Dieselgate: Palladium the big winner

Nymex palladium contracts for December delivery exchanged hands for as much as $678.00 an ounce on Friday, up another 3% on the day for a more than $60 an ounce or 11% 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 disruptions and a robust outlook for the US and Chinese auto markets.

Palladium finds application in gasoline engines and is more exposed to the Chinese and US markets, where diesel hardly features in the passenger vehicle segment. Roughly 75% of palladium demand is from the autocatalyst sector and in the longer term the metal would benefit from a move away from diesel.

After a bounce back yesterday from more than six-and-a-half year lows platinum, which is mainly used in to scrub emissions in diesel engines, in New York fell again on Friday.

In afternoon trade on the Nymex in New York platinum for delivery in January slipped to $951 an ounce, down little over 3% for the week. Year-to-date the metal is down 22%.

Europe’s car manufacturers where diesel makes up 50% of the market are the top consumers of platinum, but demand for the metal is more evenly spread with jewellery and other industrial uses making up the bulk of demand.

Volkswagen this week 11 million of its cars had been equipped with the software designed to fool emissions testing leading to the resignation of its CEO and a 30% plunge in its share price.

Stock in the German company lost ground again on Friday, but the damage done to the diesel sector and automakers in general could spread far wider.

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 than gasoline cars and PGMs are an effective way of reducing CO2 emissions, diesel technology spews out other pollutants such as nitrogen oxide.
Volkswagen cars on the road produced up to 40 times the standard for nitrogen oxide emissions.

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.

Stillwater Mining (NYSE:SWC), the only platinum and palladium producer in the US, has been laying off workers due to the “deteriorating” PGM market environment.

Stillwater accounts for 6% of global palladium production and 2% of the world’s platinum supply from its two Montana mines. After a nice bump on Friday, the $1.2 billion stock is up 14% for the week, but investors are still nursing year to date losses of 30%.