Rare earths: the new gold?
The recent discovery of the old continent’s largest rare earth site in Sweden has sparkled again discussions concerning the critical role of this niche category of metals. Being employed in most modern technologies and representing a meaningful component of the ongoing energy transition, rare earths have become a matter of national security. With regards to the dominance of China, most nations around the world, and in particular western ones, are actively trying to detach themselves.
What are rare earths?
Rare earths are 17 metallic elements which were discovered for the first time in Sweden in 1788. Although present all around the world, their “rarity” derives from being very hard to mine. They are in fact usually not present in high concentrations and mixed with other elements, sometimes radioactive. Moreover, their extraction entails a high energy consumption. Accordingly only a few countries have the expertise, equipment and facilities to successfully extract and process these materials. Until now China has held a lion’s share in the global production of rare earths, which has almost assumed the characteristics of a real monopoly.
Source: Geology.com, Evolution worldwide production of rare earths
Only the USA, Australia and Canada have very marginally been able to counter the dominance of China. Europe instead has to completely rely on external partners for its supplies of these metals. The wind could however be changing with western nations starting to aggressively invest, in order to restructure supply chains and internalize more processes. It is relatively recent the news of the US Pentagon subsidizing an Australian firm involved in this sector, Lynas Corporation. It will start building a facility in Texas for the processing and refinery of these metals, which should hopefully help on the path to self-sufficiency.
Why are rare earths of critical importance?
Rare earths are of vital importance as they have been major contributors for many technological advancements. They are in fact largely utilized for phones, computers, batteries, defense systems and monitors, just to mention a few. Moreover, as the shift away from fossil fuels like coal, gas and oil picks up momentum, rare earths’ demand will keep increasing. They are in fact essential components of renewable energy technologies like wind turbines, EV batteries and solar panels. The energy transition and the economies’ decarbonization will thus rely on this specific subset of metals. It appears clear why it is of paramount importance for most nations to secure adequate supplies of these materials.
How to invest in rare earths?
Unlike many other materials which can be traded for example through future contracts on regulated markets, this is not the case for rare earths. The only way to access this niche, but at the same time so relevant, category of metals is by investing in the companies involved in their extraction, processing and refinery. The financial performance of these firms is in fact strongly correlated with the demand and price evolution of rare earths. One could manually invest in stocks of companies involved in this sector. However, an ETF offering access to a diversified investment portfolio of rare earth companies could be an interesting alternative. By investing in multiple companies and different geographical areas, risks can be contained. Another interesting and actual factor for an investment in rare earths is on a fundamental level. Multiples have come down, relative to previous levels, while margins have become healthier. Naturally, the ETF contains risks which should carefully be considered; besides the general broad stock market and currency risk, there are also others relative to investing in emerging markets and smaller companies.
Source: Bloomberg, VanEck. Multiples referred to MVIS Global Rare Earths & Strategic Metals Index