Desperate to cut emissions, auto makers drive rhodium to 11-year high

LONDON (Reuters) - The price of rhodium, a precious metal used to curb harmful emissions from vehicle engines, has rocketed to its highest since 2008 as tightening environmental regulation compels auto makers to buy more just as supply looks set to stagnate.

Rhodium has leaped from $615 an ounce in mid-2016 to $3,565 an ounce this month, shooting up by more than $1,000 since mid-February alone.

“Within this year we might well see $4,000,” said Mitsubishi analyst Jonathan Butler, adding that rising demand would likely tip the market into deficit.

“That’s not to say we wouldn’t see a pullback potentially to $3,000 -- this is a volatile metal -- but it does have good long-term prospects,” he said.

(For a graphic on 'Rhodium price' click

Rhodium is used alongside its sister metals platinum and palladium in vehicle exhaust systems to neutralize pollutants.

But its price has raced ahead of its peers since 2016, when commodities including precious metals hit multi-year lows.

This is because rhodium is the most effective at tackling nitrogen oxides (NOx), whose reduction is increasingly demanded by regulators. Auto makers account for around 85% of rhodium demand.

(For a graphic on 'Rhodium price comparison' click

China has accelerated the introduction of emissions standards to enter force between 2019 and 2023, while in Europe, stricter rules are arriving after a diesel emissions scandal increased sales of gasoline-powered cars that use more rhodium.

“You’ve had better than expected China, and quicker than expected China, and then better than expected Europe,” said Emma Townshend, an executive at major South African producer Impala Platinum (Implats).

Rhodium’s gains have echoed a rally in palladium, whose price has more than tripled since January 2016 and which now trades around $1,550 an ounce.

Unlike palladium, which is in acute deficit, the rhodium market has a small surplus, according to materials maker Johnson Matthey.

(For a graphic on 'Rhodium supply-demand balance' click

But the rhodium market is smaller -- around 1 million ounces a year compared to 10 million for palladium -- and less liquid, so even temporary mismatches in supply and demand can dramatically impact prices, traders and analysts said.

Higher prices are encouraging glass makers, the biggest industrial users outside the auto sector, to use less rhodium, according to Johnson Matthey.

But despite a slowdown in car sales, demand from auto makers will rise by 10% this year, it said, as rhodium loadings per engine grow.

Car companies such as Volkswagen and Toyota typically buy metals through long-term contracts, but the value of these deals is informed by spot prices, and they may have to buy on the spot market if they need more metal than expected.

And it is hard for car companies to use less rhodium.

(For a graphic on 'Rhodium demand' click

Gasoline engines are estimated to need between 2.5 and 4 ounces of palladium to achieve the same result as a single ounce of rhodium, said Implats’ Townshend.

With rhodium only a little over twice as expensive as palladium, that means there’s room for further price rises, Scotiabank analyst Nicky Shiels said.

South African miners, who produce 80% of mined rhodium, have been raising output, but they plan to close older shafts and shift activity to ore bodies less rich in rhodium, which would reduce supply.

Recycling will increase, but this “may not be enough to offset future declines in mine production,” Johnson Matthey said in a May report.

Rhodium is mainly a by-product of platinum mining, making it hard to increase production even when prices are high.

Still, prices may have peaked for now, traders and analysts said.

“Certainly a number above $3,000 is justified,” said Hans-Guenter Ritter at Heraeus, a major precious metals refiner and trader. “But it’s had its run already (and) it needs to consolidate here.”

Reporting by Peter Hobson; Editing by Veronica Brown and Jan Harvey