Luxury, energy commodities, travel and entertainment. These are the sectors that celebrated the Chinese reopening and the definitive elimination of the severe lockdowns introduced to contain the spread of Covid-19 and its variants most of all on the stock exchange lists. But there is another one that is perhaps passing too quietly and in which China remains indisputably the world’s leading producerwith a market share of around 80%: le terre rare.
What are rare earths
Rare earth metals are a group of 17 heavy metal elements essential for the development of civil and military technologies that are also useful for the success of the green transition, such as motors for electric vehicles, wind energy generators and other electronic devices.
Rare earth elements are used in magnets, batteries, lasers and many other industrial products and processes. They are found within various minerals scattered throughout the worldbut their “rarity” derives from being difficult to extract: they are never found in high concentrations and are generally mixed together or with radioactive elements.
China, leader in the production of rare earths
The China is the undisputed leader in the sectorfollowed by the United States (15% of world production), Burma (9%) and Australia (8%).
The Asian giant has focused on developing this sector since the 1950s much of China’s production comes from a single mine, After Obo, located in Central Mongolia, which is estimated to account for 32% of world production. In 2022, China expanded rare earth production for the fifth consecutive year and set the mining quota at 210,000 tons, up 25 percent from 168,000 tons in 2021.
The Chinese market share rises to as much as 85% in the next phase of the supply chain, that of the separation and processing of rare earths. This is because most of the rare earths mined in the world, including those in the US, are sent to China for processing and then re-imported. Finally, continuing along the value chain up to the downstream phase, i.e. that of components and the creation of final technologies, the People’s Republic of China is also the main producer of rare earth magnets with a market share of 90%.
Il Chinese primacy on rare earths has several reasons. First of all, China has about a third of the world’s reserves, which a combination of favorable geological conditions and humid climate make it easier and more cost-effective to exploit. Furthermore, the presence of other metals in the deposits (e.g. iron) and the possibility of obtaining rare earths as a by-product has in the past further encouraged the exploitation of these deposits. Added to these factors are direct and indirect state subsidies and the presence of low environmental and social standards, which have favored the placing on the market of low-cost rare earths, making international competitors less and less competitive.
It should be noted that China has recently rationalized and consolidated the production of rare earths through a series of corporate restructurings and mergers which have led to the establishment of four major national players directly linked to the leadership of the Communist Party. This move, in addition to allowing greater control over the supply chain and therefore over the actual output, facilitating the fight against the illegal extraction and export of rare earths, it is hoped that it will favor the diffusion of more sustainable environmental and social standards.
Countries that undermine Chinese dominance in the availability of rare earths
The risk that the Dragon could use this dominant position along the supply chain as weapon of blackmail or retaliation for geopolitical purposes it is concrete and is therefore forcing the countries most dependent on rare earth imports to find alternative sources of supply and to sign alliances with friendly countries. They also need more investments in research and development and policies that encourage techniques for the use of a smaller quantity of rare earths in final technologies or the laboratory development of synthetic rare earths.
First of all Japan, which currently imports around 60% of rare earths from China, including neodymium, used in wind power plants, and dysprosium, found in electric vehicle engines. In Japan, large deposits of mud containing rare earths have been found off the Pacific Ocean at a depth of 6,000 meters. But marine engineers have so far managed to pump material from the seabed from a depth of nearly 2,500 meters into waters near Minami-Torishima, a small uninhabited atoll nearly 1,900 kilometers southeast of Tokyo, and are working to extend the extraction depth that is expected to reach 6,000 meters by 2024. The task is made more difficult by strong ocean currents and typhoons, but the Japanese government has allocated 6 billion yen to finance the project.
Japan is not alone in planning to exploit the seabed to secure access to metals critical to the energy transition. A’Canadian mining company, The Metals Company, aims to extract tons of rocks containing large quantities of nickel, manganese, cobalt and copper from the bottom of the Pacific Ocean. More precisely, the site is located in the Clarion and Clipperton rift zones, an area between central Mexico and the Hawaiian Islands. The Metals Company would like to begin mining in 2024, and expects to report a profit of $31 billion in twenty years. The Danish shipping company Maersk, the Swiss offshore energy services company Allseas and the Swiss mining group Glencore are also involved in the project.
Finally, also theEuropean Union it is taking steps to reduce its imports of rare earths and metals, first of all cobalt, used in the production of batteries, and titanium, necessary for the manufacture of fuel cells. The Committee for Industry, Research and Energy (ITRE) of the European Parliament identifies in Community-wide storage of rare metals a possible strategy to guarantee a supply of these resources to all EU countries. In addition to this strategy, ITRE suggests other practices to adopt:
- the search for alternative solutions to free trade agreements due to their limited scope in supplier differentiation;
- the expansion of monitoring mechanisms, in particular the acquisition of data on price trends and on the state of value chains;
- the provision of incentives for companies to maintain stocks;
- the use of private sector professionals in the management of storage operations;
- linking warehousing policies to strategic measures that strengthen the resilience of EU industrial capacity.
Meanwhile, it’s today’s news the discovery of the EU’s largest deposit of rare earths in Sweden, which is estimated to contain more than one million tonnes of rare earth oxides.
How to invest in rare earths
In light of the picture described above and the market driven by the discovery of new deposits, the rare earth theme is heating up again at the beginning of this 2023. This race to strengthen the production and refining supply chain for rare earth elements at the outside of China offers attractive investment opportunities.
Investors who want exposure to this theme have a couple of options to choose from when it comes to rare earth funds. The best known and most accessible is the VanEck Rare Earth And Strategic Metals Ucits Etfwhich invests in shares of global companies involved in the extraction and refining of strategic metals (such as cobalt, molybdenum, titanium and lithium) and rare earths.
Or the Global X Disruptive Materials UCITS ETF (DMAT), which invests in companies that produce metals and other raw materials essential for the development of future revolutionary technologies, such as lithium batteries, solar panels, wind turbines, fuel cells, robotics and 3D printers, which will make transport greener and more efficient , energy and industrial systems. The investable universe is made up of companies involved in the exploration, mining, production and/or valorisation of rare earths, zinc, palladium and platinum, nickel, manganese, lithium, graphene and graphite, copper, cobalt and carbon.