Do You Believe the Volkswagen Scandal Will Blow Over? Then Platinum Provides an Opportunity

December 7 2015

It is unlikely that you have missed it: in September, it was revealed that Volkswagen had been rigging its software in diesel cars for the past years. And guess what? It just so happens that the largest demand for platinum originates from the (Western) European diesel car market. So, does this provide an opportunity? In order to answer that question I will provide an analysis of the platinum market. 

Most Demand for Platinum Originates from the Car Industry

The best thing about platinum? In contrast with gold, and to a lesser extent silver, platinum is a pure commodity. Whatever platinum is mined (or recycled) is, for the most part, directly used up for industrial purposes. That’s exactly why the platinum price moves in an almost manic-depressive fashion: periods of shortages and rapidly increasing prices are followed up by periods of overproduction and excessive stockpiles.

But which industries actually use platinum? For platinum, the car industry is actually its largest purchaser. And for the record: it is by far the most important one. That is why we lay our eyes on Volkswagen (FRA:VOW).

Now, as a reminder: diesel cars in Europe are as common as kangaroos are in Australia. This is in stark contrast with the US, where they are much less common. This is largely influenced by local legislation and regulation. Historically, European regulation favored Diesel, while those of the US favored petrol. Additionally, historically speaking, smog has been a bigger problem for the US than most European countries, which have been safeguarded from large smog-related problems.

Without a catalytic converter, cars would emit toxic substances. These substances are currently neutralized by converting toxic pollutants to, among others, harmless water vapor. The underlying chemical reactions rely on precious metals such as palladium and platinum. While the converters found in diesel cars primarily use platinum, those in petrol-fueled vehicles primarily make use of palladium.

And that implies that the stricter regulation becomes (with regards to pollution), the higher the required usage of precious metals for the production of cars will be.

However, platinum is very valuable. And Volkswagen’s solution was simple: instead of introducing a new converter which contained more platinum, they simply built software which manipulates pollution lab tests. Instead of neutralizing more substances, they temporarily limited the motor’s capacity so it would (also temporarily!) emit less undesirable toxic substances. It was a simple and effective solution. That is, until they were caught!

Some Simple Math

Diesel cars currently approximately contain 5.3 grams of platinum. In 2013, about 11.8 million cars were sold in Europe. Of those, 53% were diesel cars. This comes down to 62.7 metric tons or 69.1 US tons of platinum each year, used in the production of diesel cars. The total platinum sales is approximated to be 220 metric tons or 242 US tons (source: World Platinum Investment Council).

Let’s look at two scenarios to see what will happen with demand:

  • As a result of the Volkswagen scandal, diesel cars sales decline by 10%
    The corresponding decline in platinum demand is 6.3 metric tons (7 US tons). To put this in perspective: in 2014, industrial usages exceed mining by 22 metric tons or 24.25 US tons (at the expensive of current previously mined inventories).
  • As a result of the Volkswagen scandal, an additional 1 gram has to be put in converters
    Platinum demand will rise with 12 metric tons (13.22 US tons) a year 
  • Volkswagen recalls 8.5 million cars to provide them with new converters
    This would cause a potential one-off increase in demand of 40 metric tons (44 US tons). On the other hand, they could be potentially recycling more of it in the following years than would otherwise have been the case.

The current previous mined stockpile is approximated to be 75 tons. However, it has been reduced in the past years as consumption has overshadowed the quantity supplied (more has been sold than there was mined). Whatever platinum was purchased was directly used-up, it has been years since a large producer has anticipated higher platinum prices and therefore started to build up significant inventories. 

Opportunity or Pitfall?

It should be clear that when Volkswagen recalls 8.5 million diesel cars, and replaces their converters, this will have a serious impact on the platinum price; it could rise very quickly.

But there is one enormous pitfall. The Volkswagen scandal has the potential to harm the image of all diesel cars (especially in the eyes of the governments which have historically favored diesels). This could directly, or indirectly, hurt diesel car sales.

This could become a major problem in the sense that most demand for platinum does originate from the European diesel car industry. In France, the market share of diesel cars (of the entire car market) has already been reduced after the French government issued new legislation.

Will the Volkswagen Scandal Blow Over?

If the sales of diesel cars remains unchanged, because the Volkswagen scandal was only a temporary setback and all commotion will blow over quickly, then buying platinum could be a very attractive investment for you.

In that case, the dieselgate may turn out to be a blessing in disguise for platinum investors.

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