The world’s most expensive primary metal, rhodium, is skyrocketing, and South Africa may soon earn more from the metal than from gold.
In 2007, South Africa produced about 20 t of rhodium and 270 t of gold, which, at current market prices, translates into $6,8-billion from rhodium sales and $8,2-billion from gold sales.
According to Cadiz Special Projects mining analyst Peter Major, “gold has had its day”.
“A lot of what has driven the gold price is inflation and a depreciating dollar, much like the oil price. But gold’s demand is not as strong as oil’s and is much more fickle. People do not have to have gold, but they do have to have oil. I think the gold price has finally levelled. “The American economy isn’t in such a huge mess that its dollar will keep on depreciating against the euro. “The current dollar:euro price is a serious barrier for it to exceed, and I think it will battle to break $1,60 to the euro. If the dollar slowly starts appreciating, gold will depreciate,” he says.
But while the gold price is trying to regain its peak, rhodium is still escalating.
Rhodium was priced at $4 552/oz in 2006 and increased by 36%, to $6 190/oz, in 2007. It is currently priced at about $9 825/oz and, according to experts, if the price continues to increase and gold production decreases, then rhodium might become a bigger seller than gold.
“With such extreme price increases, South Africa is set to benefit from the metal, as it is the world’s largest producer, at 80% of production, at 19,6 t.
“A lot of metal prices have gone crazy. The rhodium price has gone up tenfold in just the past four years, but slowing world economies should bring the price down again. “I am surprised it is still holding on at such high prices. I suspect that there are speculators holding rhodium back from the market, which is shoving the price up. “This cannot be done with gold all that much, because it isn’t a ‘needed’ product as much as rhodium is. “Rhodium is a speculator’s dream. If you pick up 10 000 oz to 20 000 oz of it from the market, then the market feels the effect immediately,” Major says.
Rhodium is largely used in automotive catalytic converters. An auto catalyst is a device that is fitted on a motor vehicle’s exhaust pipe and eliminates or diminishes the three main harmful pollutants – hydrocarbon, carbon monoxide and oxides of nitrogen – from the exhaust fumes.
Auto catalysts work as three-way converters and need platinum, paladium and rhodium to function properly.
A total of 85% of rhodium is used in auto catalysts.
“More cars are being required to use auto catalysts. The loading requirements for these metals in auto catalysts have increased drastically over the years and legislation is becoming tighter. In 2007, auto catalysts on average contained 1 part platinum, 1,05 parts palladium and 0,22 parts rhodium.
The average loading in terms of grams in 2007 was 1,8 g platinum, 1,9 g palladium and 0,38 g rhodium, which has more than doubled since 1990, when the average loading for auto catalysts was 0,98 g platinum, 0,20 g palladium and 0,21 g rhodium.
At current prices, a gram of rhodium costs $321, which means that there is $132 of rhodium in every auto catalyst. Platinum currently costs about $2 000/oz, which equals $64 a gram, meaning that there is $117 of platinum in each auto catalyst. And there is $28 of palladium in an auto catalyst.
“These prices are exceedingly high. World prices cannot keep growing at these rates. The world is faced with a double whammy. “Not only are we producing more cars, but the loadings are continuously escalating to stop noxious gases from further polluting the planet. If anyone wonders why prices continue to rise, this is why,” he says.
Major notes that the current high rhodium prices were not always the case. One company, in particular, fixed a ceiling to its rhodium selling prices at much lower than current prices.
Major explains that more than ten years ago, Anglo Platinum contractracted with its major clients to sell them rhodium at a very low rate (which was a high rate at the time, believed to be $3 000/oz to $4 000/oz). During the 1990s, rhodium sold at prices around $1 000/oz. A large market share was lost owing to a huge price spike in 1990/1. Because it had lost a large part of its market share, it was assumed that the rhodium price would not exceed $3 000/oz to $4 000/oz for decades.
Anglo Platinum did not really reveal its low price capping until recently when analysts started questioning the gap in its profit margin.
“No one knew about the price cap, because it was never a problem, and the metal was selling far below that for many years.
“Anglo Platinum will, however, be clear from the hedges within a year or so, but, up until now, it has lost quite a few billion rands, causing South Africa great monetary loss.
“That said, this isn’t the first time hedging has cost South African companies a lot of money, and it most probably won’t be the last. South African Airways lost more than R7-billion on a currency hedge in 2001, AngloGold lost billions of rands on its hedge book, as have South Deep mine and many other South African gold mines over the last 25 years. “Sasol is still counting the losses from its partial production hedge of $80/bl for oil.
“The lessons here should be clear: hedging is risky, time consuming, stressful and probably has much more downside to it than the upside that people imagine when they put it in place,” he concludes.