Special Report: Rebounding Rhodium

The world’s most recent financial crisis was a massive blow to almost every sector of the economy. In fact, auto markets are still recovering.

However, most recent reports show that car sales throughout Europe increased almost 10% throughout 2015. The trend is similar in the United States as well, as low gasoline prices and an overall strengthening economy contribute to growth in the automobile sector — particularly among smaller SUVs and crossovers. Sales of cars in the U.S., the largest auto market after China, rose at the fastest pace since 2005, according to Autodata.

For precious metals like rhodium, which are primarily used in catalytic converters, there is a direct correlation between the performance of the auto industry and price of the metals. The price of rhodium was at record highs immediately before the Great Recession and at record lows directly after. After reaching a high of $10,010 per ounce, rhodium prices collapsed more than 90% to a low of $760 per ounce.

But now that the global automobile industry is recovering, rhodium prices are back on the rise.

Thanks to emissions regulations, catalytic converters are a required component of all vehicles. Predictions maintain that as global automotive production increases, so will the demand for essential metals in catalytic converters. Most of the growth of the automobile industry will be driven by BRIC (Brazilian, Russian, Indian, Chinese) economies, but growth has been observed worldwide. Add to that the increasingly restrictive emissions guidelines, and we’ve just witnessed a flawless equation for rhodium success.

“The decline in rhodium, which wiped out last year’s 28 percent advance, is almost over. Rising car sales and stricter emissions rules will boost demand.” — Bloomberg Business

Of all the metals used in catalytic converters, rhodium is the most directly affected due to the small size of its market. More than 80% of global production is used in automobiles to reduce emissions and provide for better chemical performance.

According to statistics from 2014, automotive OEMs spend about $1 billion per year on rhodium.

With the upcoming transition from the U.S. EPA’s Tier 2 to Tier 3 regulations, which requires an 80% reduction in oxides of nitrogen, rhodium usage in particular (and precious metals in general) is expected to increase significantly.

Rhodium’s alternative use is as an alloying agent to harden platinum and palladium. In addition to catalytic converters, these alloys are used for furnace windings, thermocoupling elements, bushings for glass fiber production, electrodes for aircraft spark plugs, and laboratory crucibles. They are useful as an electrical contact material due to low electrical resistance, a low and stable contact resistance, and high resistance to corrosion. Plated rhodium, produced by electroplating or evaporation, is exceptionally hard and is used for optical instruments. The metal is also used extensively in LCD screens and jewelry plating.

Rare Rhodium

Compared with gold, 2,500 tons of which is mined annually, rhodium is incredibly rare and incredibly difficult to extract. In fact, only about 25 tonnes of the metal is mined each year.

In the picture below, a precious metals expert holds a relatively small coil of metal, weighing a little less than 20 lbs.

rhodiumscientist

The metal coil is 94% platinum and only 6% rhodium. Its worth? More than $350,000.

When prices were at their peak in 2008, rhodium was the world’s most expensive metal. 1 oz. was worth $10,000.

rhodium

Because rhodium is so rare, there are no mines in the world that solely extract rhodium from the ground. Of all the mines in the world, only 10 produce a “significant” amount of rhodium. Its rarity also accounts for why the metal is rarely used alone but instead as an alloy with other members of the platinum metals group.

There are two main exporters of rhodium: South Africa and Russia. South Africa holds the majority of the resource, at 80%.

In South Africa, political instability, civil unrest, and a history of violent, tumultuous mine strikes makes the platinum metals source a gamble. Tensions between two major mining unions make the political setting combustible at the least. The ripple effect from the Marikana Massacre still lingers, and the country is still working through policy that discourages violent labor actions. Earlier this year, electricity shortages and long-term strikes prevented the progress of several mining projects.

However, those labor strikes most recently came to an end, and South Africa has committed to creating an environment conducive to successful mining investments. This has directly impacted the price of rhodium, as the supply exceeds demand by the most in four years. Prices are low, lower than palladium and platinum, which makes the metal a more appealing option for auto manufacturers. Expect to see demand equalize with supply in the near future.

This confidence is mirrored by one of Africa’s largest banks. Standard Bank announced at the end of 2015 that it would be launching the continent’s first exchange-traded fund (ETF) to track movements in the USD spot price of rhodium.

Clean Diesel Technologies, Inc. (NASDAQ: CDTI), a California-based manufacturer and distributor of vehicle emissions control systems, is just one of many companies developing innovative and cost-efficient strategies for OEMs to meet increasingly stringent emission control standards. Its newest technology, Base-Metal Activated Rhodium Support (BMARS), will improve the functionality of existing rhodium in automotive catalysts. The material, which functions on a nanoscale, will promote rhodium to a more active state, therefore improving the conversion of nitrogen oxides.

In case you haven’t already realized, this company is developing technology that will allow automotive OEMs to avoid the price volatility and supply constraints of metals like rhodium. It is absolutely worth consideration should rhodium prices not stabilize in the future. 

However, if you are more inclined to ride out event-driven volatility and are more comfortable with a diverse portfolio of ETFs, then you must look at a variety of metal ores along with rhodium, particularly platinum and nickel.

Up until a few years ago, it was borderline impossible to invest in rhodium. More recently, though, Deutsche Bank launched an ETF backed by physical rhodium. 

rhodiumetf

Physical bars are also available; however, the carcinogenic nature of this metal causes us to refrain from suggesting that option to our readers. 


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