Investing in the Rare Earth Elements Market: Key Considerations

Investment in rare earth elements offers an excellent way to diversify your portfolio; however, it also comes with its own set of risks.

Rare earths play an integral role in numerous technologies, from smartphones and cars to wind turbines and beyond. But as an extremely concentrated commodity with the potential for disruption or price manipulation in major producing nations such as China, they're vulnerable to potential disruption and manipulation by these countries.

Mining Companies

Rare earth elements may only exist in low concentrations throughout Earth's crust, yet extracting and processing them is extremely challenging, making the ore and its finished products relatively expensive and thus leaving mining companies exposed to significant financial risks. Furthermore, their industry is dominated by just a few global players with strong market shares who may be vulnerable to changes in raw material prices.

China has successfully consolidated many of its rare earth mineral producers into large conglomerates for several purposes, including improving cost competitiveness, increasing production efficiency, strengthening Beijing's control on pricing and curbing illegal exports as well as raising environmental standards in this sector.

MP Materials (MPM), the owner and operator of California's Mountain Pass Mine, faces numerous environmental problems, one being toxic waste ponds that contain elevated levels of thorium. A study by Institute for Applied Ecology indicates this may be caused by its ineffective thorium treatment plant which leaks harmful toxins into local waters.

Sub-Saharan Africa presents China with an opportunity to exercise its geopolitical muscle by exploiting some countries that possess rare earth minerals but are economically fragile, creating leverage for negotiations of debt-relief packages and provision of assistance in exchange for accessing mineral resources. China can capitalize on these economic vulnerabilities through political maneuvers, offering loans or debt relief packages in return for access to those rare earth mineral reserves.

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ETFs

companies involved in producing, refining and recycling rare earth elements face significant risk. Their share prices may fluctuate significantly and shortages of strategic metals may arise, while they could even face environmental damage claims from customers or regulatory authorities.

Investment in rare earth elements through ETFs is one way to gain exposure in this niche market. These exchange-traded funds track a given index and can be traded on major US stock exchanges; for instance, Market Vectors Rare Earth/Strategic Metals ETF (REMX) tracks performance from companies engaged in mining and processing rare earth minerals and strategic metals, with Molycorp and Lynas as major holdings in its portfolio.

Neo Performance Materials ETF (NNE) is another popular ETF. This fund specializes in companies engaged in exploration and processing of rare earth minerals; however, its portfolio also contains copper and lithium stocks.

Although investing in rare earth elements ETFs carries risks, these investments may prove lucrative. With their increasing use in green technology and hybrid and electric vehicle manufacturing applications, their demand has skyrocketed rapidly - driving prices higher and increasing investor enthusiasm in this space. China has even restricted exports, further driving investor interest.

Stocks

Rare earths can be invested in several ways. One method is through mining companies that extract and produce these elements; alternatively you could purchase ETFs that hold a diverse basket of rare earths; these include VanEck Rare Earth/Strategic Metals ETF (REMX), established since 2010, as well as Optica Capital's Rare Earth/Critical Materials ETF (CRIT).

Rare earth stocks carry inherent risks that make investing difficult, particularly compared to other stocks. Mining companies, like any business, can be subject to price fluctuations of commodities they process and may also be affected by environmental regulations that alter production costs - creating unique risks unique to this sector.

Investors should take note that China controls approximately 80% of known rare earth reserves and exports nearly all its production, creating significant geopolitical risks for countries that rely on these materials for technology, military, or energy purposes.

Western companies' efforts to diversify supplies of rare earths from China have been slow in coming, due to low REE prices since 2011. While manufacturers may take years to ramp up on lower-cost Chinese raw material sources, some may need to switch if a crisis such as trade war with China or natural disaster threatens supply chains disrupts these efforts.

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Options

China dominates the rare earth elements market with the world's largest reserves, exporting much of their production to countries like Japan, the US, India and Brazil that depend on imported Chinese imports for maintaining supply-demand equilibrium. Unfortunately, in recent years this imbalance has widening as China increases its charges when exporting products so as to preserve depleted reserves.

The United States produces and sells most of the magnets used in lithium-ion batteries and nearly all NiMH battery materials globally, giving it considerable leverage over its rival nations. A recent RAND study looked into what steps can be taken by the U.S. to break its dependence, finding that current plans likely do not go far enough, fast enough.

Global demand for rare earths is expected to surge over the coming decade, driven by an expanding automotive sector that utilizes rare earth metals like cerium, neodymium and praseodymium in making motor vehicle magnets. Furthermore, increasing hybrid vehicle sales will likely drive increased usage of rare earth elements like neodymium in nickel metal hydride (NiMH) batteries.

Construction activity will likely increase the demand for ceramic tiles made of rare earths like yttrium, lanthanum and neodymium; and Asia Pacific consumer electronics manufacturing could further drive their use.