Ford claims one billion dollar loss in Palladium futures was only a hedging mistake, not speculation.
01/25 16:50
Ford's Palladium Purchases Led to $1 Bln Writedown (Update1)
By Bill Koenig
Dearborn, Michigan, Jan. 25 (Bloomberg) -- Ford Motor Co. executives forecast an increased need for palladium in 2000, just as the metal began to rise to record prices. The automaker bought palladium and locked in prices to ensure it would have enough to use in vehicle pollution-control systems.
It was a bad bet. Palladium prices plummeted 64 percent in the past 12 months and demand for Ford's cars and trucks slipped. The second-largest automaker had its first annual loss since 1992 partly because of a $1 billion writedown for precious metals.
Ford said last week that the markdown came after a fourth- quarter engineering breakthrough that reduced the use of palladium and other precious metals in car and truck exhaust controls. Investors and analysts say the company made the wrong call at the worst possible time.
``There was a fundamental lack of coordination between the buyer at Ford and those who were running the projects to reduce usage of precious metals,'' said Ross Norman, an analyst at TheBullionDesk.com in London. The former Credit Suisse First Boston metals trader also is a consultant who has advised the world's largest automakers on their use of palladium.
Ford executives defend the purchases. ``We try to protect supplies of critical commodities,'' Chief Financial Officer Martin Inglis said in an interview. ``The policy is still to protect the supply.''
Inglis did order one change: The company is adapting risk- management practices it uses for currency, where values shift often, to precious metals. Members of Ford's treasury staff will now have a say in the purchases.
``I have experts,'' Inglis said. ``I put the work where it should be done.''
`That's Real Money'
Investors and analysts say Ford hasn't fully explained why palladium was so costly for the automaker while competitors, including General Motors Corp., avoided the palladium pitfall. ``It was not an issue for us,'' General Motors spokesman Mark Tanner said. Spokesman Mike Aberlich said DaimlerChrysler AG's Chrysler unit had no significant losses related to palladium.
``It's rather embarrassing to have a billion-dollar writeoff for something that could have been avoided,'' said Dan Poole, analyst at National City Investment Advisors in Cleveland, which owns about 1.08 million shares.
The automaker disclosed the writedown Jan. 11 along with new Chief Executive Officer William Clay Ford Jr.'s plan to cut 23,000 more jobs and close five plants. Expenses for the cost-cutting and the metals writedown resulted in a $5.45 billion loss in 2001.
``Given the magnitude of the loss, there needs to be more transparency in precious metals trading at Ford,'' said Lehman Brothers analyst Nick Lobaccaro, who rates the stock a ``buy.''
Ford shares rose 16 cents to $14.61 and have declined 48 percent in 12 months.
Palladium Prices
Palladium, and to a lesser extent platinum and rhodium, is used in catalytic converters to help strip toxins from exhaust fumes. Spot palladium prices in London more than doubled to $1,125 a troy ounce in January 2001 from $449.50 at the end of 1999. The price was $380 a troy ounce today, down 12 percent since Ford's announcement.
The price rose as Russia, the biggest producer, delayed exports and demand rose as the U.S. Environmental Protection Agency adopted tougher pollution rules in 1998. Adding to the increase was a surge in U.S. auto sales, which began a three-year run of 17 million or more vehicles a year.
``You may recall that Russia turned off supply for a three- month period, and they supply most of the world's palladium, and that's why we put it in place,'' Chief Operating Officer Nicholas Scheele said today in an interview at a New Orleans conference.
Seeking a Substitute
At a Jan. 15 meeting in Detroit, Scheele told an auto- industry executives and consultants that Ford bought as the metal started ``spiking in price.'' The surplus and writedown came after ``our research labs did a magnificent job in reducing our dependence on palladium.''
The system that Ford cited as a fourth-quarter breakthrough had been under development for more than five years, and spokesman Said Deep said the automaker was using it on some Asian-built vehicles back in 1999.
An April press release said Ford began developing the palladium-saving technology, involving the use of ``rare-earth oxides,'' in 1996 in China. Spokesman Deep said the latest engineering advance involved increasing the heat-tolerance of the materials, which include cerium oxide.
Inglis said that Ford got it first indication that the partial palladium substitute would work in U.S. cars in this year's second quarter. The automaker determined in November that the system could proceed, and only then could Ford cut its palladium use, he said.
Policy: Don't Speculate
The automaker's filings with the U.S. Securities and Exchange Commission show that Ford uses forward and option contracts to hedge against price fluctuations of non-ferrous metals. Inglis said the policy is not to speculate in metals and that Ford wasn't trying to build paper profits as prices rose.
``Any other gain or loss or anything else was not the way we were managing the business,'' the CFO said. When palladium prices were rising, they were reflected in Ford's cost of sales, or expenses incurred in the building cars and trucks, he said.
Ford declined to make executives involved in the trading available for interviews.
Automakers are the biggest users of palladium. Total demand last year was 6.8 million ounces, down from 8.9 million in 2000. Supply was 7.5 million ounces in 2001, with Russia producing 4.6 million ounces, followed by South Africa at 2 million.
Influence on Price
Automakers used 4.8 million ounces of palladium in catalytic converters in 2001, down from 5.6 million in 2000, according to Johnson Matthey Plc, the biggest marketer of palladium, platinum and rhodium. The demand had been climbing every year since 1992, when automakers used only 490,000 ounces of palladium in catalytic converters.
Inglis said Ford used 1.4 million to 1.5 million ounces of palladium in its North American operations in 2000. That would have equaled about 17 percent of world production that year. He declined to say how much palladium Ford now holds.
Metals traders and analysts said the size of Ford's writedown suggests that the automaker bought and sold so much palladium that it magnified both the price rise and subsequent decline. Norman, the analyst at TheBullionDesk.com, estimated that Ford stockpiled 2 million troy ounces of palladium.
Dominick Passaro, director of precious-metals management at Technic Inc. in Cranston, Rhode Island, said he concluded that Ford was a main buyer in the market ``when everybody else was selling,'' including his own company, about 18 months ago. Technic uses palladium to make computer parts.
``Not only were they responsible for helping to push the price of palladium up, but they ended up with metal that they didn't need,'' said Norman.
Accounting
Automakers use an average of 5 grams of palladium per catalytic converter in cars and more in trucks, according to Norman and Johnson Matthey. Ford sold about 7 million cars and trucks worldwide last year, most of which were required to have converters.
Analysts said one consequence of Ford's decision to take the $1 billion writedown will be to make 2002 financial results -- and therefore the effect of its executives' restructuring plan -- compare favorably with 2001. Inglis last week said the writedown may improve the 2002 earnings comparison by $300 million to $400 million before taxes.
``This is clearly a big goof, and the writedown they're taking is not fair,'' said Rod Lache, an analyst with Deutsche Banc Alex. Brown who rates the company as ``market underperform.'' ``They should not be taking a charge, they should be expensing it'' as the material is used.
Inglis disagreed. ``What we are doing here follows exact accounting rules and was done by the book,'' the CFO said. |
