Rhodium is a very rare and precious metal that is predominately used to offset harmful nitrogen oxides in exhaust gases.
Over the last few years stricter emissions standards across the world, including in China and India, have led to a rise in demand. More stringent requirements mean that more rhodium is needed in catalytic converters to regulate greenhouse gas emissions.
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The supply of the metal is also subject to constraints. First, the vast majority is produced in South Africa. Any commodity that is overly dependent on a single country for output is usually in short supply. Second, its processing is especially difficult due to its high melting point relative to other metals.
It’s no wonder that the price has skyrocketed over the last few years, when the demand has been strong against a backdrop of scarcity.
The ETC I’m looking at
I’m able to invest in rhodium through an ETC (exchange-traded commodity). This is a fund that tracks the price of a commodity but trades like a share that I can buy from most online brokers.
The ETC in question is db Physical Rhodium ETC (LSE: XRH0). It’s a small fund, being less than $100m in size. I also think it’s quite expensive, with a management charge of 0.95%.
However, the management charges pale into insignificance when looking at the past returns of this ETC.
A £500 investment in January 2016 would be worth around £8,000 today. By any measure, this is a phenomenal return.
Supply is likely to increase as the strict Covid restrictions in South Africa subside. This is likely to be outstripped by an increase in demand.
Automakers are by far the biggest buyers of rhodium and over the last 12 months, car output has been restricted due to component shortages. Looking ahead, car output is likely to rise as the global semiconductor supply normalises, allowing car production to be ramped up.
This can be seen in the price action for 2022 already. At the time of writing, this ETC has increased by around 40% since the start of the new year.
However, further along the timeline, the picture is not so clear.
Over a longer time horizon, it’s clear that governments across the world will continue to pursue long-term carbon net-zero targets. This will probably lead to a decrease in the production of internal combustion engines requiring catalytic converters. Indeed over the last 12 months, the performance of this fund is broadly flat.
It’s very likely that over the long term, the production and popularity of battery-electric and fuel-cell vehicles will probably grow. These don’t require catalytic converters.
I could be wrong, but for my own portfolio, I like to consider the long term. Since the demand for shares in this precious metal ETC seems uncertain, I will keep looking for alternative investments.