Rhodium is a rare metal and is part of a group of metals called the platinum group metals. Rhodium is utilized in specialty optical instruments, electronics, aircraft turbine engines and jewelry finish. However most extensively it is used in automobile catalytic converters converting hydrocarbon gases from auto exhaust into less harmful substances. As the automotive sector accounts for over 80% of global demand this industry is critical for the metal. Around 80% of it is produced in South Africa, just over 10% in Russia and the remainder is scattered around the globe. Rhodium has exhibited large price volatility over the past 40 years making it a very curious metal category to look at. There are several specifics about rhodium which need to be taken into careful consideration when deciding on whether to invest in it.
Rhodium competes with platinum and is generally produced as a by-product of platinum and nickel mining. That said, the production of platinum is around 12 times larger than rhodium production and on top of that – there are only around 10 mines in the world which can produce rhodium. This makes rhodium a much more fundamentals based metal – unlike many others, such as gold which is driven heavily by investor perceptions. Only about 25 tons of rhodium are mined a year, in comparison to 2350 tons of gold.
There were several periods over the last 12 years which proved very interesting for traders – the early 1970s, early 1990s and the 2000s. Year 2004 saw a price of rhodium spike from a $440 low in January to over $10,000/oz over the subsequent 5 years. This was largely a result of hoarding among industrial users amid the fears of South African mines failing and production outages in 2008 which created strong sudden upward pressure on pricing. This is another important factor in considering rhodium as your choice of investment – its production is very strongly clustered in South Africa with around 80% of the global production based there, which makes it very susceptible to mining conditions of the region. Risk aversion among industrial users became more apparent post 2008 as many started to look for and utilize the alternatives to rhodium to protect themselves from future drastic price increases.
Rhodium supply has recovered from 2008 and its price dropped significantly – down from around $10,000/oz to $870/oz in May 2017. However there were strong increases in price between May 2016 and May 2017 – from $650/oz to $870/oz. Despite the risk diversification among many rhodium users this metal remains attractive price wise – as the global supply is extremely limited and restricted to South Africa the upside remains substantial. Additionally, as rhodium competes with platinum and there’s a price margin between the two (rhodium trading at $870/oz and platinum at $940/oz on May 19th 2017), there is room on the upside.
But how easy is it to invest in rhodium? Investing in physical metal may prove very difficult as up until around 8 years ago there was no way logistically to do so. In 2009 the Cohen Mint was the first to produce .999 fine rhodium bullion rounds and bars. Baird Mint then followed suit. With that in mind the premiums for these are very high – for example Provident Metals charges an approximately 100% premium on a Baird Mint one-tenth-ounce rhodium bar. Another potential issue with owning physical metal is liquidity – which will likely be very difficult to sell. If thinking about investing into rhodium – ETF is possibly the best option. There are a few providers out the in the marketplace, including the Deutsche Bank. All in all two important factors to remember when investing in rhodium is 1) to watch out for the automotive industry as the major demand driver and 2) the South African mining industry space as critical to rhodium production.