There are two major considerations one makes as an investor. What is the available supply and what is the present and future demand for the product or commodity? Rare earth minerals have numerous industrial purposes and supplies throughout the world have become dependent on one nation. This was not a major concern to most manufactures when it was the United States. In the 21st century the major supplier of these vital industrial minerals has been China.
The industry on the whole is worth trillions of dollars similar to oil and natural gas.
When China decided to manipulate the rare earth mineral market a few years ago prices for this commodity skyrocketed. The stocks in companies involved in the extraction and processing of rare earth minerals went through the roof. Increases of 500% and beyond were seen within a year as nations around the world were fearful that supplies would be inadequate for industrial needs. This was the state of affairs in 2011.
You might think that after this experience numerous countries around the world would make sure that this situation would be rectified by a diversification of supply. You would be incorrect. As of 2013 China is still responsible for 90% of world production. That is an unpleasant prospect for a number of nations interested in safeguarding future supplies.
It is also an investment opportunity for a number of companies that are interested in developing this resource in various nations around the globe. As a strategic resource a simple stockpiling of rare earths will not suffice in the long term. A smart investor might consider a timely investment in this industry now, it would allow one to take advantage of future price increases.
Why are rare earth metals (REM) important? They are needed in most high tech electronics and gadgetry industry wide. There is also a major usage of these minerals in many different military applications. In the United States REM are mostly used in the production of battery alloys, ceramics and magnets. The importance these elements have to the defense industry cannot be overstated. They are used extensively in computer control of guidance and maintenance of defensive systems. REM use is critical in drones and fighter jets.
REM are also used in many other industries including in the manufacture of stainless steel, infrared lasers, portable x-ray machines, nuclear medicines, fiber optics, lasers, nuclear batteries, welding goggles and oil refining to name just a few. They can also be found in everyday consumer products such as microwave filters, spark plugs, energy-efficient light bulbs, gas mantles, camera lenses and as a catalyst for self-cleaning ovens.
Colors like yellow and violet found in glass, enamels and ceramics are often the result of these minerals being employed in the manufacturing process.
The importance of these elements to industry became quite clear when China decided to halt shipments of REM in 2010 to the country of Japan. Japan is the world’s largest importer of REM. The diplomatic crisis which led to a cutoff of supply of REM to Japan for just 2 months ended up crippling the high technology industry in that country. After this incident Japan took steps to diversify its supply and reduce dependence on Chinese sources. Part of the problem with the alternate supply strategy is that China most likely holds half of the world’s supply of REM. It is estimated that China at present has reserves of 55 megatons (Mt).
As the world’s main supplier of REM China has used this near monopoly to its advantage. It has been able to induce numerous companies to relocate to China or to enter into partnerships to guarantee supplies of REM. Joint ventures and mergers were often the price that was exacted to make sure the supply of REM continued uninterrupted.
The United States has the next largest reserves at 13 Mt and India takes the third rank with just 3.1 Mt. Despite the lower reserves for India that nation has decided to move forward with plans to triple production by 2017. The increasing demand for REM and the need for self sufficiency is a paramount concern for India. It is not hard to fathom that many other nations are also interested in developing their own resources and having a number of different suppliers.
Another future source of REM could well be North Korea. The total value of this resource there may well be in excess of $6 trillion USD (Unites States Dollars). However for now, because of the present configuration of that country, the exploitation of this newly discovered resource is unlikely.
The situation in North Korea may be unique but it is part of the difficulty in the development of a domestic REM industry. REM are not found in abundance in most areas of the world and where they are found it is not particularly easy to develop the resource.
What are rare earth minerals? These are 17 mineral elements that have gained increasing importance in the manufacturing of high technology components. The minerals themselves are really not that rare. The problem is these metals are rarely found in economically viable quantities.
The list of REMs are as follows: Scandium, Yttrium, Lanthanum, Cerium, Praseodymium, Neodymium, Promethium, Samarium, Europium, Gadolinium, Terbium, Dysprosium, Holmium, Erbium, Thulium, Ytterbium, and Lutetium. Despite the name for these metals as a whole; the only element that is actually rare is promethium. This scarce metal is highly unstable and radioactive.
An additional challenge is the difficulty in separating the minerals after they are mined. Their extraction from the ground is only the first step. The processing takes skill and is capital intensive. Why? These particular elements have very similar chemical properties and are not easily differentiated.
The high cost of production and processing is complicated by the volatility in the market for REM’s in general. Given the over reliance on China for REM, nations like Australia and the United States have forged ahead with investments in the industry. In the West, making a profit is difficult due to high labor costs and the difficulty in meeting strict environmental regulations. Many of the companies who attempted to enter the market when prices where at their highest from 2010 to 2012 found their balance sheets in trouble when the REM commodity prices plunged in 2013. A number of them ended up bankrupt.
Nations with low labor costs like India, Myanmar, (Burma), Mongolia, and eventually even North Korea will continue to have the advantage in at least the mining end of this strategic and increasingly vital industry. For now it is likely that China will remain the largest producer as well as being able to offer the most competitive prices. Their only competition will be India, a nation with much smaller reserves.
There is a feeling that prices have already bottomed out. A number of companies will be able to stay in business as a result of government and other industry subsidies. Another set of companies have learned to diversify their assets across the globe and to streamline their operations to stay in business. These are the companies who will be able to take full advantage when the price catapults up in the future. It is not a matter of if the price will dramatically increase but when? As with oil and other commodities there will be shocks with REM that will have the price gyrate up and down with market conditions.
An investor will be unable to purchase the commodity itself like other precious metals such as gold, silver, palladium and platinum. It is not easily available like other metals in an industrial sense either for example copper, nickel, zinc, titanium, etc.
The investor will need to purchase stock in companies that are involved in the exploration, mining and processing of REM. These would include Lynas Corporation and Galaxy Resources Ltd., in Australia and Molycorp and Rare Element Resources Ltd. in the United States. These enterprises are four of the most successful. Other prospective companies include Azimut Exploration Inc.,Fancamp Exploration Ltd., Ucore Rare Metals, Gold Canyon Resources Inc, Globex Mining Enterprises Inc, and Focus Metals, all of which are Canadian in origin.
The recommendation here would be to invest a small portion of your stock portfolio in this industry. This would allow one to benefit from future price increases that will be the result of rising demand and speculative postulation in response to international events.