Record rhodium price not enough to increase output: Heraeus

London — Record high rhodium prices, strong cash flow and a weak rand against the US dollar should in theory motivate South African platinum group metal producers to increase production, though certain barriers exist, said one of the world's largest platinum group metals refiners, Heraeus Precious Metals.

With summer around the corner and South Africa reducing its COVID-19 alert level to level 1, some production activity has increased as a result of existing operations being optimized due to many labor-intensive deep-level South African operations now being back at or close to 100% capacity, Heraeus said in a research note released Nov. 16.

However, Heraeus said while there are a number of delayed projects and closed mines in the country that may possibly be restarted, there are also existing barriers that prevent them from restarting them.

"If the mines were closed for reasons beyond low metal prices, such as a poor ore body, then the current exceptional palladium and rhodium prices may not be sufficient to motivate a restart," Heraeus said.

"The rhodium price is volatile and producers will be reluctant to rely on the rhodium price staying at historically high levels to justify the investment in restarting a mine that could be in production for a decade or more."

Platinum group metals markets tightened and saw prices gain traction on the back of Anglo American Platinum's Nov. 05 announcement that it had decided to close its troubled Anglo Convertor Plant Unit B at its Waterval smelter complex for a full rebuild, which has been plagued by water leaks.

As a result, Amplats -- one of the world's largest platinum and platinum group metals producers -- has lowered its refined production guidance for 2020 to 2.5 million PGM ounces, from the previous COVID-19 impacted guidance of 3.1-3.3 million oz.

"Platinum would contribute the most ounces in any restart and an increase in platinum production in an already very oversupplied market could depress the price even further, hurting overall returns," Heraeus said.

In 2019, rhodium was the least diversified geographically metal with over 80% of supply coming from South Africa.

Nearly 80% of the annual demand for rhodium comes from the global automotive industry, which uses the metal in catalytic converters to control emissions of greenhouse gases and pollutants.

Growing rhodium deficit

In a Bank of America virtual conference on Nov. 10, BASF Precious & Base Metal Services Senior Vice President Matthias Dohrn said the rhodium market remained tight due to the recovery in automotive output in China and decrease in production in South Africa as a result of COVID-19 shutdowns earlier in the year.

BASF said it expects "severe shortages of rhodium projected in the future", with the rhodium global deficit at around 47,000 oz in 2020, rising to 162,000 oz in 2021, 335,000 oz in 2022, and 411,000 oz in 2024.

Following Amplats' ACP Unit B closure, Barclays analysts expect rhodium deficit for 2020 to increase around 107,000 oz, while Standard Chartered's Cooper believes rhodium will now be undersupplied by around 70,000 oz in 2020.

Gradual supply response over time

Heraeus said that over time there is likely to be a gradual supply response, though projects to maintain existing output levels "will be easier to motivate than projects to expand PGM output in South Africa."

Nedbank analyst Arnold Van Graan told Platts that South African PGM producers may possibly look at available options in terms of restarting mothballed operations, "but it's important to note that there is no such thing as quick ounces."

"Quick ounces is probably at best, when talking about rhodium ounces, 12 months away, when talking about meaningful increase in rhodium output. So I think that's the misnomer, when people think 'We can just open up mothballed mines and we are going to get a big supply of rhodium,' that's not the case," Van Graan said.

"Then you've got to say 'is there a will to do it?', 'What about labour?' Because you have to remember that if you sign on people and the rhodium price turns, you're going to open up what was previously a marginal mine because the mothballed mines were closed for a reason," he added.

Heraeus said gasoline light-vehicle sales are likely to recover and with tightening emissions legislation could lead the rhodium market to experience widening deficits, and in turn keep prices elevated.

The Johnson Matthey, or JM, rhodium London base price on Nov. 17 stood at $14,800/oz, down 1.3% week on week. The JM price is for metal in sponge form with minimum purity of 99.9%.

The S&P Global Platts New York Dealer rhodium price range jumped to $14,200-$15,000/oz for the Nov. 6-12 period from $12,800-$14,500/oz for the Oct. 30-Nov. 5 period. The price reflects transactions of rhodium sponge between dealers, refiners/recyclers, investment banks and industrial consumers.