Update on Rare Earth Metals

Unlike many other commodities, the group of 17 rare earth metallic elements does not trade on any futures exchange. On November 15, 2021, in an article on Barchart, I highlighted the bullish price action in rare earth metals. In that piece, I chronicled the move in the VanEck Rare Earth Strategic Metals ETF product (REMX) that moved from $23.91 in March 2020 to $123.38 on November 8, 2021. 

REMX is one of the few tools for those looking to participate in the rare earth metals sector. In nearly September 2022, the shares were below the $100 level, which could be an excellent area to begin building an investment position in the metals required for many essential products. 

REMX made a slightly higher high

Bull markets rarely move in straight lines. In mid-November 2021, the REMX ETF product was near the high at the $123.38 level.

The chart illustrates that REMX made two higher highs after mid-November, reaching a peak of $127.50 in early April 2022. The rare earth metals ETF product ran out of upside steam and corrected to a low of $77.17 in mid-July, a 39.5% decline. Rising interest rates, a strong US dollar, and the economic slowdown in China weighed on all commodities and raw material-producing shares, and rare earth metals and the REMX were no exception. 

The geopolitical landscape with China has changed

The worldwide political landscape underwent significant changes in 2022. As the impact of the pandemic declined, global tensions rose. In early February, at the Beijing Winter Olympics opening ceremony, Chinese President Xi and Russia leader Putin shook hands on a massive trade package and a “no-limits” support alliance. A few weeks later, Russian troops crossed the Ukraine border, starting the first major war in Europe since WW II. 

Russia long considered Ukraine part of Russian territory in Western Russia, while the US and NATO countries believe Ukraine is a sovereign country in Eastern Europe. In early September, the war continues to rage. 

Meanwhile, China’s Taiwan policy is that the independent Asian country is part of Chinese territory, while the US and its allies support Taiwan’s sovereignty. Over the past months, tensions have increased as the US Speaker of the House visited Taiwan despite Beijing’s strong objections, and military exercises in the Taiwan Straits have increased.

The bottom line is a bifurcation between the world’s nuclear powers, with China and Russia on one side and the US, Europe, and Japan on the other. The geopolitical landscape will likely impact trade. Russia is using natural gas and fertilizer supplies and exports as economic weapons against “unfriendly” countries supporting Ukraine. China could do the same with rare earth metals and minerals if the tensions continue to increase. China dominates global rare earth metal and mineral supplies via domestic production and worldwide investments. 

The US makes a move to address Chinese dominance

As trade tensions between the US and China rose during the previous US administration, former President Trump ordered the Defense Department to fund more at-home output of rare earth elements for military-grade products and clean energy technologies. The Biden administration ordered the Defense Department to consider at least five metals- lithium, cobalt, graphite, nickel, and manganese, essential to national security.  The Defense Production Act earmarked more funding for US mining. 

China’s share of rare earth production has declined since 2016 as other countries increase their output. 

Source: Statista.com

The chart shows that Chinese output fell from over 83% of total annual production to just over 60% from 2016 through 2021. However, China’s position remains dominant, with over half the world’s output. 

Meanwhile, the annual rare earth metal demand doubled to 125,000 tons over the past fifteen years and is projected to reach 315,000 tons in 2030. Increasing requirements for green technologies and electronics are putting upward pressure on the demand side of rare earth metal’s fundamental equation. Moreover, as the world becomes more dangerous from a geopolitical standpoint, the demand for increased military products will only put more upside pressure on the demand. 

A long-term chart shows REMX’s upside potential

The $127.50 peak in REMX in early April 2022 was not the ETF’s all-time high. 

The chart shows REMX reached its all-time high in 2011 at $346.92 per share. The composition of the ETF changed over the years as it has gone from holding shares in many Chinese producers to owning Australian, US, and other non-Chinese producers. 

Moreover, rare earth metals and minerals prices reached peaks when the REMX rose to nearly $350 per share. China increased production to take advantage of the high prices. Still, the strategic output increase also inhibited competition as lower prices made it less likely for other countries to increase output, cementing China’s dominant position in the market. 

REMX’s top holdings and an above-market dividend yield

The REMX ETF was trading at around the $102 level on September 12. The midpoint of the move from $127.50 in April to $77.17 in July stands at $102.34. The top holdings of the ETF include:

At the $102.34 level on September 12, REMX had over $863 million in assets under management. The ETF trades an average of over 103,000 shares daily and charges a 0.53% management fee. REMX pays shareholders a $5.89 dividend, translating to an above-market 5.74% yield. The dividend pays for the annual management fee in under two months. 

The demand for rare earth metals is rising, and the US and other allied countries are scrambling to increase output to reduce the dependence on Chinese supplies. REMX could benefit from the current market dynamics that are critical for technological advances. 

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