New York -- (Kitco News) --Rhodium prices could rise substantially during 2010, driven largely by strong fabrication and investment demand, the CPM Group Platinum Group Metals Yearbook 2010 said Tuesday.

The report by the New York-based metals consultancy also said price support will be accentuated by the concentration in the metal’s supply and demand. CPM said about 72 percent of rhodium’s supply comes from South Africa. Output there has benefitted from the increased mining of the rhodium rich UG2 ore body.

“A shortfall of resources such as electricity, water and labor, however, could compromise mining activity in South Africa,” CPM said. The report noted such factors affected production in 2008 and helped drive rhodium to record highs.

CPM said that about 85% of rhodium’s fabrication demand comes from auto catalysts. “The concentration of fabrication demand has been and seems likely to continue to play an important role in driving the price of the metal higher during 2010,” CPM said in the Outlook.

"After weakening over the past two years, the global auto market is expected to show strength this year,” the report said. “This, coupled with the global tightening of emission standards focused on reducing NOx emissions, is expected to boost fabrication demand for the metal during 2010 and beyond.”

The Outlook noted that total rhodium supply in 2010 is projected to rise 4.8% to 1,054,820 ounces. In 2009, total supply was 1,066, 217.

An increase in South African production was largely responsible for the increase in rhodium min production, which was up 4.0 percent from 2008, CPM said.

South African rhodium production in 2009 was 722,407 ounces, up 14.1 percent from 2008 levels. The increase followed two consecutive years of decline due to a range of production problems that plagued the PGM mining industry in that country.

CPM said the growth rate in South African rhodium has been greater than the growth rate of South African platinum and palladium production. “This no doubt reflects increased focus on the rhodium-rich UG2 ore body and efforts to increase the recovery of rhodium from all ore processing, given the tight market conditions and high prices for this metal” CPM said.

CPM noted that investor activity in rhodium increased when the price was rising in 2008. The report noted that investors typically buy an asset when the price is on the rise, even though that may not be the best strategy.

“If investors purchased this metal at the time when rhodium prices were peaking in 2008 they may be highly unlikely to liquate their positions and most likely would hold on to their metal for at least a few years in anticipation of prices reaching those high levels once again, CPM said.

Likewise, the report said, those who bought the metal closer to $2,000 are not likely to liquidate their positions in anticipation of maximizing their profits. Several trading companies and investors bought rhodium in late 2008 and early 2009 when prices had dropped into a range around $1,050 to $1,400, CPM said.

The Outlook emphasized that hedge funds and wealthy individuals are typical investors in physical rhodium One Canadian retailer of precious metals this year began offering one ounce, five ounces and ten ounces of pure rhodium sponge. “There is a possibility that the investment market for this metal will expand following this move,” the report said.