Growing Chinese, Indian Auto Market to Help Push Price of Rhodium

1 April 2010, 9:38 a.m. EST
Daniela Cambone
Kitco News

Montreal (Kitco News) -- Demand for rhodium, a key element in catalytic converters, is expected to increase as automobile markets in China and emerging countries continue their rapid growth.

Ford Motor Co., announced today that its first-quarter sales in China leapt 84% from a year and that sales reached a record 153,362. It also said that March sales for India more than tripled from the previous month.

Last week's announcement that Volvo was bought by China's Zhejiang Geely Holding Group was a further signal that the Asian auto market is expanding rather than slowing. .

“In China and India, auto sales are skyrocketing; other emerging economies are also seeing strong growth in auto sales," said Jeffrey Christian, Managing Editor of CPM Group told Kitco News. In the United States auto sales will probably be 10 to 15 per cent higher than they were last year. When you sell a car pretty much anywhere in the world you need a catalyst on in, so that means more platinum, palladium and rhodium.

China vehicle sales surged 25 per cent in February after the government cut taxes on some models, helping the country extend its lead as the world’s largest auto market this year. Sales of cars, commercial vehicles and SUVs rose to 942,900 units, while sales of all vehicles including trucks and buses rose 46 per cent year-on-year to 1.21 million, according to the government-affiliated China Association of Automobile Manufacturers.

India's motor vehicle sales have also been rising rapidly - topping 2.5 million in 2009 - and are expected to rise another 10 to 15 per cent in 2010.  Indian car sales touched their highest-ever monthly number in February as cheaper loans drove purchases. February's growth follows a 32 per cent on-year rise in January and a 40% increase in December, according to the Society of Indian Automobile Manufacturers.  

The greater the demand for cars, the greater the demand for rhodium. “We have been very bullish on rhodium,” echoed Rohit Savant, Senior Commodity Analyst for CPM Group, the commodities market research firm.
Along with platinum and palladium, rhodium belongs to the Platinum Group Metals (PGMs). Rhodium's main use is in catalytic converters in automobiles which help reduce harmful emissions.

Savant explained that the rhodium market is currently being driven by investors and by consumers building inventory. “In anticipation of higher prices, many are saying, ‘we might as well be buying some metal now than be buying it at a higher price later,’” he said.

A consultant in the mining and exploration field for the past 50 years, Jack Lifton, is certain that rhodium will skyrocket.  “Rhodium will be short, shortly and by 2015 it will be a real mess. China is mandating catalytic converters on cars; they have exhaust requirements. The electric car revolution is not going to occur in less than a generation if ever. You are looking at an immense increase in the annual production of internal combustion engines requiring platinum, palladium and rhodium to moderate their exhausts,” Lifton said.  “We have been looking for substitutes for 30 years.  Guess what? No luck yet.”

Anton Berlin, Marketing Director for Norilsk Nickel, stressed that there is no feasible economic alternative for catalytic converters.  
“There are many challenges with substitution in the automotive sector; it can’t change overnight. The catalyst has to be certified by the authorities and by the governments," Berlin said.  It’s not worth the headache and cost of getting the new certification for a new catalyst."

Berlin noted that while rhodium is not the primary focus of Norilsk, it is still important for the Russian-based company, currently the world’s largest producer of nickel and palladium. Rhodium is mined as a byproduct of platinum and palladium in most mines, and as a byproduct of nickel and copper at other mines.

“We would not adjust our mining for rhodium but we do appreciate the metal because it is a portion of the revenues,” Berlin said. 
For Gerry Dawson, Head Trader at the precious metals and technology group Heraeus, rhodium’s current rise can be attributed to investment-related transactions.

“We are seeing that banks, especially European banks are buying Rhodium. If you look at what has gone on in Detroit, especially with GM and Chrysler, the biggest driver from the low price this year has been the investment community and the weaker dollar.  I would say the second biggest driver has been, pretty good demand out of Asia in particular China,” Dawson explained from the company’s New York office. 

Rhodium’s History
 
Historically, the metal has been quite volatile. A lack of supply led to it peaking at $10,000/oz in 2008 but with the car industry plummeting in the third quarter of 2008, rhodium’s price fell by more than 90%.

Rhodium’s average historical price sits around $1,000/troy oz, but in recent years it jumped to $4500/troy oz.
While CPM’s Savant said that Rhodium will be crawling back up, with an average price of $2500 expected for 2010 and $3600 for 2011, he thinks a $10,000 price repeat would be uncommon. “We do anticipate strength. We think prices will go up on a spike to $5,000 or $6,000,” Savant said.

However, Savant could see prices going up to the double-digit thousands on a spike, mostly fueled by the South African factor.  
“Once you see economic recovery come back in South Africa that could put additional pressure on electricity supply and push metal prices,”  Savant said. 

Nearly 70 per cent of the total rhodium supply comes from South Africa. This high concentration of supply coupled with the short fall in electricity to the South African mining industry during January 2008, helped push rhodium prices sharply higher.

The SUV Effect

Besides the South African aspect, SUVs might also impact the price of rhodium.  Larger vehicles such as SUVs require more PGMs. With more people going green less people are buying gas-guzzling cars.

Dawson explained that last year we suffered a double-whammy with the precipitous drop in car sales and high oil prices. “Rhodium began to sell-off dramatically.  So I think the fact that SUV sales were sharply lower was a major contributing factor to rhodium going down to $900 last year.“

For Savant however, there are two factors that will counterbalance the SUV factor and the changes in sales trends.
“One is the tightening in emission standards and the other is a greater volume of vehicles being sold in the developing markets -- it is these two factors that will offset to some extent the loss of rhodium use in larger vehicles," he said.

-- By Daniela Cambone of Kitco News, dcambone@kitco.com