Rare Earth Metals

Rare earth metals or rare earth elements (or REEs) is a generic name for 17 metals widely used mostly in high-technology devices, such as mobile phones, laptops, flat screen televisions, hybrid car batteries, lasers, optics and military equipment. New uses for these metals are being constantly found, but more on that later.

Despite the name, these metals are not actually rare in nature. The name refers to the fact that they are rarely found in a pure form and are usually mixed with other minerals, which makes extraction complicated and costly. Further, mining and refining of rare earth metals is environmentally challenging, due to acidic and radioactive byproducts. This is why most countries don't produce REEs. This has led to a reduction in reserves of these metals and left the bulk of production to less environmentally conscious companies and jurisdictions. China has expanded its production and, at least on the surface, looks to have a near monopoly on the industry. According to the US Geological Survey, China possesses one-third of the world's reserves and produces 97% of global supply.

None of this was a problem until China started introducing trade limits. Dramatic changes took place in 2010, when Beijing officially decided to cut export quotas on rare earths by 72%, to 35,000 tonnes, far below the levels of world consumption. Quotas were further reduced by 35% in the first half of 2011. Steep export taxes were applied, too. As a result, REE prices skyrocketed.

Rare Earth Metals

Consumers lost some of their appetite for the now-expensive metals, and most REEs dropped in price – some of them by as much as two-thirds. Prices remain above historical norms, however, and were so lofty that exporters used only half of the Chinese quota allocations last year.

It's hard to miss the steep rise in prices from mid-2010 to April 2011. Should we expect similar price spikes in the future? And what's the long-term trend?

Analysts have opinions supporting both bullish and bearish outlooks. Some think another price rally is possible, since the industries using REEs are on the rise and also because there are, in the majority of cases, no substitutes for REEs. Neither is there an immediate solution to the market conditions caused by China's supply policy. Others believe that the REE market will face a surplus in 2012 and that prices will thus correct further.

The REE market is precarious because supply is artificially restricted. This imbalance can't be sustained for long, though, because industries and companies that use REEs need to have predictable and stable long-term supplies of the metals and hopefully at reasonable prices. It thus seems reasonable to assume that the market will find ways to decrease the effects of China's policy.

It's clear that REEs have investment merit. These elements are crucial and irreplaceable for a lot of consumer uses.

However, the rare earth metals market is small, opaque, volatile, illiquid, and subject to manipulation. It's further complicated by a lack of reliable data, making it difficult to forecast and risky to play. It's also worth remembering that REEs are industrial metals, which are usually weak when the economy enters a recession – an outcome we think is more likely than not.

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