Rare Earth Metals – Froth, Fizzle, And Fortune

The rare earth metals are a lesser known group of extremely important metal, known also as Rare Earth Elements (REEs), that are critical to our current way of life. A century ago, rare earth metals were sort of like oil was before the combustion engine. These days, though few people realize it, the rare earth metals are essential to our modern way of life.

Indeed, we’d have a hard time producing superconductors, x-rays, lasers, television colors, radar, and bunker busting smart bombs without rare earth metals. You may not have used any Tomahawk cruise missiles personally, but you may have enjoyed a catalytic converter or plasma television in your lifetime. If you’re like me, I was remarkably disinterested when I first heard the words Europium, Thulium, Gadolinium Sheet, Dysprosium, Holmium, Terbium, Erbium, and Cerium. However, I since changed my tune, even as they have changed my investment account!

Basic supply and demand presents a great investment opportunity in rare earth metals, as they are indeed rare, and more and more people have need of them. Demand is only expected to escalate, not only due to increasing uses, but also increasing users. Consider the fact that there are literally billions of people in China and India who are stepping into the comforts and luxuries of first-world living, and those gadgets and goodies use rare earth elements.

China is instrumental in yet another way, as it has control over approximately 97% of all the rare earth elements. China has been restricting exports, if not stopping them in some instances, and taxing the exports that do happen, as they are content to use them for their own purposes. The Chinese are working on a windmill program and are ramping up their involvement in electric cars. Windmills are able to gobble up hundreds of pounds of rare earth metals. They are also essential for the batteries used in electric cars and hybrid cars.

There are now companies looking to meet the world’s growing demand in different parts of the world, since the Chinese supply cannot be counted on and we are growing more dependent on the rare earth metals every day. Yet, even when a company has a proven deposit of significant enough concentration to justify mining, it takes time to bring the materials to production. Other companies are looking to reinvigorate existing mining projects that were left dormant because the REEs weren’t needed, were too cheap to produce for profit, or faced mining restrictions of one form or another. And, of course, there are companies who only have rare earth metals in the company name, but are in hot pursuit nonetheless.

When investing in this highly deserving sector, you not only have to look out for particular company dynamics, but also overall sector factors like the instant froth that can occur when some trigger prompts widespread momentum in these stocks. Specifically, consider what happened in the late spring and early summer of 2009. There was an investment guru who started talking openly about his fondness of rare earth metals, and the stocks responded favorably as people piled in. As expected, there was near-term profit-taking and things cooled off until another big push in the late summer and fall of 2010. Japan and China had a bit of a tussle at sea, and China also talked about choking back exports to Europe and the United States, so REE stock prices saw big run ups. Again, things cooled off a bit. You have to be careful not to get caught up in these premature jumps when prices outpace fundamentals. It’s common to see froth followed by some fizzle, but REEs are long-term destined to deliver a fortune!

At the end of the day, basic, time-tested economic principles show the rare earth metals to be in an inevitable bull market that’s far from completing its course. The metals are in increasing demand, with a constricting supply, and there’s even a company looking to move from the pink sheets to the NYSE as I write this, so increased exposure by the average investor is inevitable too. From a fundamental perspective, you should know that China in large part kept REE prices low since they were mining them very cheaply as a mere by-product to a large iron mine. Other companies had larger production costs and could not profitably pull the elements out of the ground at the suppressed prices.

Things have changed these days, and China is now keeping and using 2/3 of the rare earth metals they produce. As a result, China cannot flood the market with cheap rare earth metals and keep competition in the bleachers. Prices have increased dramatically and this gives other companies the breathing room they need to mine the metals cost-effectively. If you are smart enough to be well-positioned in good companies early on, just be patient as the bus prepares for departure and you should witness gains in your portfolio that will make most people salivate, if not drool altogether!

 

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