While mostly unknown to an amateur, rhodium is currently one of the hottest trades. This silvery-white metal had peaked — and abruptly crashed — once before in 2008 at over $10,000 per troy ounce.
However, it is now trading above that previous high thanks to a significant wave of demand. This boost in price is not unwarranted, as the metal is a key component in the auto industry.
Moreover, a supply stoppage is also triggering the considerable price increase, and those investing in the rhodium-pegged crypto, Rhodium Coin, are driving its value up as well.
But what exactly is the cause of this rampant demand from auto businesses, and why is there a supply stoppage of rhodium?
Vehicle Demand
Rhodium usage is popular in production equipment that builds fiberglass, state-of-the-art equipment for laboratory testing, jet engines, liquid crystal displays, digital displays, sensors, and thermocouples commonly used in nuclear reactors.
In the case of jewelry, it is primarily utilized in thin plating. However, most of the demand for rhodium stems from the car industry.
Rhodium’s rally to record highs is expected to continue. Prices went up 19% in February as automakers requiring that the metal meet constricting emission regulations ran into a limited supply.
Moreover, automakers use roughly 85% of rhodium in their production.
As the largest market globally, Chinese economic growth gathered impressive strength in 2020. Auto demand and tightening emission standards are what is propelling the overwhelming need for rhodium in China.
The precious metal is a key ingredient in creating catalytic converters that cut down on pollutants and toxic gases in the exhaust gas.
In China (i.e. the biggest market), sales are predicted to grow this year after a slight dip last year, and emission regulations tighten once more in 2023.
Slashing the Supply
The increase in demand from the auto industry to adhere to the ever-growing strict emission standards comes amid a supply shortage that the market is experiencing.
Chinese growth is a driving force behind a commodity boom for rhodium. In 2020, Anglo-American Platinum stoppages reduced rhodium supply by 16%.
That compares with a 10% demand decline, thus creating a shortfall in the approximately 1 million ounces per year market that will continue this year and is likely to boost prices.
The COVID-19 outbreak will only tighten the market further as the pandemic triggers a series of lockdowns in South Africa, which is the top producer of the precious metal.
Other issues like strikes in South Africa that go on for months and a lack of dependable energy-generating infrastructure also impact production. Therefore, it is important to watch the production there closely.
Rhodium’s price can continue rising in the near future, but its sizable premium to platinum and palladium could affect demand and prices.
Rhodium Coin
Stablecoins pegged to precious metals garner a lot of attention in recent years, and Rhodium Coin is no exception.
This is an ERC-20 rhodium-backed digital currency whose initial construction occurred on the Ethereum network.
Rhodium Coin is the first rhodium-backed one to be available for purchase with both cryptocurrencies and national currencies in terms of fractionalized assets.
Its fractionalized nature allows investors to buy whatever amount of the crypto they want at any time.
The success of this crypto relies heavily on the success of rhodium. Because its value is tied to the metal itself, any price changes — good or bad — affect the stablecoin’s overall worth.
Will this continue?
There has been a shortfall of rhodium for most of the last decade. In doing so, it has driven inventories down and allowed periods of strong purchases to tighten the market and increase the prices.
According to Rohit Savant of CPM Group, on an annual basis, the market experienced a small surplus in 2020 and will likely see it again this year.
The prices are expected to dip when the traditionally strong demand period at the start of the year slackens.
“But going forward,” he states, “you are likely to see a continued narrowing of surplus and potentially deficits again.”
Rhodium usage may eventually drop due to combustion engines gradually being replaced by power vehicle batteries. However, analysts believe that this process will take many years.
Jonathon Spire
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