2011-06-20 19:13
Strategy: watch out for rhodium price
There are more interesting characteristics of this rare metal. Wedding rings made of white gold are often plated with a thin Rhodium layer because it prevents corrosion and improves appearance. But nowadays, it is primarily used as catalyst in vehicle exhaust systems. Rhodium’s role in these catalytic converters is to break down harmful nitrogenous oxides into oxygen and nitrogen in a chemical reaction, as shown below. 2N02 → N2 + 2O2 Most countries have emission regulations that enforce the use of catalytic converters in cars. Like rhodium, other elements from the same group such as platinum and palladium are also used as catalysts. However, a whopping 80 percent of gross demand for rhodium is for automotive-catalyst applications, which stands in stark contrast to platinum’s 28 percent and palladium’s 45 percent. Thus, rhodium prices more accurately reflect the world’s auto industry conditions than platinum and palladium prices. For instance, the global automakers’ rally was stalled when rhodium prices hit a peak in April 2010. The stocks resumed their upward moves when rhodium prices started a moderate rebound in September. There is another reason why rhodium prices paint a clearer picture of the global auto industry than platinum and palladium — the latter two are traded on the financial market as precious metal commodities while rhodium is not. This means rhodium is less easily swayed by liquidity conditions or investment sentiment in financial markets compared to other commodities such as WTI crude oil or gold.  For example, platinum and palladium prices jumped but rhodium stayed relatively stable when the U.S. Fed started the second round of quantitative easing (QE) in late-2010. As asset prices rose in response to QE2, the policy efforts backfired and resulted in inflation rather than fundamental improvements. Recent moves But, departing from its usual pattern, rhodium prices have been on a rollercoaster ride recently. Rhodium plunged at the end of April right after Japan’s earthquake crisis and regained strength during the end of May only to fall again since early June. The U.S. economic slowdown is still unfolding whether it is due to temporary disruptions in the wake of Japan’s earthquake or more fundamental reasons. Given that Japan and China represent 32 percent and 20 percent of the world’s rhodium consumption respectively, I believe rhodium prices are a good gauge to see if Japan’s manufacturing sector is returning to normal or how China’s auto sector is faring. I do not think expectations for QE alone will lead to a “V-shaped” rebound. For QE3 to happen, it must be preceded by the stock market’s complete collapse, devastating enough to silence the opposition who fear QE3 would create inflation and fiscal deficits. The U.S. economic slowdown is more than a simple, one-off effect of the troubled production in Japan. Behind the slumping economy, there is a mix of culprits, such as falling mortgage bond prices and resulting steep decline of banking stocks and slowing jobs creation in the services and manufacturing sectors. As this suggests, there is still room for greater stock market volatility. But it would not be pointless to think about where the sign of change will first become visible. Futures market participants have had to adjust their forecast for the timing of the U.S. Fed’s rate hike. They are now skeptical about the possibility of a rate increase within 2011. Expectations for monetary easing will mount further if the market environment worsens. At this moment, it is critical to find an indicator measuring the stock market’s bottom. Recently, rhodium prices are again falling fast, which suggests the economic slowdown is still underway in the auto industry as well as the whole U.S. economy. I believe a strong rebound of rhodium price will be a signal of the U.S. auto industry’s returning to normal operations from the troubles caused by Japan’s earthquake. For people in the financial industry, this is what probably makes this precious metal even more precious. Park So-yeon is investment strategy analyst at Korea Investment & Securities. She can be reached at sypark@truefriend.com |
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