Friday, April 22, 2011

Rare earths - Best opportunity in commodities?

Rare earths have shown a killer price increase over the past year, dwarfing most commodities and by the looks of things trend will most likely continue. 

What are these rare earths?

Rare earths are rare earth elements that are not actually so very rare in the ground but they can`t be easily found in any plentiful supply in just one place, which makes mining for such elements pretty difficult.

They are used in most of today`s consumer electronics(LCDs, Ipads, ...), high tech weaponry, hybrid cars and so on.


Demand for such rare earths is gradually increasing due to countries such as India, China, Russia, Brazil. The middle class is becoming increasingly well represented and it aims towards a more plentiful western way of living.  The consumer electronics, cars and other utilities that support such industries will dramatically increase demand for rare earths.
On top of these developing countries, western consumption of such goods will also tend to increase as hybrid cars, smartphones and other such electronics become more popular.

At the moment China controls 97% of world`s production of rare earths, with one third of world`s known reserves being located in China.
In 2010 China restricted exports of such rare earths and mentioned it`s considering importing to meet growing domestic demand. Thus, as a result, world`s supply became increasingly lower.

How to play it

REMX-Market Vectors Rare Earths ETF
A rare earths ETF was recently launched on the market. Market Vectors Rare Earths ETF(ticker: REMX). Over the past 6months it had an increase of 42%. Looks pretty promising right?

Well, let`s look over some other options such as rare earths stocks. As we can see in this next chart, the Rare earth stocks such as Molycorp or Avalon Rare Metals have been best performers over the past 6 months.

Rare earth ETF vs Rare earth stocks comparison

Worth noting however, the ETF is relatively new to the market and will most likely catch more attention as more people find out about it. As a stock, Molycorp is pretty well positioned as they are closer to starting production having reactivated their rare earths mine.

The Outlook

The major advantage China has holding its rare earths monopoly is due to their approach to mining. Mining for rare earths requires extensive environmental permits as its one of the most damaging to environment especially if done in a cost effective way. At the moment China has no such concerns even if some of its rare earth operations are said to be one of the most polluted places in the world.

It would be pretty difficult to get such cost effective mines up and running in other places. Opening up a mine, getting permits and so on would take over 4-5years. During this time demand is expected to spike dramatically and the price of rare earths to follow accordingly.

US is looking to build up a strategic reserve of rare earths. The defense department is most concerned of securing enough of these. Lots of other industrialized and developing countries are expected to follow suit.

Molycorp 9 months chart
As a result of all of the above, the supply bottleneck is expected to narrow down further. Also worth considering that rise in stock price of rare earth players such as Molycorp, which increased at around 600%/year, is expected to continue at an accelerated pace.

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