In this article I will share with you some more details about the impact of electric and hybrid cars to the rhodium demand, which will also be important for investors in the PGMs (platinum, palladium).

I received an email today from a reader who was worried what will happen to the rhodium demand and investments in the metal, if electric or hybrid cars production increase. In his opinion because more than 80% of the rhodium market demand is from catalytic converters, and in the long run fuel engines are doomed we have to pay attention to the electric cars development.

That’s why I will post here my reply to him as it’s a part of an analysis that I didn’t share with you in my previous writings. I will start with my own opinion that fuel engines are not doomed even in the long-run and that is because of the supply and existence of rare earth metals.

Now, let’s start with a little introduction. Hybrid cars are required to have catalytic converters because they have fuel engines along with electric engines. Hybrids do have catalytic converters and are not a threat to the rhodium demand.

Electric cars don’t need catalytic converter but here are my three main points why electric cars will never be of a much importance to the rhodium demand:

1. Rare Earth Metals in electric cars. There are not enough rare metals in the world to produce much electric cars. About 95% of all rare earth metals come from China, which lowered its export quote to world in attempt to save its resources for the decades ahead and for its own production. For example, electric cars use rare earth metals in their electric motors and car batteries like neodymium which is in deficit even at this increase of electric cars and other tech stuff.

Currently, every Toyota Prius uses 2.2 lbs (1 kg) of neodymium in each motor, while the hybrid batteries each pack 22-33 lbs. (10-15 kg) of lanthanium (another earth metal in short supply). In summary, even if we find more rare earth metals, they will be much more expensive which will make these cars much more noncompetitive to normal. Even now, electric cars are more expensive than gas because such rare metals.

2. Electric cars production. Even if you are not yet sure that I’m right in my assessment about the future of electric cars and their impact to the rhodium demand (which I believe will be very little), let me refer you to this: President Obama’s goal of putting 1 million electric cars on the road in the U.S. by 2015. Pike Research Forecasts 1 Million Plug-in Electric Cars by 2016. That’s not even 1% of the car market. How will such small share have significant impact to the rhodium demand?

For example, according to CSM Worldwide Inc. (IHS Global Insight Automotive), February 2011, if there is no recession and Asia keep buying cars as fast as now, just for one year the world will buy in 2012 – 81 million vehicles from 77.6 million in 2011, or 3.4 million vehicles more. That is just for one year. IDC predicts there will be 885,000 electric cars in North America, 780,000 in Europe and 2.7 million worldwide by the year 2015. So, basically in 4-5 years we will have approx 3 million vehicles without catalytic converters, while just between 2011 and 2012, the world will need 3.4 million vehicles more. It seems the world will not need more than 1 million electric cars per year in the next 5 years, so that can’t even absorb 33% of the annual world car demand increase, and is not even 1.5% of the world car production.

3. Impact of electric cars. If we have too many electric cars, we will probably run out of electricity. In order to increase rapidly the share of such vehicles, we will need to also increase the electricity production significantly. Of course that will offset some of the benefits of electric cars, and will probably create another problem – need for more electricity. I won’t go in more details, why it’s not so easy to produce much more electricity than now … I have covered solar, wind, nuclear, coal and other sources…  In this point I just want to show you that no idea, no matter how good comes for free and will change the world much. Every idea has its own price. Don’t think that electric cars that are emission free and will save us money for fuel are so efficient for our world and future.

In summary, electric cars are not a threat to the rhodium demand and they will have limited impact on it. Fuel engines are not doomed in the medium and even long-term (5+ years). Rhodium demand will keep increasing if there is no recession and Asia keeps growing.