The rare earth elements (REEs), or Lanthanoid series in the periodic table, are a group of heavy metals that are widely used in modern technologies. Smartphones, electric vehicles (EVs) and renewable energies are some of the modern products that depend on the unique magnetic and electrical properties of REEs to function. Each F-35 fighter jet, for example, contains 417 kg worth of rare-earth materials (around 5% of the plane). In recent months, these metals have become a focal point of ongoing U.S. -China geopolitical tensions as the Chinese Community Party (CCP) has openly discussed banning or curbing exports of REE to the world. China controls an incredible 80% of the global rare earth supply, meaning the curbing of REE exports is an intimidating strategic tool for the Chinese government to use at this time.
An upcoming review commissioned by newly elected U.S. President Biden into key American supply chains is expected to find that the States is overly dependent on China for the importing of REEs. Thankfully, despite what the name suggests, rare earths are actually in plentiful supply globally and only 23% of terrestrial deposits rest in China. Whilst mines with impressive output such as MP Materials’ Mountain Pass mine in California remain very much operational, the mining process is incredibly pollutive, prompting Western countries to largely shift demand to offshore locations such as China. Once mined, the refining process is also toxic to the environment, owing to the radioactive waste and strong acids involved. To circumvent this, companies such as American miner MP materials again outsource their raw metals to China for further processing because tightening pollution regulations would make domestic rare earth refineries a difficult and costly proposition to a Biden administration already firmly paving the way towards a greener United States. The situation naturally positions China as market dominating in both the mining and refining of REEs and gives it important leverage over its Western rivals.
The threat of Chinese export bans has had a noted effect on financial instruments. The MVIS global rare earth/strategic metal index (Fig. 1), which tracks the performance of the largest and most liquid companies in the global rare earth and strategic metals segment, has reported a 150% return over the past year, with miners outside of China performing particularly well. Zimbabwean Rainbow Rare Earths’ share price increased nearly tenfold, and the aforementioned MP materials’ stock price has gone up 450% during the year as investors looked to capitalise on potential scarcity-driven price rises.
Figure 1: The MVIS rare earth/strategic metal price index from 2008-2020.
As Fig. 1 shows, the current rare earths rally has not reached the same heights as the price spike in 2009-2011 – driven by China’s first serious attempt at imposing export restrictions. When China cut off exports to Japan because of territorial disputes in the South China Sea, the country also imposed additional quotas that reduced global exports by 35% and the prices of REE metals like dysprosium and neodymium surged by over 1000%. This higher price point signalled for investment in REE extraction capacity outside of China in the form of new mining companies and the revival of abandoned projects. In 2010, the U.S. miner Molycorp responded by raised money for investment in REE mining on the premise that the CCP export policy would remain unchanged and that rare earth prices would remain high. Both presumptions proved false and China reinstated their prior level of supply when the WTO ruled against their export restrictions and this new wave of mining companies outside of China further bolstered the global REE supply. Prices fell and the mine went bankrupt in 2015. This case study shows the endemic nature of markets dominated by one country, where politics and regulation setting heavily influences price, with new market entrants struggling to gain a foothold. If the U.S. and Europe wish to diversify their REE supply chains away from China once and for all, an increasingly popular target for Western countries, governments will likely have to provide a significant amount of support to young mining projects which lack the capital or state funding of their Chinese counterparts. They must also come to terms with the corrosive pollution associated with REE extraction and refinement through either innovation or deregulation or indeed develop their own, greener methods.
In the short term, investors looking to profit on Sinocentric geopolitical tensions may wish to buy shares in REE miners outside of China. However, they should be wary that the current REE rally may have already factored in the future tensions to the market price. REEs exist in abundance and any temporary supply shock will be assuaged in the long run by new mining projects, more fervent recycling efforts, or technologies that divest away their usefulness.
By Stan Clark
Sector Head: Edouard Nelson