Minor Metals Markets Are Not Transparent And Hedging Non Exchange Traded Metals Requires Great Skill

Implications: End users of minor metals for critical purposes, i.e., for purposes that are not economically or technologically possible without a particular minor metal, can hedge the required supply of metal by financing the producer's output, through offtake agreements, for example, and by being the buyer of last resort as well as the holder of a small strategic excess inventory to use as a barrier against a speculative corner. Contrary to that type of reasoning the unskilled and inexperienced trader in this story simply tried to extend his company's inventory out as far as he could as a way to manage supply interruption. He miscalculated badly and only achieved an enormous cost increase when he was actually trying to stabilize a supply.

Analysis: The rhodium market is very small. It is, perhaps, no more than 25 metric tons a year of new production. All of that production is as a byproduct of platinum mining, almost all of which is done in southern Africa.

The Detroit 'Three' as the shrinking, two public and one private, OEM automotive assemblers based in and around the former Motor City are now known utilize among themselves between two and four tons od rhodium a year for their combined global 'build.' This doesn't mean that they cooperate in obtaining or distributing rhodium; quite the opposite is true. It does mean, however, that the Detroit three use as much as 20% of the world's supply of new rhodium annually to construct somewhat less than 20% of the globe's annual production of motor vehicles using internal combustion engines in countries where the fitting of catalytic converters to manage the exhaust emissions is mandated by law.

One of the Detroit appears to have stumbled badly this year by attempting to manage the risk of the interruption of its critical rhodium supply by building a large inventory one that was too large by two or even three times by historical standards. As the inventory was being built it fulfilled its own destiny. The accumulation shifted the market into an apparent shortfall position, so the price climbed. As the price climbed the Detroit car company buyer panicked and believed he was seeing a genuine shortage. Therefore he paid more and bought more thus continuing to drive the price skyward.

Finally the car company's treasury reacted to having a billion dollars tied up in an inventory that had never before even approached such a dollar cost figure. It decided to sell off the inventory overhang, but, of course, there was no skill set in the company to manage such a sale by feeding the excess in small lots all over the world so large amounts were offered and the shortfall became a surplus as fast as it had become a shortfall. The price kept dropping and now the car company worried that it would be stuck with overvalued inventory so it accelerated the sale.

Has a lesson been learned/ Not at all. The car company has simply moved its unskilled primates to other branches of its corporate tree but the members of the group are the same unskilled and inexperienced team. The boss primate of this group is famous for saying that employees are interchangeable commodities. Anyway it is shareholder value that has been affected not the top team's paychecks.

Next time the primate-in-chief told them at the club "we'll do it right the next time" he noticed that the club had fewer members and remarked that he felt bad about the workers losing their jobs due to market conditions as he ordered the veal chop and a nice bottle of wine to be charged to the shareholders.