Volatile raw material costs, a falling car market and an unexpected break-through in emissions control technology have cost Ford Motor Company a $US1 billion write-down of its precious metal stocks, according to The Financial Times (FT).
Analysts think that Ford was signing fixed-price contracts for platinum group metals (PGMs) — platinum, rhodium and palladium — and building up stocks, much of it held in powdered form in vaults or at metal refineries, just as PGM prices were rising near the end of 2000, the FT said.
But a combination of PGM over-supply, a break-through in catalytic converter manufacturing technology that reduces the amount of PGMs required, and reduced demand for new cars mean Ford has paid a heavy cost for overstocking over-priced PGMs, the newspaper said.
The FT said Ford’s gamble on precious metal prices has left it holding large stocks of palladium worth around $430 an ounce which could have cost as much as $1,100 an ounce if bought in early 2001.
One London metals analyst interviewed by the newspaper estimated Ford’s PGMs inventory at 2.2 to 2.5 million ounces, including 1.8 million ounces of palladium.
That’s a quarter of the gross demand for palladium last year. As an analyst described it to the FT: “That’s a central bank-like position”.
The FT said that, assuming an average ‘cat’ uses 4-5 grammes of palladium, a one-million-ounce stock would cover 6.2 to 7.8 million vehicles a year. But, the paper added, even at full capacity Ford can build only 5.7 million cars and light trucks in North America each year — and last year sold only 3.97 million.
Worse, the company is shutting five million plants to reduce capacity by a further million, the FT added.
The FT said Ford’s PGM predicament arose through a combination of unfortunate circumstances:
— The US government did a deal in the late 1990s to bring forward new emissions standards from 2004 to 2002;
— To meet the standards without extensive re-engineering, the amount of palladium in each catalytic converter was increased, or an extra ‘cat’ was installed. This moved coincided with a rapid increase in consumer demand for light trucks;
— Ford assumed record industry sales and began to stock sufficient PGMs for a project 18-million-plus market. But 2001 sales dropped to 17.1 million and this year’s projection is 15.5 million.
Worse was to come, the FT said. As Ford began stockpiling PGMs, Russia, source of two-thirds of the world’s palladium supply, cut exports, sending prices surging and forcing Ford and other car makers to commit to fixed-price contracts with other suppliers.
According to the FT, Ford’s purchasing department did not know that the engineers were close to a breakthrough that would drastically reduce the company’s PGM needs in the future.
Newly-improved ‘pre-wash’ oxide coatings on a cat’s ceramic honeycomb will mean fewer PGMs are needed to meet tougher exhaust emission standards, the paper added.
It quoted a Ford insider as saying the company had been hit by “a confluence of events no-one predicted”.
“We got a technical breakthrough, PGM prices went down 70 percent, vehicle demand started to slow and we felt ‘let’s take the heat now, let’s get the bad news out’,” the employee told the Financial Times.