Fallout from the VW diesel emissions testing debacle could alter the platinum to palladium demand and pricing balance, should diesel cars lose market share as a result and put more pressure on South Africa’s marginal platinum-rich producers.
By Lawrie Williams
The South African platinum mining sector has faced much trial and tribulation over the past few years.
A five month strike last year affecting mostly the underground operations on the Bushveld’s western limb, where most of the older mines are located, decimated production, and therefore revenues.
But despite the huge fall in output because of the strike, the anticipated rise in platinum and palladium prices has not come about – indeed they have fallen – which put a number of the Rustenburg area mines into marginal, or even lossmaking, territory.
And now there is Volkswagen! The fallout from the world’s biggest automaker’s emissions testing data circumvention, via software which put its most popular diesel engines into low emission mode when testing was initiated, could cast a cloud over the whole diesel engine sector.
Some think the fallout could hit the growing diesel engines market hard in favour of petrol (gasoline) engines – or perhaps further stimulate the move to alternate and hybrid engine systems.
Platinum in direct line of fire if diesel were to lose global popularity due to VW imbroglio -could endanger our richest natural endowment?
— Cees Bruggemans (@ceesbruggemans) September 25, 2015
While this might not be critical for the PGMs market as a whole, because petrol engines for the most part utilise palladium-based autocatalysts in their exhaust cleaning systems and diesels mostly platinum catalysts, the balance of demand could be radically altered in favour of palladium. And the South African mines predominantly produce platinum with palladium as the minor co-product.
The ratio is around 2.6:1 platinum to palladium in the Rustenburg area on the Merensky Reef. It can be a little closer on the UG2 horizon, but not much. On the Platreef where production is likely to increase in the years ahead, the ratio is a much more even 1:1 – all these numbers according to the USGS.
11 million diesel cars made by VW since 2009 may not be as greener due to software test cheating. This may hurt #platinum mining hard.
— Bo Mbindwane (@mbindwane) September 22, 2015
Overall, South Africa produces over 70% of the world’s platinum but only 37% of the world’s palladium. A big switch out of diesel to other systems would thus strongly impact the global supply/demand balance – and the earnings of the South African mines.
Read also: More platinum gloom: market deficit shrinks as supply grows, demand slows
Much will depend though on how the public and governments will view VW’s system-cheating software and whether other diesel engine manufacturers will have also been guilty of incorporating similar software tweaks. It does seem unlikely that VW will prove to be the only one.
The problem with diesels is that they tend to emit higher levels of nitrous oxides which have been shown to cause respiratory problems, so there are stricter standards imposed – which the VW software was designed to get around.
The diesel driving public may not be too much affected in their attitudes, although the more socially responsible may decide to switch when changing vehicles and those considering buying the more fuel-efficient diesels for the first time may now think twice.
Government attitudes may be key and media campaigns may well push them into ever stricter standards which manufacturers may find it tough to meet, or even impose outright bans on diesel use in urban areas.
Read also: Can platinum – as a Reserve Bank asset – soothe mining’s woes?
Sibanye Gold, which has recently announced plans to take over Anglo American Platinum’s Rustenburg mines, may well have to rework its calculations if ‘diesel-gate’ pans out the way some think it will in terms of PGM price performance – and certainly so if it alters the platinum to palladium price balance in favour of the latter.
It may also lead to the acceleration in development of Platreef-based mines in the northern Bushveld with their much higher palladium content and transform their already seemingly-good economics if the palladium price receives something of a boost.
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