Volkswagen AG (ADR) Could Spell Big Profits for Rare Earth Metals
Its name is “defeat device.” It is a software that alters a diesel engine’s control unit to reduce CO2 emissions. Volkswagen AG(ADR) (OTC:VLKAY) used this to pass U.S. environmental protection agency (EPA) controls while also ensuring its vehicles performed as advertised.
Ironically, on the eve of the Frankfurt Motor Show, VW’s outgoing CEO announced that the car maker would be offering 20 models with either electric or plug-in hybrid power. With the present state of things, the scandal is likely to accelerate this revolution, which will translate to higher demand for materials needed to make batteries, electric motors, and rare earths in particular.
This Could Be Bad News for Volkswagen Stock
The policy was deliberate. Its repercussions will go far beyond Volkswagen’s boardrooms and dealerships as Volkswagen stock dropped some 22% over the past few days. Indeed, the very fact that VW had to cheat to address U.S. environmental controls has challenged the very idea of a “clean diesel.”
Chart courtesy of www.StockCharts.com
Many customers will not feel betrayed by VW, given that residual values of the many thousands of diesel-powered Audi and VW models in North America will collapse. Not to mention the frustration of dealerships. Many of these vehicle owners are environmentally conscious consumers who were drawn to the high mileage potential of such cars as the VW Jetta or A3 diesel along with the peppy performance.
The VW emission scandal has hit Europe hard as well. This is not just because that is where Martin Winterkorn, the VAG Group CEO, has his office. Diesel cars are as popular as gasoline-powered ones in many EU countries, starting with Germany. This is because of the lower cost of diesel fuel and their high fuel efficiency relative to performance. Perhaps that is the meaning of “Das Auto.” Soon to be replaced by Gas Auto!
The U.S. controls have revealed a trick that could involve other manufacturers while highlighting the weakness of its own environmental regulations when it comes to vehicle emissions. There will be pressure to toughen standards. Should manufacturers have to make too many adjustments to the detriment of driving pleasure and practicality, they will lose customers.
Bloomberg has even hinted that VW managers could face a criminal investigation over its violations. In addition, Volkswagen has blocked the sale of VW and Audi models in the U.S. Still, its customers will not suddenly shift their family vehicle from the high-torque turbodiesel that gets 40 mpg while traveling at 85 mph on the highway with a V8-powered Hummer or a 2-cylinder Smart Car.
If Volkswagen fails to satisfy EPA investigators, explaining the discrepancy of values, it will lose its environmental certification. That means that it literally risks being forced out of the American market.
If the cost of hybrid cars or high efficiency were prohibitive a few years ago, today, even with oil prices at less than $50.00, fuel-efficient vehicles would remain desirable. Nevertheless, other kinds of resources may see higher demand. Rare earths are used extensively in hybrid cars, especially in the batteries.
Could Volkswagen’s Downfall Be the Savior for Rare Earth Metals?
This is only the first step for America, because the key to the exploitation in the rare earth is not only the research and production of minerals, but also the separation of rare earth oxides to refined products. The United States has yet to reactivate the production of rare earths outside of China, even if they are trying to rebuild the rare earth sector. Much of production has shifted to China, for the usual reason as to why in recent years everything has moved there.
Among rare earth elements, dysprosium is the one to watch where hybrid cars are concerned. Dysprosium is also used in wind turbine generators and in related magnets. Now is the time to consider investing in dysprosium. Along with holmium, it has the highest magnetic strength among all elements, which means it is ideal for electric motors.
The European Commission in charge of critical materials for new technologies said that demand for dysprosium would double by 2020. The shift away from diesel to hybrid may well cause the EU to revise that figure upwards. Indeed, such is the demand for dysprosium and other critical rare earths (not all rare earths are the same) that Honda has started to use recycling.
The famous Japanese automaker uses nickel-metal hydride batteries, which also included many rare earth metals. Due to cost and limited supply, these metals are extracted from used batteries to recover these valuable and limited resources.
Aluminum will also experience higher demand, as demand for lower fuel consumption brings this traditional aerospace material to automotive.
Here’s the Bottom Line
The use of aluminum in some car components can easily reduce the weight of the car body up to 40%, reducing total consumption of fossil fuels. Aluminum can be used to reduce the weight without depriving the rigidity of the vehicle or reduce performance. The Aluminum Association’s Transportation Group says that this study, combined with other data, suggests that a weight savings of around 238 kg can be achieved by using aluminum.