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Rhodium Rodeo

Written by Luke Burgess
Posted November 20, 2006 at 8:00AM

BALTIMORE, MD -- The tech bull of the 90s benefited more than the dot-coms and internet service providers. Computer hardware and software, telecommunications, tech consulting and biotech stocks all enjoyed magnificent booms within the overall secular bull market.

But they all didn't experience gains at the same time. Rather, each of these sectors found their strengths and weakness' at different times. Some led...some lagged... and some built momentum and strength for others to follow. Nevertheless they all contributed to what is known as the single biggest tech bull market in history.

Today's metals bull market has a similar flavor.

Recent upswings in various metal prices have come at different times due to a range of several different factors. But like each sector that benefited in the 90s tech boom, each metal is being benefited in today's commodity bull.

So far, zinc has been the superstar of the group. The bluish-white metal has easily gained worldwide interest from the major investment houses to individual investors like you and me as prices continue to break all-time highs. And as you might know, I still think the galvanizing metal still has a lot of steam behind it.

But let's forget about zinc just for today. I want to talk with you about rhodium.

Rhodium is part of a collection of metals that make up the platinum group metals(PGM).The platinum group metals are six metals that have physical and chemical properties similar to platinum. They consist of: ruthenium, rhodium, palladium, osmium, iridium, and, of course, platinum.

Rhodium is a hard silver-white metal that is highly resistant to corrosion and is extremely reflective.  It is used as an alloying agent for hardening platinum and palladium. These alloys are used in furnace windings, bushings for glass fiber production, thermocouple elements, electrodes for aircraft spark plugs, and laboratory crucibles.

High rhodium prices during the late 80s led to increased rhodium production from South Africa, the world's largest supplier. But it was too much, too fast. And an oversupply caused prices to drastically decline during the 90s.

 
Back in April, rhodium prices hit an all-time high $6,275. Recently, however, the metal has experienced a pullback as the overall metals market has taken a breather. But I think that's all about to change.
 
 
Why do I say that?

Well, annual world production of rhodium is only about 20 tons (about 40,000 pounds), making it very rare. The fact is supplies are tight, and demand is consistent.

Now like I mentioned before, high rhodium prices during the late 80s led to increased rhodium production from South Africa, but nowadays things are different. South African mines haven't been able to push out as much rhodium as they want or planned. In fact, last year rhodium demand grew by more than twice the rate of increase in production.

That's a detail that no other commodity can claim. Not even zinc.

In 2005, demand rose 10% to 812,000 ounces, up from 2004's 729,000 ounces. This strong demand did spur some production...but not much. Global supplies only increased by a mere 5%. This has caused a major supply deficit.

With demand for rhodium still high and producers unable to make with the goods, rhodium is poised to break its all-time high of $7,000 an ounce over the next few years.

So how can you profit?

Simple. Even though rhodium is illiquid and does not trade on any futures exchange, investors can still leverage themselves to higher prices through buying the producers.

The problem is, however, rhodium is a not a primary metal in the chain for any PGM producer. But a PGM producer or explorer with a heavy interest in rhodium is sure to take advantage of this bull market.

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