Platinum price falls to 7-year low

On Tuesday, platinum futures in New York fell to levels last seen during the global financial crisis as investors spooked by the fallout from a cheating scandal at the world’s largest automaker continue to abandon the metal.

In early afternoon trade on the Nymex in New York platinum for delivery in January – the most active contract – dropped more than $20 or 2.5% dipping below $900 an ounce, levels last seen October 2008, before recovering some ground later in the day. Compared to this time last year the metal is down 29.5%.

After the dip below $900 at the height of the financial crisis the price of the metal quickly recovered and was trading back above $1,000 in January 2009 – for a sustained period below $900 an ounce you have to go back more than a decade.

Platinum’s primary use is in catalytic converters to reduce emissions – specifically for diesel vehicles – and Europe’s car manufacturers are the top consumers of the metal where diesel makes up 50% of the market. The average PGM load in autocatalysts in passenger vehicles are around 4 grams, a level that’s been steadily rising as emissions regulations are tightened around the world.

Volkswagen on Tuesday said that it’s commercial vehicle division used the same ‘defeat’ devices found in 11 million of its passenger cars that led to what has now become know as dieselgate.

Diesel vehicle sales have already come under pressure in Europe where cities like London and Paris have restricted access to diesel vehicles. While diesel engines emit less carbon dioxide thanks to better fuel efficiency than gasoline cars, it spews out other pollutants such as nitrogen oxide.

A research note  yesterday from investment bank Barclays argues that the plunging platinum price could drive physical demand of platinum in jewellery:

“Currently, platinum/gold is trading the lowest level in more than 25 years. Although the diesel-engine scandal has a limited direct effect on gold, the price ratio between platinum and gold can affect jewelry demand, shifting some from gold into platinum, especially in markets such as China, where there is a preference for platinum jewelry,” the analysts wrote.

Sister metal palladium finds more application in gasoline engines and is therefore more exposed to the Chinese and US markets and should therefore in the longer term benefit from a move away from diesel.

Nymex palladium contracts for December delivery exchanged hands for $657.50, up 0.8% on Tuesday for a more than $50 an ounce gain since the news broke.

In August the metal plunged to $532 an ounce, but quickly recovered. The price of palladium reached 13-year highs above $900 an ounce in September 2014 on the back of supply worries due to a strike at the world’s three largest producers in South Africa and tensions in Russia.

Together Russia and South Africa control between 70% and 80% of the world’s supply of PGMs. Russia’s state stockpiling organization called Gokhran sits on an disclosed amount of palladium built up during the Soviet era, which it releases onto the market from time to time.

The structure of supply has not altered in any substantial way since the 1970s when platinum and later palladium came to the fore as an important part of the world’s automobile industry.