economist at Capital Economics. “We think that sentiment towards platinum is unduly negative at the moment and prices should recover to $980 per ounce by end-2015.” 

Courtesy: Kitco News