According to analysis from Deutsche Bank and Johnson Matthey global demand for the metal is poised to exceed supply by 78,000 oz this year, the most since at least 1984. Deutsche forecasts that supply will drop 0.7% this year while consumption is expected to rise 5.8%. Furthermore global demand is expected to exceed supply every year through 2020, with a shortfall of 530,000 oz accumulated during that period.
As we noted back in October with rhodium prices at the cheapest relative to platinum and palladium (both metals are also used in catalytic converters) car manufacturers may look to substitute towards cheaper alternatives. Rhodium prices reached a floor of $890 per oz in December before rising by 18% to $1,050 per oz currently.
Related article: Rhodium slump to end on higher substitution demand
In the past rhodium has generally been characterised by inelastic supply with higher demand resulting in sharply higher prices. However with automotive replacement cycles set to accelerate over the next few years, particularly in Europe significant supplies are likely to come from recovering rhodium from old catalytic converters. According to Morgan Stanley recovery from old catalytic converters will rise 1.4% this year and 9.1% in 2015, reaching 311,000 oz or enough to meet 36% of what car companies need.
Labour unrest in South Africa remains a significant supply-side risk though. The metal is mined alongside platinum and palladium, with about 80% of production coming from South Africa, according to Johnson Matthey. Deutsche Bank forecasts rhodium output from South Africa will fall by 5.7% in 2014, dragged lower by the recent strike action. With elections due in May there is potential for further disruption in coming months which could lead to rhodium stockpiles disappearing quicker.
Related article: Global stockpile weighs on platinum prices despite strike