By Luke Burgess
It's one of the most exotic metals in the world. 100 times rarer than gold ... 150 times more expensive than silver. In fact it's the most expensive of all precious metals. Yet no matter its rarity or cost, this metal is absolutely vital to the rapidly recovering automobile industry. The metal I'm talking about is rhodium.
The World Rhodium Market
Rhodium — along with platinum, palladium, ruthenium, iridium, and osmium — is part of a group of elements referred to as the platinum group metals (PGMs) or platinum group elements (PGEs). Platinum group metals have similar physical and chemical properties, but rhodium is the rarest.
Some of rhodium's principal applications are as a finish for jewelry, mirrors, optical instruments, in electrical connections, and in aircraft turbine engines. But the predominant use of rhodium is in catalytic converters for automobiles, for which — especially in diesel engines — the metal has no substitute. As much as 80%-90% of annual rhodium supplies go into the production of automotive catalytic converters, which convert harmful gases from auto exhaust into less harmful substances.
Rhodium is exceedingly rare. And there are no pure rhodium mines in existence; rhodium is produced entirely as a byproduct of platinum and/or nickel mining. This means global rhodium supplies can not respond to changes in demand. So if the supply of rhodium is short, prices will rise drastically — and fall just as fast if demand eases off.
There are less than ten significant rhodium producing mines in the world, most of which are located in South Africa, which supplies over 80% of the world's demand for rhodium. But recent power shortages in South Africa have forced mining companies to decrease — and sometimes even completely halt — rhodium production, with no clear resolution to the crisis in the foreseeable future. This has caused sharp deficits in the supply/demand dynamics of the rhodium market in recent years.
Annual rhodium production is already extremely limited. Only about 25 tons of rhodium are mined each year. Compare that to the 2,350 tonnes of gold mined in 2009, or the 220 tons of platinum mined each year ...
With such a limited supply, rhodium doesn't come cheap. It is the most expensive of all precious metals, currently trading at $2,725 an ounce. (To give you a better idea of its cost, that's over twice as expensive as gold and 154 times more than silver.)
The spot prices of rhodium are set by Johnson Matthey twice daily for the American market. You can see the latest prices and price histories here. Rhodium prices have been quite volatile in recent years. In 2003, rhodium averaged $530 an ounce; but rapidly increasing demand and supply deficits over the next five years skyrocketed rhodium prices to over $10,000 an ounce.
As its principal application is in automotive catalytic converters, the sharp decline of the global automobile industry sent rhodium prices tumbling. After reaching a high of $10,010 per ounce, rhodium prices collapsed more than 90% to a low of $760 per ounce in just a few months. But now that the global automobile industry is recovering, rhodium prices are back on the rise.
In the past 6 months alone, rhodium prices have risen 270%. Take a look:
Buying rhodium for investment is difficult because rhodium is a non-exchange traded commodity and cannot be bought using futures, ETFs, spread betting, or other derivatives. However, investors can now buy the physical metal ... And to my knowledge, there is one mint that offers investment grade 0.999 fine rhodium. The Cohen Mint produced the first grade o.999 rhodium bullion coins and bars in April 2009.
Rhodium is extremely hard, has an extremely high melting point, and is very difficult to work with. Thus, traditional methods of minting bullion will not work with rhodium. The Cohen Mint claims it has developed a special process that allows it to be the only mint in the world to produce rhodium bullion.
The main downside to investing in this rhodium bullion, however, is that the premium for bars and coins are outrageously high. At last look, the premium for a one troy ounce rhodium bar from the Cohen Mint was near 20%. Compare that to gold coins where premiums average about 5%.
If paying a high premium turns you off, you can also invest in rhodium through one of the several platinum group metal producers where the precious metal is part of the mix. Large platinum group metal producers that have exposure to rhodium include:
- North American Palladium (NYSEMKT:PAL)
- Anglo American (OTCPK:AAUKY)
- Norilsk Nickel (OTCPK:NILSY)
- Anglo Platinum (OTCPK:AGPPY)
- Impala Platinum (OTCQX:IMPUY)
- Lonmin plc (OTCPK:LNMIY)
- Aquarius Platinum (OTC:AQPBF)
The outlook for rhodium prices remains robust as the global automotive industry recovers ... And continued supply shortages from South Africa may continue to drive prices higher as long as the demand for rhodium remains strong. Thus, rhodium merits limited allocation within a properly diversified precious metals portfolio.
Disclosure: No positions