SAN FRANCISCO (MarketWatch) — Rare earths, as the name implies, make up a tiny market with huge growth potential. It’s also a market with little transparency, fraught with the kind of volatility that keeps investors wondering whether they can withstand the risks to reap the rewards.
Rare earths are minerals whose special properties make them ideal components in a wide variety of high-tech products, from hybrid cars to smartphones. They also have many key defense applications.
Prices of these metals began to soar last year when China, which controls 95% of the world’s rare-earth output, said it would cut its exports by 40% — prompting speculation that the restricted supply would drive prices up. The bubble burst a year later as strategic metals prices tumbled, hurt by fears of cooling global demand.
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Strategic metals are defined as metals crucial for industry and national security. Of the estimated 43 dubbed strategic, 17 are rare-earth metals. But industry analysts say “rare earth” is a bit of a misnomer, because these elements are relatively common. What makes them rare is finding them in concentrations high enough to mine profitably.
Despite growing demand, betting on them carries big risks. Unlike such mainstream metals as gold, it’s hard to track rare-earth prices in the underlying commodities market. That means the only way to bet on the industry is through the mining companies themselves, along with a handful of specialized mutual funds and exchange-traded funds.
China’s near-monopoly also makes the rare-earth market less transparent, which can drive volatility as investors buy and sell on any rumor of China tightening its metals exports, analysts say.
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Given the importance of these metals in national-defense systems, governments around the world have discussed stockpiling their own reserves. Earlier this month, the United States began probing the possibility of a strategic reserve of rare-earth metals after a Pentagon report showed the nation was “critically dependent” on China for them.
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Still, if investors do their research, they could reap significant long-term gains, Gissen said. “Because of technologies discovering more applications for rare earths, it’s very likely that demand will increase. At the same time, the challenges in finding the metals and getting them into production are so enormous that prices will remain high. This is a good place to be invested.”
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