The VW Scandal: SA Platinum Impact

Blue Quadrant Research Team
Market Commentary

The VW scandal

What does it mean for diesel vehicles, platinum and South Africa?

There exists the potential for modestly reduced platinum demand over 1-3 years if fewer small diesel vehicles are sold as platinum is a key component of the catalytic converter found in diesel vehicles.

The main problem with diesel engines, as it pertains to emissions, is controlling NOx emissions in smaller vehicles where the cost-efficiency trade-off becomes more critical at the lower price point of smaller vehicles.

Longer term, overall platinum demand will still grow as large vehicle sales remain unaffected and emerging markets grow their vehicle fleets from a low base.

For the ZAR platinum price, nothing changes as the cost curve is still the same and 70-80% industry not profitable after CapEx currently with a ZAR platinum price under R14,000/oz. The only factor that could change the cost curve for South African platinum is a substantial rise in by-product prices such as palladium. For instance, a rise in the palladium  to $1500 per ounce (currently $644 per ounce).

Platinum Cost Curve

Platinum Cost Curve: JP Morgan Estimates April 2014

Platinum Price

Platinum Price: FactSet

In the worse case scenario, supply would have to be reduced to meet lower demand. This makes an even stronger case for higher cost operations to be closed sooner rather than later.

The impact would be a reduction in South African PGM exports and negative impact on trade deficit.

However, maintaining production would lower prices and take years for the return on equity to normalize to a level that would be acceptable to investors.

This could also mean that companies will wait for many years of sustained higher prices before ramping up CapEx spend. This is a negative long-term for South African GDP growth.

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