After the euphoria fades from a sector, forward-thinking investors often have the chance to pick up some quality assets on the cheap. Right now, the commodities sector is full of such examples. Everything from copper to coal is currently trading down relative to the long-term picture for hard assets.
One quite intriguing opportunity exists in the so-called rare earths, or strategic elements. Prices for these minerals, used in everything from TVs to lasers, have fallen in the face of slowing global growth. For investors, these often misunderstood materials could be an interesting, though volatile, bet.
And perhaps the best way to do that is through the Market Vectors Rare Earth/Strategic Metals ETF (NYSE:REMX). But first, here’s some important background about rare earths.
While neodymium, cerium and thorium aren’t well known outside a chemistry classroom, these elements play an important part in modern living. They’re critical components of many electronic devices such as cell phones, flat panel TVs, electric cars and hard drives. Those fancy CFL light bulbs, which are set to take center stage after the recent incandescent bans, use terbium as one of their key ingredients. And roughly one ton of neodymium is needed for every megawatt of generating capacity a wind turbine has.
Chinese Roadblocks
As the world continues to modernize and middle classes across emerging markets keep expanding and consuming, rare earths will see greater demand. Analysts estimate that the market will reach 200,000 tons by 2014, up from about 60,000 tons today.
However, some pretty serious roadblocks stand in the way. China has emerged as the world’s major player in a variety of these critical metals. Even though rare earths aren’t actually that hard to find, tough environmental standards in the developed world have pushed their processing to less strict nations. Reports by the U.S. Geologic Survey show that China now produces roughly 95% of the world’s rare earth oxides and is also the major producer of the minor metals, accounting for 34% of global production.
The real kicker for rare earth prices has been China’s continued reliance on export quotas. The nation has reduced its rare earth oxide exports by 40% over the last few years. The Asian superpower has said several times that it wouldn’t use its dominance of these materials as a bargaining tool, but the continued export quotas have driven prices sky-high. For example, lanthanum oxide peaked at $140 a kilogram in July, and cerium rose from $6 a pound to $77. Overall, prices for rare earth minerals rose an average of 30% over the last few years.
But recent months haven’t been good for rare earth pricing, thanks to fears about another global slowdown. In addition, a variety of rare-earth-using manufacturing firms across the U.S., Europe and Japan have begun moving production to China to skirt the quotas. Inventory drawdowns and switching to alternative materials have also been gaining speed. So short-term demand has waned.
Buying the Bottom
However, this lower demand could actually be worse for the end users. The New York Times reports that China’s Commerce Ministry has historically penalized exporters for not using all of their quotas by giving them smaller quotas the next year. This in turn could create another shortage and keep prices firm.
And for investors, the recent dip in shares of rare earth miners could offer a great buying opportunity in the face of continued shortages over the longer term.
According to analysts at Technology Metals Research, 250 to 360 public companies currently claim to be exploring for or mining rare-earth metals. However, only about 25 have viable resource estimates or mining projects with decent prospects. For the individual investor, navigating that field can be a daunting task, which is where the Market Vectors Rare Earth/Strategic Metals ETF comes in.
The exchange-traded fund follows 28 different firms, including heavy hitters like Molycorp (NYSE:MCP) and Australia’s Lynas (PINK:LYSCF), and it provides exposure to a variety of other metals producers outside the realm of rare earths. The ETF features good trading volumes and is currently about $11 below its 52-week high. For investors, this broad approach to a very volatile sector is hands-down the best strategy for those with longer timelines.
Concerns about the global economy’s health have clearly pushed rare earth prices down. However, given China’s continued dominance as a producer and ever-growing demand long term, now could be a good time to dip into this sector via the Market Vectors Rare Earth/Strategic Metals ETF.
