Stellar rhodium price rally could be coming to an end
The price of rhodium is up 272% since August 2016 with the platinum group metal hitting an eight year high last week.
Like its sister metals, rhodium’s main application is to clean vehicle emissions and the price quoted by Johnson Matthey, the world’s number one manufacturer of autocatalysts, reached $2,350 an ounce on Friday.
Due to rarity, the small size of the market and concentrated supply – South Africa alone produces roughly 80% of the world’s rhodium – prices are typically volatile.
But given the weakness for other PGMs and dire forecasts for diesel vehicle production in Europe, the biggest source of demand for the metals, rhodium’s outperformance is puzzling.
South African PGM producers extract a mix of metals comprising roughly 60% platinum, 30% palladium and 10% rhodium but recent announcement of production curtailment by Impala and Lonmin can only partially explain the huge upswing.
In a research note Simona Gambarini of Capital Economics argues the fact that rhodium is such a tiny market helps to explain why it’s been shielded from PGM weakness:
We think that rhodium’s outperformance relative to its peers is due to the fact that investment demand for rhodium is limited, unlike platinum and palladium.
Speculative activity has played a big role in the recent falls in platinum and palladium prices. In contrast, rhodium has been largely immune to changes in investor sentiment as investment in the market is much more difficult and potentially costly. In fact, the market is so small that there are no futures contracts.
There are only a few physically-backed ETFs and their holdings are currently trivial. This means that an investor wanting to take a position in rhodium would have to physically buy the metal, which typically involves storage and liquidity costs.
Capital Economics’ house view is a pull-back for the price of rhodium to $1,950 per ounce by year end, adding that the reason why it’s “not more negative on prices is that supply is getting tighter – South Africa’s PGM mine production was down by over 6% y/y in January-May.”
Deutsche Bank launched a rhodium exchange traded fund as far back as 2011 while South Africa’s Standard Bank listed its own physically-backed rhodium ETF at the end of 2015.
Rhodium (and sister metal ruthenium) stands out when it comes to price swings – rhodium touched $10,025 an ounce just before the 2008 financial crisis hit, but would drop 90% before the end of that tumultuous year.
Rhodium and palladium finds application in gasoline vehicles while diesel-powered mostly use platinum for autocatalysts. Rhodium is also used in high-tech glass for consumer electronics
Platinum at $835 an ounce is only slightly up from 14-year lows hit in July, while palladium is down 20% from its multi-year high struck in January, trading at $906 an ounce on Friday.
Ruthenium prices have also been moving with the metal trading at $255 this week after spending years in double digits. Ruthenium, used in the aerospace industry thanks to a very high melting point and in distinctive jet black jewellery, peaked in 2007 shy of $900 an ounce.