Rare Earths Offer A Volatile, Yet Profitable Long Term Play

By Aaron Levitt | October 09, 2013 AAA

At this point, it’s no secret that the world’s long term thirst for commodities continues to grow. While most investors know about the opportunities in heavily used natural resources like oil or steel, there are plenty of other opportunities out there off the beaten path. Demand for rare earth and critical metals continues to rise as the world's technology becomes more complex.

While a volatile bunch, betting on the rare earths with a longer term timeline could prove to be a very profitable proposition for investors.

Rising Demand, Limited Supplies

While you may not have heard of Neodymium or Terbium, numbers 60 and 65 on the period table respectively, they are quickly becoming necessities in the global economy. Neodymium magnets can be found in everything from gigantic wind turbines to vacuum cleaners. Terbium is found in every compact fluorescent light bulb. Essentially, these forgotten minerals form the backbone of our modern society, finding their way into applications and devices like Apple (NASDAQ:AAPL) iPhones, motors, solar panels and computer chips. These elements are an absolute necessity to run our lives in the twenty-first century, yet many investors have zero exposure to these important elements.

According to an IHS Chemical (NYSE:HIS) research report, as of the end of 2012, global demand for rare earths was around 145,000 metric tons. That worldwide demand is forecasted to rise by 7.6% to 180,000 metric tons, by 2015. China’s consumption of this critical minerals is set to grow at 8.3% annually.

However, there are some major roadblocks to those demands.

Supply of these minerals was limited to just 113,000 metric tons in 2012. Perhaps, more critical is the fact that a major proportion of the world’s rare earth reserves are located in China. The Asian Dragon accounted for more than 85% of world rare earth production in 2012, and consumed approximately 70% of what it produced in house. China has stated that it would not use its dominance of these materials as a bargaining tool or bully other nations. However, it has cut exports of the minerals on environmental grounds before and recently began building a surplus to bolster its own reserves.

This creates some big swings in prices for the critical metals as Chinese export decisions weigh heavily on the market.

A Strategic Metals Portfolio

Demand for strategic minerals like Lithium and Europium will continue to increase as they are critical components for a variety of new technologies. Energy efficiency measures, consumer electronics, new infrastructure and green renewable energy will all play a major role in this demand escalation. Some miners like Rio Tinto (NYSE:RIO) do have some exposure to these minerals. However, it's small. Luckily, there are some direct plays as well.

Following a recent reverse split, the Market Vectors Rare Earth/Strategic Metals ETF (NASDAQ:REMX) could be a great overall arching play on the theme. The ETF tracks 24 miners of these metals including Avalon Rare Metals (NYSE:AVL) and RTI International Metals (NYSE:RTI). So far since its inception in 2010, REMX hasn’t lived up to its promise and has lost about 19% annually- hence the recent reverse split. Yet, with rising demand amid supply constraints, the longer term picture could be rosy for the fund and it investors. Expenses are a relatively cheap 0.59%. Investors may also find the Global X Lithium ETF (NYSE:LIT) of interest as well.

If investors were going to place their bets on one producer of rare earths, it would have to U.S. leader Molycorp (NYSE:MCP). The company has 26 facilities across 11 countries. Its focus on downstream operations makes the firm a direct play on the prices of rare earths. With China beginning to stockpile and getting tougher on exports, Molycorp could soar. Already, shares have popped about 12% since those reports surfaced last week about the hoarding.

The Bottom Line

The commodities space is full of opportunities for investors willing to go off the beaten path. One such long term opportunity is in the strategic and rare earth metals. As we increasingly turn towards technology, demand for these minerals will continue to surge.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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