Understanding the Investment Potential of Rare Earth Metals

Rare earth elements play an integral role in various emerging technologies, including hybrid and electric vehicles, green engine technology, fiber optics and strategic military weaponry. But their availability lags behind demand.

REEs can be best invested in by choosing to invest through mining companies that extract and produce them, or exchange-traded funds (ETFs) that hold diversified baskets of REE stocks - though both investments come with risks attached.

Supply and Demand

Rare earth elements are an essential component of high-tech manufacturing. Common uses for rare earth elements include magnets, hybrid vehicles, fluorescent light bulbs and rechargeable batteries. Due to their unique physical properties, rare earth elements cannot be obtained in any other form other than being extracted from the ground - making them a sought-after commodity that mining companies can charge premium prices for.

In the 1970s, China's Communist government under Mao Zedong began developing its manufacturing and global trading capabilities to ensure domestic prosperity while simultaneously maintaining political stability. China quickly established itself as the global source for rare earth metals before purchasing out American companies to gain full control of this lucrative market in 1990s.

By 2019, China held an estimated 80% share of global rare earth production capacity, prompting manufacturers to search for alternative sources of these minerals in order to lessen reliance on China and avoid geopolitical risk. New technologies were created that used less rare earth elements or substituted them with cheaper options such as cobalt or lithium; recycling efforts also increased for electronic waste which can contain rare earth elements.

But the growth of alternative sources of rare earths does not come without its risks. Many new technologies require costly infrastructure such as mines and processing plants; mining operations may be exposed to political events like China-Japan conflicts over disputed islands that led to export embargoes of rare earths in 2019.

Because the market is highly sensitive to supply chain disruptions, investors may find it challenging to accurately forecast future price trends; this is especially true of investors specializing in certain technology sectors.

Investors interested in technology or environmental investments have several ways of getting exposure to this sector and its opportunities. Direct investing into rare earth mineral producers through shares of mining companies or investing in VanEck Vectors Rare Earth/Strategic Metals ETF (REMX). This ETF gives access to companies involved with extracting and refining rare earth minerals.

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Technology

Rare Earth Metals, comprising of 17 elements with atomic numbers 57 through 71 plus scandium and yttrium, are used in numerous high-tech components, including permanent magnets, catalysts, rechargeable batteries, LED lights and displays, advanced military weapons systems as well as energy technologies like wind turbines and electric vehicles. Due to limited supply, renewable energy technology and hybrid and electric vehicle adoption is expected to lead to an increase in mining activity for rare earth metals - and as demand for these elements grows globally so does demand for production - creating an opportunity for investors interested in investing in companies involved with rare earth metal production.

China controls 60-60-85 of mining operations, 85% of processing capacity and 90% of global permanent magnet production - accounting for 60% mining operations, 85% processing capacity and 90% of permanent magnet production worldwide. But many experts fear Beijing's dominance may be threatened if other countries seek to break its grip.

As demand increases, companies around the world are exploring alternative means of extracting and processing rare earth metals - many of these methods may one day make conventional mining obsolete - to meet demand. Unfortunately, however, new rare earth mines typically take several years to bring online and require significant capital investments.

Arms race between the United States and Soviet Union during the Cold War contributed to government funding of rare earth mining research, including upgrades in radar instruments used by fighter jets and satellites (utilizing extremely rare metal samarium ) as well as stronger aluminum for tanks and aircraft (utilizing yttrium). Some of these advances enabled nuclear weapon development as well as improved guidance systems for guided missiles.

These minerals have become even more prevalent since then, being employed in numerous applications. Rare earth compounds are now widely found in hybrid and electric vehicle batteries containing several pounds each, as more consumers seek alternative fuel vehicles such as these hybrids and electrics. Catalysts, phosphors for air pollution control and glass polishing and ceramic lighting lighting use rare earth compounds; though other substances can sometimes serve similar roles but usually provide less effective and/or higher cost alternatives.

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Sustainability

Rare earths are dispersed throughout Earth at low concentrations, making them hard to access and extract. Julie Klinger of the University of Delaware in Newark noted that mining companies must undergo complex and often environmental-hazardous processing procedures before producing usable material from it; mining companies therefore strive to find ways to cut out this step and produce metals more efficiently while less damaging the planet.

China controls approximately eighty to ninety percent of global rare earth element mining capacity; their Bayan Obo mine in Inner Mongolia covers an astounding 4,800 hectares - half the size of Florida's Walt Disney World resort; yet only a tiny percentage of their output is exported; furthermore, this place ranks among one of the most polluted sites worldwide.

But China is beginning to pay the price for its dependence on REEs: when China reduced exports in 2010 in order to leverage a trade dispute with Japan, prices skyrocketed. Recently, however, Chinese officials have begun taking steps to mitigate any environmental damages associated with their operations, potentially helping stabilize global prices in turn.

At present, there is a growing movement to move rare earth production closer to home. This is especially crucial given that energy transition requires far more minerals than conventional vehicles or wind turbines and that its pace is likely only set to accelerate with climate change.

Investors should look at several smaller producers that are developing innovative processes for producing REMs. Companies such as Aclara Resources could make waves in the market with their eco-friendly extraction process and create lasting change in this space. As the world transitions towards sustainable and responsible growth, producers specializing in clean technology should see increased demand. Investors who invest now may enjoy a healthy return as the energy transition progresses. Rapid and orderly energy transitions require investments far exceeding anything seen previously; otherwise bottlenecks could delay transition efforts and raise costs significantly.

Risk

The periodic table of Earth's known elements offers many investment and trading opportunities for investors and traders, from base metals and precious metals that are commonplace to rare earth metals which provide vital resources for green energy production and emerging technologies. Investors and traders can invest in these minerals through share offerings, ETFs or options and futures contracts.

Investors looking to invest in rare earths through mining companies are typically the best bet. Investors should select companies with proven exploration and mining techniques, reasonable market shares and consistent output - such as MP Materials Corp (NYSE: MP) and Rare Element Resources (REEMF) in the US or Lynas Rare Earths Ltd (ASX: LYC) in Australia as examples of such firms; otherwise the VanEck Vectors Rare Earth/Strategic Metals Index Fund (REMX) provides access to an assemblage of rare earth stocks diversified among rare earth metal stocks stocks for investors.

Investment in rare earth mining companies should not be taken lightly; many rare earth elements can be found in mineral deposits with radioactive elements that pose risks of disruption to ecosystems, contamination of water tables and environmental issues during extraction processes. Therefore, investors must always read reports, conduct due diligence and understand any associated risks before making their decisions on investment decisions.

China currently dominates rare earth mineral production and processing capacity in the world, leading to concerns that it might use this dominance to gain economic or strategic leverage by restricting or delaying exports of these minerals to gain an edge on rival suppliers. Meanwhile, other countries are trying to decrease their reliance on Chinese suppliers while diversifying their sources.

African nations should utilize this opportunity to capitalize on their endowments of rare earth minerals by increasing participation in global supply chains and strengthening trade partnerships with friendly countries, which will also serve to expand Africa Continental Free Trade Area (AfCFTA), promote economic growth and development and further support economic development in Africa.