DETROIT (Resource Investor) -- The Effect Of Diesel Engine Exhaust Management Systems Utilizing Base Metals and Rare Earths On The Demand For And The Price of Rhodium and Platinum.
The price of rhodium, the platinum group metal which is critical for NOx elimination from the exhaust emissions of gasoline fueled internal combustion engines (ICEs), has been on a steady uptick since 2003. It has now reached previously unimagined heights.
If you had obtained rhodium metal in 2003, stored it against contamination, and achieved an exit strategy, you would be sitting on a return of almost 3,000 percent on your investment as of July 9, 2008.
What's going on and what's the prognosis for the price of rhodium in the short and the long term?
I have previously written about the precariousness of new rhodium supplies since it is only found as a byproduct of platinum mining. With platinum mining confined primarily to South Africa and Russia, the world is dependent on a narrow supply window.
The newest driver for the price increases of platinum and rhodium is the increased demand for platinum to meet the stringent mandated reduction of exhaust emission contaminants, particularly particulates and NOx (nitrogen oxides). When NOx combines with water it forms an acid. The issue of the similar nature of sulfur oxides from diesel exhaust is being met primarily by a (costly reduction in the contained sulfur in diesel fuel.
The following chart, from an explanatory article by Implats, tells the story about the rapid increase in mandated reduction of:
Nitrogen Oxides (NOx)
The Implats article says:
"NOx includes Nitrogen Monoxide (NO), and Nitrogen Dioxide (NO^2). In gasoline vehicles, reduction catalysts are used to decrease NOx by transforming it into Nitrogen and Oxygen. A Three Way Catalyst (TWC), converts NOx, HC, and CO simultaneously. This technology can only be used in gasoline engines because of its exhaust composition. NOx abatement in diesel engines is trickier, but is currently being met using NOx adsorbers, which utilise platinum as the primary catalytic agent.
Japanese NOx regulations are the same for both gasoline and diesel engines. By 2009, the NOx limit for the US will drop from the highest of the vanguard nations to the lowest and most stringent. In 2005, the EU's Euro IV regulation for NOx reduces the limit by 50% for diesel vehicles and 47% for passenger vehicles. The adoption of Euro IV made the use of NOx adsorbers necessary for many vehicles, although engine improvements allowed some manufacturers to delay the inclusion of after treatment."
Substitution
Let's briefly deal with platinum and palladium interchangeability. There are three ways to reduce an end-user's demand for new platinum group metals (PGMs):
1. Substitution of a cheaper 'base' metal for a PGM, or by using a cheaper PGM in place of a more expensive one.
2. Thrifting, i.e., to get the same effect by using less PGM, and
3. Recycling, where the end user recovers as much as possible of the 'spent' PGM by recovering it from the waste stream.
The substitution of PGMs for each other has likely gone as far as it can in the present state of the global OEM automotive industry with its current mix of gasoline and diesel engines for motive power. I believe that palladium is now used everywhere that it is possible to use it efficiently, i.e. in place of platinum because it is so much cheaper.
Where cheaper palladium has not been a viable substitute for platinum the manufacturers have nonetheless thrifted to reduce the amount of platinum required whilst still being able to meet the requirements of exhaust emission management and longevity.
There is still much required to improve the collection of PGM bearing scrap and to recover the PGM values. As far as it is possible to pry information from the very secretive scrapping business, recoveries of PGM from automotive scrap have improved dramatically recently.
Since this aspect of the PGM supply market is opaque it does not affect the global traded price of PGMs as much as it affects local availability of the metals.
Diesel
Note well in the notes following the NOx regulation history graphs, above, that it is not possible to use rhodium by itself to reduce NOx to acceptable levels in diesel engines.
It does seem to be necessary, however, to use platinum in the diesel exhaust management systems now mandated for all diesel vehicles manufactured and sold in the western world, Japan, and Korea.
It is, therefore, reasonable to say that the rising price for rhodium is driven by speculation on the part of buyers expecting that
1) There may be sudden demand for rhodium if China ramps up its production to 20 million vehicles a year by 2015 as some are saying, and if the majority of those vehicles are powered by gasoline fueled internal combustion engines,
2) Europe's largest car market becomes Russia and keeps growing and using gasoline engines,
3.) Diesel exhaust management systems need rhodium, and
4.) Political instability and power shortages in southern Africa could close down platinum mining creating not only a potential platinum supply deficit but, automatically, a rhodium supply deficit.
Earlier this week it was reported that Argonne National laboratory licensed a diesel NOx reduction system it had developed to a company in Oregon.
Unlike the systems now in use the Argonne system requires no injection into the exhaust stream of a liquid chemical reductant such as urea or ammonia to operate the Selective Catalytic Reduction (SCR) process. Nor does the Argonne system require Exhaust Gas Recirculation. Most interesting of all, the system uses copper and the second most common rare earth metal, cerium as, the active catalytic metals with a projected lifetime of 400,000 driving miles,
I emailed the scientist at Argonne, who managed the development of this system, Dr. Chris Marshall, and I asked him:
"Why is no one noting in their announcements the impact on the demand for rhodium that systems such as yours will have? Is it because your new catalytic reduction systems still must use a rhodium NOx reduction 'final' catalyst? If that is the case, then will not your system reduce the need for as large a final catalyst as is in use today?"
His answer was directly to the point:
"Our system will utilize no rhodium or any other precious metal. It utilizes copper in a zeolite with a coating of cerium oxide. None of these are considered to be in short supply and hence should help the global shortage of these metals".
Note well that the "system" of which he speaks is the NOx reduction system; the total exhaust management systems for diesels still need platinum based oxidation catalyst.
Conclusion
The future choice of power trains for personal automobiles will primarily be a function of the cost of driving the car. This will, itself, be a function of the cost of buying the vehicle and the cost per mile for fuel to operate it.
By 2015 more than a third, perhaps as many as one-half, of all of the new cars made and sold in the world will be made and sold, in order of volumes, in China, Russia, India, and Brazil. As is already the case today, in western Europe, more than half of these cars will be diesel powered as will the same proportion of cars sold in 2015 in North America, Korea, and Japan.
By 2015, if new sources of rare earth metals are brought into production, as many as 5% of all new cars may be hybrids, of which perhaps, 1/2 of 1% may be lithium battery powered high end performance vehicles. The majority of the hybrids will be utilizing nickel metal hydride batteries and small diesel or small very high efficiency gasoline engines which will not need PGM based catalytic converters.
The demand for platinum for automotive exhaust emission control will be considerably greater than it is today, but I believe that by then the demand for rhodium will have peaked.
At this time there is a reasonable chance that the OEM American owned and operated automobile manufacturing industry may collapse before 2010. This could mean that there will be a year in America without an American domestic car industry. Even without a bankruptcy of any one American company, much less of the entire domestic vehicle industry, there is a developing dramatic collapse in new car sales. The figure could go down to a low of 10 million units in 2009 or 2010, because even if a foreign car maker wanted to fill the void there is not enough time or productive capacity to do so before 2011 or later.
Unless China suddenly mandates catalytic converters across the board, followed by India, there may be a surplus of platinum group metals used by the OEM automotive industry by 2010.
I see in this scenario of globally changing power trains and reduced production only one other factor operating to drive up price, in addition to political instability, and that is the US dollar.
If you are an end user for whom platinum and rhodium are critical to your manufacturing process it might be wise to consider a hedging program. If you are a speculator a dollar investment in platinum or rhodium may be a the last thing your portfolio needs.
Postscript
I just checked the price of catalytic converter scrap in the Detroit market; it has more than 50% higher than it was at the end of 2007. The majority of the unprocessed scrap is going to the Republic of South Africa and Japan where the PGMs will be recovered for much less than the extraction costs of new metal from the mine and sold back to buyers at the full market price. The largest component of the 'street price' of a scrap catalytic converter is the value of the contained rhodium. If and when the rhodium price breaks the scrap price will tumble. Scrap dealers do not hold inventory of PGM containing scrap for speculation; they buy and sell on the same day, and that may be a model for some classes of investor to heed.
