Rare earth metals: What are they, and are they a solid investment?

Open full sized image

There are 17 “rare earths” with unusual names to match.

© Alexey Rezvykh/stock.adobe.com

The topic of rare earth metals (or rare earth elements) may not be the hottest on Wall Street, but it seems to be popping up with greater frequency in the post-pandemic economy. The reason is simple: Rare earths are critical to the production of existing and emerging technologies, and currently, there aren’t enough of them to go around.

Does that make rare earth metals a favorable investment opportunity? Maybe. But it’s important to bear in mind that so-called “rare earths” go well beyond the domains of technology and finance. They involve international trade and politics, which can be messy. Before we get into that, let’s first explore what rare earths are. Believe it or not, most people probably can’t name a single rare earth metal. So let’s start there.

Rare earth metals comprise 17 metallic elements, all of which are used in the production of high-tech and industrial products. Here they are in alphabetical order:

It depends on the metal. Each has its own characteristics. For example, neodymium is used to make powerful magnets that are used in computer hard drives, loudspeakers, wind turbines, and hybrid cars. Cerium is used to produce catalytic converters; cerium and lanthanum are both used to refine crude oil.

Overall, rare earths have a surprisingly wide range of applications. You can find them in the most basic to the most sophisticated gadgets, from power tools and cell phones to electric vehicles and missiles.

This is a little tricky. With a name like “rare earth,” you’d think there aren’t enough natural deposits underground to extract. That’s not the case, as some metal deposits may exist in abundance.

So why are they called rare? Initially, it was because they were unusual when they were discovered. More importantly, the deposits are unevenly concentrated in a few countries across the globe, posing both political and supply chain challenges. Mining and processing rare earth metals is also a technically difficult process—one that often negatively affects the environment.

As of January 2023, China holds the largest share of proven rare earth deposits in the world, boasting 33.8% of all reserves. Vietnam is in second place, with reserves of 16.9% of all available rare earths. Russia and Brazil are tied for third, each accounting for around 16.1% of the world’s rare earth reserves.

From there, the size of natural deposits begins to dwindle significantly, with India (5.3%) and Australia (3.2%) rounding out the top six. Although the U.S. (1.7%) lags these heavyweights, it’s upped its game in the last few years, with proven reserves—and mine production—each up more than 60% between 2019 and 2022.

Let’s go back to 2019. That year, China exported a whopping 80% of the world’s rare earth metals. They practically cornered the market. And if you remember, the U.S. happened to be engaged in a trade war with the country.

It’s tough to have a sour relationship with a trading partner that holds critical resources you can’t easily find elsewhere. So what does this mean for countries like the U.S. and others that need rare earths for technological, industrial, and defense production? Besides global reliance on China, it can spell vulnerability.

China may have the largest share of natural rare earth deposits, but for a long time before the 1980s, the U.S. dominated rare earth extraction and production. Now that China has developed into a formidable competitor in the rare earth space, the U.S. may not be able to reclaim anything close to its former degree of industry dominance. But it certainly can boost its own levels of production.

How? There are several ways the U.S. might increase production:

Most likely, the solution will involve all three options, but each presents its own challenges. From a supply chain standpoint, reshoring may be the most palatable, but the ramp-up would be costly and could take several years. Plus, mining is only the first step. China also holds the dominant position in global rare earth refining capacity.

As it stands, a lot of what is pulled out of the ground in the U.S. is actually shipped to China for processing. In order to truly reshore the rare earth supply chain, the U.S. would need to build refining capacity in addition to mining.

Those looking to invest in rare earth metals can purchase shares of mining companies that extract and produce rare earths, or buy exchange-traded funds (ETFs) that hold a diversified basket of these mining companies.

Top mining companies include Freeport-McMoRan (FCX), BHP Group (BHP), and MP Materials (MP). MP Materials owns the Mountain Pass Mine, as of 2023 the only U.S.-based rare earth mining and processing operation. In the ETF space, the VanEck Rare Earth/Strategic Metals ETF (REMX) has been around since 2010. In 2022, Optica Capital launched the Rare Earths and Critical Materials ETF (CRIT).

But there’s a big caveat: Remember that the share price of a mining company is different from the spot price of the metals they extract and produce. One can rise while the other falls, depending on the health of the company and the demand for the metal.

The biggest pro is probably diversification. As with many alternative investments, the price of rare earth metals doesn’t move in lockstep with traditional investments like stocks and bonds. This makes it a favorable asset to mix up your financial basket.

The other pros are scarcity and high demand. When demand meets scarcity, the potential for large returns tends to rise. Given that tech-related industries are likely to continue using rare earths, the long-term return potential for this type of investment seems quite favorable and attractive.

On the flip side, rare earth markets can be illiquid and thus quite volatile. Plus, these commodities are tightly controlled by a few big—and sometimes secretive—mining firms. When supply or demand disruptions happen, small retail investors are typically the last to know.

Plus, mining and extraction can have severe environmental impacts, such as water pollution or habitat destruction. In other words, rare earth miners aren’t likely to be included in your sustainable investing choice list. So, weigh that on your conscience.

If you invest in foreign mining companies, you have to consider political risk as a major factor as well. Finally, if the U.S. or any nation develops cheaper and better alternatives to certain rare earth metals, demand may dwindle, and with it, your return potential.

Investing in a market well ahead of the mainstream public has its advantages, particularly when that investment centers on scarce commodities and emerging technologies. But it also comes with the kinds of risks unique to any emerging market or industry. So be careful. Rare earth metals fit well within this category.

Do rare earth metals belong in your portfolio? Perhaps. Ultimately, it’s how you allocate them within your traditional bag of financial assets that can make the difference.

Specific companies and funds are mentioned in this article for educational purposes only and not as an endorsement.