By Peter Hobson
LONDON (Reuters) - A rally in rhodium, a precious metal used to reduce vehicle emissions, has exploded into high gear, with surging demand and an uncertain supply outlook pushing prices up 40% in just three weeks to near record highs.
Rhodium is used to neutralise nitrous oxides in car exhausts, and increasingly stringent emissions regulations, particularly in China, are forcing auto makers to use more of the metal.
Demand is expected to outstrip supply this year and supplies are being disrupted by power outages at South African mines which produce more than 80% of mined rhodium.
Prices have rocketed to $9,975 an ounce from $6,040 at the start of January - ten times their level through the mid-2010s and within a whisker of an all-time high of $10,050 in 2008.
"It's being driven by insatiable demand from Asia," said Scotiabank analyst Nicky Shiels.
"There is also a supply side trigger with power cuts in South Africa. That injects a certain amount of fear into the market and in a small, opaque market that can have a huge impact," she said.
(Graphic: Rhodium, palladium and platinum prices - https://fingfx.thomsonreuters.com/gfx/ce/7/8224/8205/RHODIUM%20GRAPHIC%20PRICES.jpg)
Rhodium does not trade on an exchange, and producers who mainly sell through long-term contracts are releasing little into the spot market and creating a lack of liquidity, a trader in London said.
"There's very little material around," he said. "It's trading to illiquidity, not to fundamentals ... There is the incessant thought that prices are going to go higher, so every offer is taken."
Rhodium has rallied in parallel with palladium, another precious metal in increasing demand to neutralise engine emissions and whose price has risen 25% this year.
Unlike palladium, the roughly 1.1 million ounce a year rhodium market has seen small surpluses in recent years, according to specialist manufacturer Johnson Matthey (LON:JMAT).
However, consumption will rise more rapidly than output, pushing the market into a 100,000-150,000-ounce deficit this year, said Johann Wiebe at consultants Refinitiv GFMS.
Auto makers account for around 85% of rhodium demand, and emissions standards entering force in China, the world's largest car market, require 50% more rhodium per vehicle, said Standard Chartered (LON:STAN) analyst Suki Cooper.
(Graphic: Rhodium demand - https://fingfx.thomsonreuters.com/gfx/ce/7/8222/8203/RHODIUM%20GRAPHIC%20DEMAND.jpg)
Holdings of rhodium by exchange traded funds (ETFs) have drawn down to less than 20,000 ounces from over 100,000 ounces in mid-2017, removing a potential source of supply.
(Graphic: Rhodium ETF holdings - https://fingfx.thomsonreuters.com/gfx/ce/7/8223/8204/RHODIUM%20GRAPHIC%20ETFs.jpg)
South African data shows production of platinum group metals including rhodium fell 13.5% in November, and traders expect more disruption due to an ongoing crisis at state power firm Eskom.
A shift in mining activity in South Africa to shafts less rich in rhodium also means production there will gradually decrease in the coming years, helping keep the market in deficit, said David Davis, an independent analyst.
These fundamentals mean rhodium won't repeat its experience in 2008, when a rally ended with a collapse from $10,050 to less than $1,000 in a matter of months, but illiquidity means prices could be volatile, analysts said.
"It's overextended by every measure," said Scotiabank's Shiels. "But the path of least resistance (for prices) is clearly higher."