This precious metal ETF has returned more than 600% over two years

Right now, both electric car makers and rhodium are soaring in price – but that can’t last forever, explains Tom Bailey. 

It has been a good year so far for commodity exchange-traded funds (ETFs). The WisdomTree Broad Commodities ETC (LSE:AIGC) is up by around 7.5% in sterling terms, while the L&G All Commodities ETF (LSE: BCOG) is up by around 8%.

Behind this surge in commodities is the general pick-up in economic growth. Oil and other industrial metals experience higher demand when there is more economic activity, so their prices rise and fall on the back of economic optimism. More broadly there is also a sense that some commodities will see increased demand, with much talk of a new commodities supercycle.

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One commodity that stands out is rhodium, a precious metal. Since the start of the year, the Xtrackers Physical Rhodium ETC (LSE:XRH0) has returned 60%. However, this strong performance isn’t just spurred by the economic reflation trade powering the price rise of other commodities. Indeed, on a one-year basis, the ETF has returned over 300%. On a two-year basis, the ETF has returned 640%.

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What’s driving the price of this obscure commodity? On the demand side, it is increased concern about car emissions. The biggest buyers of rhodium are car manufacturers. It is used in engine exhausts to neutralise harmful nitrous oxides. Car makers, therefore, need more of the metal to meet tightening emissions regulation requirements. Many have pointed at recent stricter regulations in China as fuelling demand for rhodium.

However, there is also an issue of supply. S&P Global Platts, which provides commodity information services, notes that due to the chemistry of the metal it takes a lot longer to refine than other similar metals such as platinum or palladium. As a result, producers respond slower to a surge in demand.

Covid-19 has also hamstrung supply. S&P Global Platts observes that there have been issues getting new labour-intensive conventional mines working in South Africa as a result of strict compliance with Covid-19 rules. South Africa accounts for around 80% of global mined rhodium supply, produced by a small number of companies.

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All of this has coalesced to provide anyone with the foresight to buy the rhodium ETF with envious returns. Of course, I have no idea whether the precious metal will continue to rise in price. Perhaps new supply will come online soon; perhaps demand will continue to outpace what miners can provide.

However, it is interesting to think about rhodium in relation to the very popular investment theme of electric cars. As noted above, rhodium’s primary use is to neutralise the emissions from cars. But electric vehicles (that is, fully electric, not hybrid) have no use for this. If, as the price of electric car companies suggests, we will soon see the mass adoption of electric cars, demand for rhodium will collapse. Right now, both electric car makers and rhodium are soaring in price – but that can’t last forever.