Investing in commodities has become more popular over the last few years as a variety of global macroeconomic factors has made the asset class an ideal play on growth and safety. In addition, the proliferation of products like the PowerShares DB Commodity (ARCA:DBC) has made it easy for retail investors to add exposure. In the case of the metals sector, much of this focus has been towards the precious and base metals. However, some of the best future returns could lie within the often ignored minor or critical metals sectors.
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Ignored but Extremely Important
For investors, the critical metals sector could be the place for high returns over the next decade. These forgotten minerals form the backbone of our modern society, finding their way into applications and devices like mobile phones, 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.
Prices for critical metals, which are defined as rare earth elements, minor metals (such as gallium) and strategic metals (such as molybdenum and titanium), have been rising in the face of a major supply/demand imbalance. As the planet's population continues to grow and become more high-tech, demand for these materials is increasing at a rapid rate. Analysts estimate that the market value for rare earths alone will reach 200,000 tons by 2014, up from about 60,000 tons today. Similar demand requirements are estimated across all the critical metals. Molybdenum consumption will double by 2020 and will require two new moly mines coming into production every year for the next eight or nine years to meet that demand. The current annual demand for manganese dioxide is around 270,000 tonnes. However, with the widespread adoption of various green and cleantech technologies, annual demand is set to rise to around five million tonnes between 2015 and 2020.
In the face of this demand come some pretty serious roadblocks. China has emerged as the major player in variety of these critical metals; the nation produces roughly 95% of the supply of rare earths. A report from the USGS shows that China also is the major producer of the minor metals, accounting for 34% of global production. China's recent decision to slash its rare earth exports has certainly thrown a wrench into cog of global industry. Many of the other critical metals are produced in less than desirable locations. For example, the majority of world's cobalt supply comes from the politically unstable Democratic Republic of Congo in Africa.
For investors, the long-term opportunity in these minerals is great and adding some exposure seems prudent. Some major miners like Rio Tinto (NYSE:RIO) do have some operations in this area, but it amounts to very little in the way of overall production. To that end, direct exposure is best. A great overarching play is the Market Vectors Rare Earth/Strategic Metals ETF (ARCA:REMX). The fund follows 29 companies associated with critical metals including Molycorp (NYSE:MCP) and RTI International Metals (NYSE:RTI). The fund is trading below its initial offering price.
The growth in global infrastructure spending is helping to boost the bottom lines of companies that produce minor metals used to strengthen still. Both molybdenum and titanium have seen their fortunes rise in the face of the strengthening global economy. With its near debt-free balance sheet and 2.7% dividend, Titanium Metals (NYSE:TIE) makes an ideal choice to play the growth in titanium, while both Thompson Creek (NYSE:TC) and General Moly (NYSE:GMO) are top picks in molybdenum.
Finally, some of the biggest bang for your buck could come from the junior miners in the rare earth space. Both Quest Rare Minerals (NYSE:QRM) and Avalon Rare Metals (NYSE:AVL) are a great way to play future supply, as they are set to come online around 2015.
The Bottom Line
While most investors focus on the precious and base metals, the real long-term action could be in the critical elements. Used in everything from Apple's (Nasdaq:AAPL) iPods to MRI machines, the demand for these minerals is exponentially increasing. For investors, adding a dose of these elements makes a great long-term proposition.
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