DETROIT () -- Rhodium is the rarest natural metal produced in significant quantities relative to its very low abundance. The richest deposits on earth from which rhodium is recovered are contained in southern Africa's Merensky Reef formation of nickel and copper sulphides. There, in the ore bodies which assay typically at 258 parts per billion (ppb) of platinum (and 102 ppb of palladium) there can be found typically 17 ppb of rhodium.
The chemistries of platinum (and palladium) and rhodium are different enough so that if there were no demand for rhodium it simply would not be produced even though the platinum/palladium ore in which it is contained was being processed to extract the platinum and palladium.
Rhodium has been known since 1803 and has long been used industrially for making vessels (alloyed with platinum) which can be raised to high temperatures, without becoming chemically reactive, in which very pure glass can be made. The glass fibre industry also uses rhodium alloys for making spinneret bushings, so that a great deal of glass fibre can be extruded with uniform diameter, because the rhodium alloy bushing resists wear during the operation.
Rhodium gauze forms are also used, and have been used for some time industrially, to catalyze the formation of anhydrous nitric oxide, which when passed into water forms nitric acid. This last property of rhodium led to the discovery of the particular use of rhodium which creates the largest contemporary demand (87% of all new metal annually) for this very rare metal
The OEM automotive emissions control device known as a catalytic converter was mandated on all new car and truck production beginning in 1974 to comply with Federal legislation enacted in the late 1960s regulating the allowable emissions of carbon monoxide and unburned hydrocarbons (fuel) that could be emitted by an internal combustion engine.
The very first such "converters" consisted of platinum or palladium metal coated on alumina beads packed into a canister placed in the vehicle's exhaust train tubing close to the engine so the hot exhaust gases could be "treated" well before they reached the muffler and tail pipe. It was soon decided that the exhaust gases needed also to be cleansed of nitrogen oxides produced in the combustion process from the ordinary constituents of air, nitrogen and oxygen. It was said that these nitrogen oxides when combined with water vapour in the air or naturally produced in the engine's operation gave rise to various acids that were unhealthy and also could produce the nitrogen version of what was called "acid rain."
Clever chemists at the companies making the coated catalysts came up with a combination of rhodium and rare earth metals, which when coated on a substrate and placed in a motor vehicle's hot exhaust stream caused nitrogen oxides to be catalytically reduced back to harmless nitrogen gas. By the 1980s virtually all cars made or sold in the U.S. and Europe had a three-way catalytic converter. It oxidized carbon monoxide to carbon dioxide (platinum or palladium), caused the complete combustion of unburned fuel (hydrocarbons) to carbon dioxide and water (platinum and palladium), and reduced nitrogen oxides to nitrogen (rhodium).
Although there are catalyst systems other than those using platinum and palladium, which can catalyze the complete combustion of partially oxidized exhaust gases, there is only one metal known that when placed downstream (after) the combustion of the carbon monoxide and the unburned fuel can then reduce nitrogen oxides to nitrogen: rhodium.
You cannot produce rhodium economically without producing platinum and palladium, so the car makers, the platinum group metal producers, and the politicians agreed to mandate a long service life for catalytic converters. This could and can only be done with a platinum-palladium-rhodium system, so a supply of rhodium was thereby assured so long as the platinum demand was maintained.
This is because no primary rhodium mine has yet been discovered on this planet, so that it must be produced as a byproduct. Fortunately for the environmental activists, academics, politicians and those who produce and sell the platinum group metals the majority of the world's new rhodium, annually, can be, and is, produced as a byproduct of platinum mining in southern Africa. I say "fortunately" because as I explained above platinum's use as a modifier of the emissions from internal combustion engines, is mandated by law by politicians acting at the behest of the above enumerated influence groups, and this keeps the demand for southern African platinum high enough to enable the production, as a byproduct, of more than half of the world's new rhodium each year.
When platinum production in southern Africa is interrupted for any reason such as labour strife, equipment breakdown or a refinery energy or raw materials supply reduction issue, the production of rhodium is also halted. In the last five years even with platinum production at a maximum the demand for rhodium seems to have increased so dramatically that the annual rhodium supply should be in massive deficit.
A normally good indicator of the deficit in supply is the price of rhodium. The chart below shows what has happened:
But demand exceeding supply cannot alone account for the fact that the price of rhodium has gone up by 2000% since 2002. Only part of the new demand surely is from the expansion of emissions limiting regulations to the domestic markets of car making countries which before did not have such restrictions.
The globalization of the car industry is also a factor. For example you cannot even make one car for export from America or Europe which does not have an emissions control catalytic converter system. But the main demand driver for rhodium seems to be the perception that all 70 million cars and trucks made each year globally today will need a three-way catalytic converter system as original equipment.
In fact the OEM American automotive industry in 2006 used, itself, 60% of all of the new rhodium produced that year to make or sell just 17 million cars and trucks, so the global demand must be, in fact, literally insatiable, all things being equal. One nagging problem is that the total annual new rhodium production in grams is 25 million. The U.S. OEM automotive industry uses 15 million of that itself. European car production in total is greater than U.S. production, so if Europe (and Japan) were using as much rhodium as the U.S. per vehicle there would be a massive shortage not just a supply deficiency.
Is this stuff, rhodium, even at its sky high price, a sleeper investment in rare metals? It would seem that the price of rhodium must continue to skyrocket as world production of motor vehicles powered by internal combustion engines continues to grow. But this I think is not what's happening. I think that there is a rhodium bubble.
There is no futures market for rhodium, and if you want to invest in it don't even consider doing so unless you are an end user who either must have the metal or shut down production. The price of rhodium is posted on a spot basis by Johnson Matthey in London, and there are only a handful of companies that can sell you new metal.
Sometime in 2001 the selling price for rhodium was around $200 a troy ounce (31.1 grams). This means that the cost of producing an ounce of rhodium was less than $200 in 2001. In the 25 years between 1981 and 2006 world production (overwhelmingly in southern Africa and Russia) of platinum group metals went from a total of 6 million troy ounces per annum to 15 million, a factor of 2.5. This reflected primarily the increased usage by the global (mainly the American and European) OEM automotive industries. This increase in demand had been predicted in 1981 and all planning for production took this into account. There was no surprise.
Palladium sold for $1000 per troy ounce at the peak of a 2001 "bubble." It has never since been above $400 per ounce, and it is said that palladium today may be in surplus by as much as one year's new production, 6 million ounces still being held by fund managers who over invested in 2001 without an exit strategy for the downturn that occurred.
Now look at the platinum price chart for the last five years:
The price of platinum has doubled in the last five years. The price of palladium has traded in a relatively narrow band. I am showing below the palladium price over the last 15 years to illustrate that, although palladium production has doubled, its price, in fixed dollars, certainly has not and the 2000-2001 bubble was just that, a speculative rise and fall.
The OEM American car industry, which for the purpose of this article includes all cars made or sold in the U.S. uses today more than half of the world's production of new rhodium and around half of both the volume of annual new platinum and palladium production. I use this round about phrase, "volume of annual new palladium production," because the usage of palladium may actually be static or declining if it is true that there is an overhang of 6 million physical ounces being held back by failed investment strategies.
The fact is that if the demand for rhodium were such as to justify a price increase of 2000% since 2002, then one might expect to see a decrease in the price of platinum as it might be being overproduced to get at the rhodium. This is not happening to platinum or its price. Palladium, by the way, is not as good an indicator of rhodium's price and demand as platinum, because most of the world's palladium is being produced in Russia and Canada where only a relatively insignificant amount of rhodium is associated with the palladium.
The global OEM automotive industry's demand for platinum group metals is benefiting, lessening, from thrifting, i.e., using less due to smaller or more efficient engines, scrap mining and substitution of cheaper palladium for platinum. Johnson Matthey has already predicted flat platinum and palladium pricing, at best, over the next two years due to these factors and the increased possibility of hybrids and battery powered vehicles, which will use no platinum group metals. But what about rhodium?
The greatest fear of the rhodium producers is that either a substitute for rhodium will be found, or that the OEM automobile industry will switch to non-internal combustion engine power plants. The fear is much greater now that the price of rhodium has run up to the point where the annual revenues from rhodium are roughly equal to those for platinum. In addition since the cost of producing rhodium has not increased since 2002 this means that rhodium margins have exploded and profits may be extraordinary. Certainly operating expenses for the southern African producers may well now be totally covered by rhodium margins!
I think that the opacity of the rhodium market has allowed the tiny number of rhodium producers and official market makers in the absence of a futures market to control and run the price of this byproduct up all out of proportion to actual supply and demand. I think further that the price is now such that it is impacting the OEM automotive industry so that just the price is pushing accelerated research on substitution and recycling. It may be that both are closer than the platinum group metals producers and traders want to believe.
It could well be that without $6000 rhodium some southern African miners and London based traders would be in financial distress. I think they are going to find out if this is so sooner rather than later. Whether the price is truly demand driven or pure speculation or a combination of both it cannot long keep going up so much out of proportion to its sister metals.