Today, for the first time, we’re exploring rare earth metals.
Also known as “rare earth minerals” (or just “rare earths”), these trace elements have become absolutely critical to modern technology. They power smartphones, semiconductors, industrial magnets, flat-screen TVs, LED lights, and electric car batteries.
In short, they’re used for all sorts of things most of us don’t even realize we need. And demand is rising.
This isn’t a world we know very well, so we got help from Alts community member Louis O’Connor of Strategic Metals Invest. Louis is a walking, talking rare earths expert.
By the end of this issue, you’ll understand why these are so important, and which ones to invest in.
This is an important, fascinating, complex world.
Let’s dig in 👇
Table of Contents
Rare Metals vs Strategic Metals
In terms of powering modern technology, rare earths are practically irreplaceable.
For example, iPhones require 8 different rare earths. The LCD display only glows thanks to terbium, and the speaker and vibration wouldn’t work without neodymium.
Rare earths are an example of strategic metals, which is a broader category referring to elements which are especially critical to economic and military security.
In fact, 16 of the 17 rare earth metals were deemed critical to national security by the US Department of the Interior.
Until recently, purchasing these metals hasn’t been an option for regular investors. Guaranteeing the quality and selling the metals back to the market requires intricate knowledge, which very few people have.
One firm is determined to solve these problems for investors, though — a company called Strategic Metals Invest. They’ve partnered with a broker to give investors access to strategic metals, data, storage, and liquidity.
Everyone is eligible to invest. This is open to both accredited and non-accredited investors anywhere in the world.
It’s an interesting company. Keep an eye out for our Deep Dive on them later this week.
Rare earths 101
Question: What do a smartphone and an F35 fighter jet have in common?
[Yes, there’s a joke here about how it’s easy to lose either of them, as the US Marine Corps learned last week]
But the answer is that both machines require rare earths to function.
Rare earths are a group of 17 metals with specific magnetic and electrochemical properties not commonly found in other elements.
While each of these 17 metals is distinct, they all have two traits in common:
- Limited supply, and
- Technology-driven demand
Limited supply
Rare earths are not concentrated in abundance.
Despite the name, rare earth elements aren’t all that rare. In fact, the US Geological Survey notes that rare earths “are relatively abundant in the Earth’s crust.”
But the key is concentration. Rare earths aren’t concentrated in one place, easy to access and dig up. Think of rare earths as trace elements. They exist within other ores, and are widely dispersed around the globe.
They occur naturally, yes. But rare earths are mostly byproducts of the refining process for other materials. This means the actual supply can be extremely low.
This lack of abundant supply sets rare earths apart from metals like lithium and platinum. While lithium-ion batteries are used all sorts of devices, lithium is found directly in nature.
As Wyatt discussed earlier this week, nearly a trillion dollars of lithium was recently discovered in an extinct Nevada crater. The discovery is so large that “it could change the dynamics of lithium globally, in terms of price, security of supply and geopolitics.”
This never happens with rare earths. You don’t just stumble upon a huge deposit of Dysprosium. It doesn’t work like that.
High demand from tech
Rare earths are critical to leading technologies.
There are often no substitutes for the unique properties these metals carry. They’ve become crucial to technology in both civilian and military spheres.
Including the new Las Vegas Sphere 🌎
The fact is, these raw materials are nothing less the backbone of modern manufacturing.
History of rare earth metals
Discovery in Sweden
While rare metals like gold have been used for at least six thousand years, the first rare earth element was only discovered in 1787, when an amateur geologist found an unusual black mineral formation in Ytterby, Sweden.
After a rigorous analysis, chemists determined that the mineral comprised an entirely new element, which they christened Yttrium after its discovery location.
This was quickly followed by the discovery of several other rare earth elements, all sourced from around the same area in Sweden. But in the 20th century, scientists realized we could use them for cutting-edge technology.
Rare earths in the atomic age
The 1950s and 1960s were a boom time for rare earths, as post-war demand for new military tech and civilian appliances went through the roof.
This led to increased investment in refinement operations, allowing industrial giants to produce sufficient quantities of these rare metals for the very first time.
In the 1960s, for instance, the adoption of color TV drove demand for Europium, a rare earth that TVs use to produce red and blue luminescent light.
Around the same time, the US Air Force developed a powerful new type of magnet that needed Samarium to function.
For decades, most of America’s mining and refining of rare earths was done at a remote place in California’s Mojave Desert called Mountain Pass Mine.
However, with the rise of globalization and the efficiencies of international supply chains, production quickly shifted across the Pacific.
The rise of China 🇨🇳
China’s rise in the rare earths market is no accident.
The Chinese government recognized how important these materials would become — how much they would power the world’s future technological innovations — more than any other country.
“The Middle East has oil. China has rare earths.”
– Chinese President Deng Xiaoping, architect of the China’s economic revolution, in 1987
America didn’t give up its industrial capacity unwillingly. Rare earths refining has some traits that make it particularly unattractive to do onshore, including:
- High costs. Refining rare earth metals is expensive. Lower labor costs in China helped keep the costs of refined materials much lower than they otherwise would be.
- Environmentally unfriendly. Without proper supervision, rare earth projects can pollute and contaminate the environment, leaking acids, heavy metals, and radioactivity. With their lax environmental standards, China could process rare earths cheaper and more efficiently than Western countries.
In addition, China accelerated its dominance of the metals market by leveraging subsidies to keep export costs low.
China has strategically flooded the global market with rare earths at subsidized prices, driven out competitors, and deterred new market entrants. – 2018 US Dept. of Defense report
That dynamic resulted in a steadily growing market share for Chinese refining of rare earths and other strategic metals.
The world continues to grapple with the geopolitical and economic fallout from this dynamic, as the role of these metals in everyday life has only grown in importance.
The rare earths market today
China dominates the market
Today, China is responsible for a whopping 70% of all rare earth element mining. And they have a near-monopoly on refinement, with 87% of the global supply of refined rare earths.
Want to manufacture some solar panels or fiber-optic cables? Cool. You’ll need germanium, and China refines 68% of it.
How about advanced computer chips? I hear that’s all the rage these days. Well, you’ll need something called gallium. Guess who owns 98% of the world’s supply (!) That’s right, China.
The fact is that China has been building up its market share for decades. This flex has blindsided Western policymakers, who’ve shrugged this off at best, and ignored it at worst. The result is that the world’s rare earths supply chain is now almost entirely in the hands of China.
The obvious geopolitical risks of having such an ultra-concentrated supply chain are starting to be noticed. In 2022 President Biden rolled out an unprecedented set of restrictions in an attempt to dampen China’s ability to fabricate semiconductors.
But remember, China still dominates the refinement supply, and they’ve created restrictions of their own.
And the country has shown a willingness to use its market stranglehold as a powerful geopolitical tool.
Export restrictions
A 2010 episode marked the first time China used its strategic metals dominance to further its international policy goals.
That year, a Chinese boat captain was detained after his ship collided with a Japanese Coast Guard vessel in disputed waters. In retaliation, China briefly halted exports of rare earth metals to Japan.
This past summer, China used the same exact playbook to punish the US for restricting the export of advanced chips and semiconductors to the country. This past July, China announced restrictions on exports of gallium and germanium. By August, Chinese exports of both metals had completely stopped!
Building Western supply chains
As global competition between the West and China heats up, these trade restrictions will likely worsen.
In response, the US and the EU have attempted to develop parallel supply chains of rare earths that don’t rely on China. So far, though, the efforts are slow-moving.
In America, policymakers have reached a (rare) bipartisan agreement that action needs to be taken to reduce dependence on China. Both President Trump and President Biden have issued executive orders to direct federal resources towards improving American refinement of rare earths.
Much of this is aimed at expanding the aforementioned Mountain Pass Mine. Incredibly, this site is the only rare earth mining and processing facility in the entire country. That’s right, the only one. (And Europe has none!)
For its part, the EU has also issued several acts directing funding to reorganize its supply chains.
In the near term, however, Chinese dominance of the metals market is here to stay.
Australia’s tremendous supply
Australia has substantial reserves of rare earth minerals, particularly in Western Australia and the Northern Territory.
They are currently the 3rd largest producer of rare earths, extracting 7% of the world’s total. They are also making long-term strategic investments to dilute the supply chain now dominated by China.
Mining is Australia’s largest export industry by far (70% of Australian exports are rare earths!) and is one of the world’s leading producers of bauxite (i.e. aluminum ore), iron, lithium, gold, lead, diamond, uranium, and zinc.
Just like the US, Australia doesn’t do much refining themselves. Instead, they’ve offshored the refinement overseas — particularly to Malaysia, where companies like Lynas Rare Earths run big processing plants.
If you’re interested in this world, Melbourne-based Fat Tail Investment Research publishes several deep dives into Australian mining companies. They have a daily publication called Fat Tail Commodities. Check it out.
A restructuring is needed
Ultimately, re-shoring isn’t so much a financial issue, but rather a human capital issue.
If it were merely a matter of throwing enough money at the problem, the West could end its dependence on China overnight. But refining rare earths is a complicated, highly technical process. Rediscovering the necessary industrial and institutional knowledge at scale will take time.
China has 39 universities offering degrees in critical minerals, creating 200 metallurgist graduates per a week for the past 30 years. It is estimated that there are 300,000 people working in the rare earths industry in China – compared with just 400 people in the US.
Closing this gap will take more than just money. Even with massive political will, it will likely take the West decades to catch up.
Better get crackin’.
Which rare earths should you invest in?
For Western nations, the rare earths supply outlook is bleak. Chinese dominance of the metals market will remain, and export restrictions will likely expand and intensify soon.
For investors, though, this is a tremendous opportunity. Demand for rare earths, and strategic metals in general, is set to grow significantly over the next few years.
Couple these demand trends with restricted supply, and the case for price increases is clear.
But not all metals will be impacted equally by these dynamics.
According to Louis O’Connor from Strategic Metals Invest, four rare earths have the strongest investment case today: Dysprosium, Praseodymium, Neodymium, and Terbium.
These are all what’s known as energy transition metals, meaning they’ll play an outsized role in the global clean energy transition. The demand for these particular metals is not expected to peak until the late 2040s.
Dysprosium (5% annual growth)
Dysprosium is usually a byproduct of mining other rare earths. No surprise, China accounts for over 90% of global production, with smaller amounts produced by Russia, Malaysia, and Australia.
Historically, scientists have had an enormously difficult time isolating this element in its pure form. In fact, that achievement was only accomplished in the 1950s. Appropriately, the element was named after the Greek word dysprositos, meaning “hard to get.”
Dysprosium is especially used for magnets in wind turbines (not windmills!) Over the next decade, demand for dysprosium is expected to climb 5% per year.
Praseodymium (8% annual growth)
Like dysprosium, praseodymium is a rare earth that is usually a byproduct of mining other rare earths. It’s used to make industrial magnets, and high-strength alloys for airplanes.
The element was named for its greenish hue (prasios is the Greek word for green), but praseodymium is used to dye glass yellow. It’s usually found in a mixture called didymium, which is used to make safety glasses, and paired with its twin element, neodymium, another glass dye.
China accounts for about 85% of the global supply. Over the next 5 years, demand is expected to grow by 8% per year.
Neodymium (4% annual growth)
Neodymium is a rare earth notable for being capable of creating incredibly strong magnets. 🧲
After combining neodymium with some other materials, you can create a magnet that can lift up to 1,300 times its own weight — forever.
Those magnets are useful in products like speakers, microphones, and crucially, electric vehicles. An electric Toyota Prius needs 2.2 pounds of neodymium to work.
Like other rare earths, neodymium is typically a byproduct of larger mining operations, and estimates indicate over 85% comes from China. Demand is expected to grow by over 4% annually until 2040, although expanded sustainable development plans could accelerate that.
Terbium (7% annual growth)
Terbium is considered one of the rarest rare earth elements, and is very difficult to extract from ore. It’s incredibly important to digital screens, and is the main way smartphones and televisions produce the color green.
Terbium is one of four rare earths, named after Ytterby in Sweden, where it was first discovered. It’s also vital to data storage systems, and could be used in next-generation fuel cells.
Here’s the kicker: 99% of the world’s supply of terbium comes from China. Demand is expected to grow by about 7% annually over the next 8 years.
Other ways to invest in rare earths
Investing in the rare earths market is challenging.
Yes, there is a fundamental imbalance between future supply and demand for the metals, but taking advantage of that imbalance isn’t simple.
The most common approach is to purchase stocks of companies that mine or refine rare earths. But since China dominates this market, regular investors cannot access many of the best companies, which are state-dominated and listed on Chinese exchanges.
Some Western firms could be an attractive investment. MP Materials, for instance, is the NYSE-listed company actively trying to restart Mountain Pass Mine.
ETFs are another option. The VanEck Rare Earth/Strategic Metals ETF includes a basket of companies from The US and Australia (and even a few from China.)
But this is still a fundamentally indirect way to bet on future prices. If you want to purchase the metals directly, you need to work with a company like Strategic Metals Invest.
More to come on these guys Thursday. Stay tuned.
Closing thoughts
Rare earths aren’t something people think about very often, but they should, because they power our society, and China owns nearly all the refinement supply. (No big deal, right?)
I think it’s especially fascinating how common some of the applications are. Sure, most people can name a few different ways that humanity uses iron, nickel, and aluminum (bauxite). But how many people know what dysprosium is, or how it’s used in iPhones?
The massive, growing demand and restricted supply (due to a global lack of refinement capacity) show why rare earths can’t simply be grouped together with more well-known metals. They’re in a class of their own, and must be considered as a distinct investment.
Depending on how you look at it, it’s clear that Western political leaders either didn’t read tea leaves during the 90s, or completely dropped the ball. Yes, refining rare earths is messy, but it’s time to get real. Demand for these isn’t going anywhere, and the West is way behind now.
Also, as dirty as this stuff can be, it’s important to remember that rare earth metals are what will underpin the clean energy transition — another huge source of growth in the coming decades. (Oh, and Chinese scientists have just found a new way to mine rare earth metals that is faster and causes less pollution.)
In the meantime, rare earths are clearly an alternative investment to consider — especially the four energy transition metals above.
We have a lot more to learn about this market, and will cover it deeper this Thursday.
See you then ⛏️
Further reading
- Sweden is where rare earths were first discovered. 236 years later, the music hasn’t stopped. In January, Europe’s largest deposit of rare earths was found in Arctic Sweden.
- Why America’s much-needed rare earths supply chain won’t be easy.
- Visual Capitalist put together 12 different ways of looking at the Periodic Table of Elements
- The European Chemical Society created this Periodic Table of Endangered Elements
- Another great Visual Capitalist chart showing America’s reliance on importing critical minerals
Disclosures
- This issue was sponsored by our friends at Strategic Metals Invest
- Our ALTS 1 Fund holds no rare earth metals
- This issue contains affiliate links to Fat Tail Commodities and Trading View
