Platinum Prices Could Plunge On Volkswagen AG Emissions Scandal
The Volkswagen AG (OTCMKTS:VLKAY) emission scandal continues to claim victims. The German automaker, which has admitted to having installed software to reduce emissions on its diesel cars during, and only for, environmental compliance checks, said that about 11 million vehicles worldwide are affected.
This was bad news for platinum, one of the raw materials whose price has continued to fall since the “Dieselgate” emissions scandal broke out, dropping to $910.00 an ounce from $984.00 an ounce. (Source: Falling Price of Platinum: Volkswagen Cheating Scandal Latest Straw in Ongoing Decline, International Business Times, October 3, 2015.)
Platinum prices could see an even steeper descent according to some experts who believe that it could fall below that of its poorer cousin, palladium, whose price has oscillated between $700.00 and $850.00 an ounce in the past year.
Here’s How “Dieselgate” Will Hit Platinum Prices
Platinum is one of the key materials used in catalytic converters and diesel automobile engines. Some analysts have suggested that in the wake of the scandal, diesel vehicles will no longer be as popular as they have become over the past few decades, reducing demand for catalytic converters. Catalytic converters account for about 40% of global demand for platinum.
Consumers have become disillusioned about diesel claims, especially in Europe, where the use of this type of engine is very popular. The reaction to give these types of vehicles could be very strong. Therefore, platinum could fall between $700.00 and $850.00.
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Meanwhile, palladium prices have benefited substantially from the new situation. The metal has risen by over 10%, reaching $700.00 per ounce because catalytic converters use this metal for automotive gasoline engines, which could start to regain market share from diesel engines. Consider that in most European countries, diesel engine car sales exceed gasoline.
The one redeeming quality that platinum possesses is that its supply is frequently inconsistent due to the few sources of this metal around the world.
The price of platinum is but one of the victims of “Dieselgate,” and a minor one at that. Indeed, the fake performance software has marked a major turning point in the life of Volkswagen, whose future has turned from industry leader to pariah overnight.
On Tuesday, October 6th, Matthias Müller, the new, ex-Porsche chief executive told some 20,000 employees at its headquarters in Wolfsburg (Lower Saxony) that “the financial and commercial consequences are still impossible to predict. That is why we will again review all planned investments.” (Source: New VW CEO tells staff to brace for “massive cutbacks, Reuters, October 6, 2015.)
Volkswagen Stock is Plunging After Emission Scandal
Muller was most keen to note that the 6.5 billion euros—about $7.0 billion—that were first estimated as the price to pay for the emission scandal will “not be sufficient” to deal with the scandal of global dimension. The group’s boss is also committed to employees to “do everything” to limit the impact on jobs.
“Anything that is not needed urgently be abandoned or postponed, he added. “Accordingly, we will adjust our efficiency program. Let me be very clear: it will not be painless.” (Source: Mail Online, October 6, 2015.)
Some of the pain may include the sale of the Lamborghini, Bentley, Ducati, and Bugatti divisions—symbols of the company’s quest for grandeur over the past 15 years. It may even be forced to sell Porsche. The group could sell its truck and bus units, MAN and Scania, which together could bring in some 30.0 billion euros.
The Volkswagen Group reported over $200 billion in revenue and $11.0 billion in earnings in 2014. Now, the company, which had grown accustomed to accolades, will have to start making some serious calculations about how much it’s all going to cost.
The banks are having a field day with estimates, pulling wild numbers out of a basket of doom. Credit Suisse suggests VW will have to pay anywhere from 23.0 to 78.0 billion euros ($25.0 -$80.0 billion). Exane has a target of at least 25.0 billion euros. While Deutsche Bank is not interested in astrology, it too must be thinking that the figures will be astronomical. They noted that an estimate is “impossible […] there are still too many unknowns to assess the damage.”
Nevertheless, a hint of what the costs might be is possible. In the U.S., the world’s most litigious country, between legal costs and fines, VW can expect a bill of over $16.0 billion from the U.S. government—and that doesn’t include tip! However, when the numbers are that big, there is room for negotiation, such that VW could get away with paying just two thirds of that—which is still about $10.0 to $11.0 billion. European fines will add some $5.0 to $6.0 billion to the till. (Source: Toronto Star, October 6, 2015.)
Then there are the costs of the recalls and reparations involving almost 12 million affected vehicles needing to be brought up to standard, not including potential lawsuits from customers, who will note a performance drop in their cars.
Lower Sales for VW, Lower Performance for VW Stock (OTC:VLKAY)
The scandal could also weigh on the company’s overall appeal and consequently on future sales, which may drop due to distrust. Exane anticipates a five percent decline in revenues in 2016, while Deutsche Bank is willing to bet on a three percent drop. That said, as the case is entirely new, these forecasts remain highly theoretical.
Volkswagen is rich—or was. The group had 21.0 billion euros in cash at the end of the first half of 2015. This amount should be enough to finance operations until the end of the year and the beginning of 2016 while maintaining its credit ratings of the main agencies Fitch (A-), Moody’s (AA3) and Standard & Poor’s (A), which is crucial to allow VW to pay its fines and remain in business.
VW will have to get used to not launching a new model every so many months across such a wide market spectrum. The German weekly Der Spiegel says VW will have to cut 15 to 20 billion euros in spending from the 100 billion investment planned from 2015 to 2018 (research and development, new models, new plants).
Germany’s finance minister Wolfgang Schaeuble, the very same who has pestered Greece for the past few years, was quoted as saying that “in the end, VW will not be the same company it once was. A lot will change from a structural perspective.” (Source: German Finance Minister Says VW Won’t Be The Same Company It Once Was, International Business Times, September 30, 2015.)