Volkswagen scandal plagues platinum market

File photo of a production at a Impala Platinum mine in Phokeng, the capital of the Bafokeng kingdom, northwest of Johannesburg on Jan 19, 2011. (AFP/Paballo Thekiso)

LONDON: The price of platinum, used in the production of catalytic converters, sank on Wednesday (Sep 23) to the lowest level in six and a half years on the back of Volkswagen's pollution-cheating scandal.

The German car manufacturer faces a US criminal investigation and worldwide legal action after admitting on Tuesday that as many as 11 million of its diesel cars are equipped with software capable of fooling official pollution tests.

The precious metal, which has already been weakened in recent months by worries arising from the weak global economy, dived on Wednesday to US$926.35 per ounce - last seen in January 2009.

The Volkswagen furore has sent prices sliding as investors fret over reduced consumer confidence in diesel cars that mainly use platinum in their catalytic converters.

"If consumers lose confidence in diesel cars, this will have a substantial impact on future platinum demand," said Georgette Boele, precious metals analyst at Dutch bank ABN Amro. "We suspect that as a result of these expectations, platinum prices have fallen more substantially than other precious metals this week."

Platinum is mainly used for industrial purposes and about half of global demand stems from the production of catalytic converters for diesel cars.

Volkswagen is meanwhile the world's largest auto manufacturer by sales in the first half of this year, with car brands including Audi, VW, Seat and Skoda.

"The reason for platinum to be singled out (by investors) is because of its contribution to catalytic converters - especially in diesel engines," added Saxo Bank analyst Ole Hansen. "So if this scandal raises questions about the future of diesel engines, then it could also mean a slowdown in demand for platinum."

The price of sister metal palladium - used in gasoline or petrol powered vehicles - meanwhile climbed as a result of the Volkswagen affair. In Wednesday trade, palladium advanced to US$651.25 per ounce, touching a high last seen in July.

"Consumers may shift to gasoline cars - where mainly palladium is used in catalytic converters in engines," added Boele. "Such expectations could have supported palladium prices and have resulted in palladium prices outperforming other precious metals."

Despite a supply deficit in the platinum market, prices have plunged by 23 per cent since the start of this year, weighed down also by concerns over the world economy - and particularly China.

Saxo Bank's Ole Hansen noted a 7.0-per cent divergence between the two metals on Wednesday, while ABN Amro's Boele warned that platinum and palladium could diverge further.

"It is likely that the divergence between platinum and palladium prices in the near-term will continue as long as more details about this scandal are released," Boele said.

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