What lessons does rhodium have for commodity investors?

All investors should occasionally look to the past to guide their views on what could happen in the future. For as they saying goes history doesnt repeat itself, but it often rhymes. Almost ten years ago the eyes of many commodity investors were focused on a little known precious metal called rhodium. What are the similarities to the present day surge in cobalt prices and can investors learn anything from that episode and others like it?

Rhodium is similar to cobalt in that it has a very small, very concentrated supply base. Around 80% of rhodium supply comes from South Africa, while around two-thirds of cobalt comes from the DRC. Much like cobalt, the supply of rhodium is also an indirect supply – the precious metal being a byproduct of platinum and nickel mining. That means that supply doesnt typically respond in the same way to high prices. Since the economics of the mine is governed by the value of the predominant metal rather than the byproduct supply tends to only respond after a big step up in prices. The relatively low prices for both nickel and platinum at the present time do not bode well for cobalt supply.

Like cobalt which is predominantly used in batteries, the demand for rhodium is also very concentrated. Eighty percent of rhodium is consumed in autocatalysts, with the remainder in chemicals, glass and the electricals industry. Meanwhile, in the same way that Tesla and other companies are keen to get their hands on as cobalt now amid supply risks in its main producing country, the same was true for rhodium in the eary 2000’s. From a $440 low in January 2004, prices ballooned near 23-fold to more than $10,000 over five years as industrial users hoarded the metal amid concern that South African mine supply would fall.

You could argue that the straw that broke the camels back for rhodium prices was the start of the global financial crisis. With car manufacturers holding large stocks of rhodium procurement decisions resulted in large swings in prices. Indeed, it is rumoured that the decision by one car manufacturer in the US to offload its rhodium stocks in 2008 set off the subsequent price collapse. Due to the ultra small nature of the cobalt market the same thing could happen there if one or more manufacturer becomes a forced seller for whatever reason.

The financial crisis was the final straw for rhodium, but it can be argued the crash would have come soon enough as car manufacturers were substituting with other materials. As the price of rhodium soared car manufacturers looked to cheaper alternative metals and reducing the amount of precious metals that they needed to use in catalytic converters. Could the same happen for cobalt? A complete shift away from high-energy batteries looks hypothetical at this stage with all high energy batteries currently requiring cobalt. However, there has been recently efforts to produce other types of battery chemistries that do not require cobalt. Tesla has reportedly also been trying to remove cobalt from the equation and add nickel instead. So far attempts for substituting cobalt resulted in a loss in product performance. But nothing is set in stone.

At least until recently there was little way that retail investors could gain exposure to rhodium directly. At the moment the only way for investors to gain exposure to cobalt is by investing in a company that mines it (e.g. eCobalt Solutions). There have been rumours that some financial institutions who have built up large stocks of cobalt are looking to create a product that would allow retail investors to ‘gain exposure’ directly. This should, in the same way that the launch of the rhodium ETF as a sign that some are trying to take some profit.

The rhodium market has seen several price spikes. The most recent being a major rally in the early 1990’s, a smaller one around the millennium and then the enormous 2004-08 boom. The cobalt market is no different. The last major spike in cobalt prices occurred in 2006/07 when prices surged from around $30 per tonne to over $110 per tonne.

One major factor that characterises rhodium, cobalt and a range of other minor metals is the short time in which prices spike and then fall back to earth, quite often right back where they started. How long do minor metal super-cycles typically last? Not very long is the answer. Prices typically increase sharply for 1-3 years before prices crash, often back to where they started 6-12 months later. What does that imply for cobalt? Well, cobalt’s rally is still relatively young by these standards, but come the end of this year it may start to look a little weathered.

Investors take note. By the end of 2008 the price of rhodium had declined by 88% to $1250 per oz. Remember miners are often (but not always a very good one) a leveraged bet on the underlying commodity. Trying to pick the peak in the price of rhodium will probably be just as difficult with cobalt. But by the time that happens the share price of a cobalt miner may have already gone in reverse.

Ride the narrative for as long as you dare.

Related article: Batteries now included: You’ll meet a bad fate if you extrapolate

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