Rhodium Prices Are Quietly Increasing
The price of rhodium is quietly breaking out — and no one is paying attention.
Since the beginning of the year, rhodium prices have increased by over 55%.
What is rhodium?
Rhodium is a member of a group of metals known as the platinum group metals (PGMs). These metals have similar physical and chemical properties and include platinum, palladium, ruthenium, iridium, osmium, and rhodium.
Rhodium is an important industrial metal used in specialty optical instruments, electronics, aircraft turbine engines, and as a jewelry finish. If you've ever bought “white gold,” it's likely you've bought rhodium. White gold jewelry is gold jewelry that has been electroplated with rhodium.
The primary application for rhodium, however, is catalytic converters — specifically three-way catalytic converters which convert harmful hydrocarbon gases from auto exhaust into substances with lower environmental impact.
In fact, over 80% of all rhodium production will end up in a catalytic converter somewhere. So demand from the automobile industry is critical for rhodium.
Thing is, rhodium is quite rare. It's so rare that an entire year's worth of total world supply could fit onto the back of three pick-up trucks.
In fact, there are less than 10 mines around the entire world that produce any significant amounts of rhodium. And almost every one of those mines is located in a single country: South Africa.
There's no such thing as a mine that only produces rhodium. Like many other metals, rhodium is produced as a by-product from larger PGM operations.
Some 80% of the world's rhodium supply comes from South Africa. And that has been a problem.
In 2008, supply shortfalls as a result of mining strikes in the country caused rhodium prices to spike to over $10,000 an ounce.
The financial crisis of 2008 eventually caught up with rhodium, and prices collapsed after the South African mines reopened.
The price of rhodium recovered a bit following the price collapse. But rhodium is often recycled from old catalytic converters. And an increase in recycling beginning in 2008 actually lead to an oversupply in the market — eventually pushing prices all the way down to $750 an ounce.
Last year, the rhodium market remained in surplus. But growing demand over the long-term is expected to bring back a supply deficit. I suspect the recent increase in prices is a reaction to this coming deficit.
But even though rhodium's supply/demand fundamentals seem solid — and the upside astronomical, with prices once at $10,000 an ounce — there's a big problem when it comes to investing in rhodium.
Fact is, up until only a few years ago, there was almost no way to invest in rhodium.
Kitco sold a rhodium “sponge,” which is just industry parlance for a powdered form of the metal. But that was about it.
In 2009, the Cohen Mint was the first to produce .999 fine rhodium bullion rounds and bars. And more recently, the Baird Mint has introduced a line of physical rhodium bars, which are available in one- and five-ounce bars, as well as fractional sizes of one-tenth, one-quarter, and one-half ounce.
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However, the premiums for rhodium bullion are outrageously high. Provident Metals has a near 100% premium on a Baird Mint one-tenth-ounce rhodium bar. That means you pay double the market price!
And on the sell side, things are no better. An investment-size holding is going to be extremely difficult to sell.
Your local bullion dealer is probably not going to want to buy your rhodium when it comes time to divest.
Owning the physical metal is probably best simply as a curiosity.
For direct exposure to physical rhodium, there is an ETF available. Deutsche Bank launched a rhodium ETF (LON: XRH0) in 2011 that is 100% backed by the physical metal.
But the ETF doesn't trade on any of the American exchanges, meaning it might be difficult for some to trade — which it barely does anyway.
Right now, the exchange's the three-month average daily volume is 348 shares a day. So at $283, that's an average of less than $100K in daily interest in XRH0.
Compare that to a gold ETF like SPDR Gold ETF (NYSEArca: GLD), which traded almost 9 million shares a day with a value of over a billion dollars.
And as far as rhodium stocks go, there is no pure or even primary metal play because, as already mentioned, rhodium is produced as a by-product.
Large rhodium producers include:
- Anglo American Platinum (JSE: AMS)
- Norilsk Nickel (MCX: GMKN)
- Impala Platinum (JSE: IMP)
- Lonmin (LON: LMI)
However, all these companies have different primary metals they mine.
So, despite solid supply/demand fundamentals, I just don't think rhodium makes for a good investment because of liquidity issues and the lack of good investment platforms.
Have a great weekend.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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