The Commodity Investor: Rare Earth Provider Molycorp Offers Discounted Entry Into Sector

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March 06, 2012
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With high-tech and green technology fueling demand in this niche asset class, one company is well positioned to capitalize on price increases.

 

The rare earths element (REE) sector has been receiving plenty of media and investor attention in recent months. The sector occupies a unique space in the commodities complex since it doesn’t fall within any of the major commodity subcategories. Indeed, it occupies a niche subsector that can provide a unique investment opportunity for the discerning investor.

Before reviewing investment opportunities in the sector, let’s look at an overview of the industry.

The REE sector is composed of lanthanides and actinides, which are elements commonly found at the bottom of the periodic table of elements. Rare earths have unique characteristics that make them extremely valuable for industrial and commercial applications. Specifically, rare earths are very valuable in creating goods such as cellphones, laptops, flat-panel display screens and even in missile technology.

REEs are called rare earths because they are spread around the Earth’s crust, and are not found in concentrated vein deposits and locations such as other metals (such as gold and silver). Another characteristic of REEs is that they’re located in certain geographical locations that make the market structure intriguing. Most are in fact located in China, which has a series of implications I’ll discuss later.

Market Structure

The REE market has been propelled by twin market drivers: the digital revolution and the green revolution. The demand for hardware such as faster and smaller phones, computers, display screens and other electronic equipment has been instrumental in the price increases the sector experienced in recent years. It’s safe to say that any electronic device you use contains some rare earth elements.

In addition, the military is becoming a major end-user of REEs that it uses to develop high-tech weaponry such as self-guided missiles, bunker-buster bombs, global positioning systems and predator drones. The fact that many of the world’s rare earth metals are located in China has important implications as militaries around the world seek to secure supplies of REEs for national security purposes.

In January, German Chancellor Angela Merkel signed a strategic pact with President Nursultan Nazarbayev of Kazakhstan to secure Kazakh supplies of REEs for German industrial and military industries. Furthermore, the United States Department of Defense is aggressively seeking to diversify its supplies of REEs and is actively seeking other sources outside of China. The fact that there are nation-states involved in this market for national security purposes gives the REE industry a special status in the commodities and natural resource complex.

Another important market driver is the green revolution. In addition to high-tech electronic devices, REEs are commonly used in solar panels, wind turbines and other industrial equipment that defines the renewable energy industry. All these industrial applications have increased the importance of REEs and pushed up demand for these critical metals. Demand for REEs currently stands at almost 150,000 tons per year, up from 70,000 tons only a few years ago. This demand is expected to increase by double digits and may even reach 300,000 tons per year by 2015.

 

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