2011 has been a pretty good year for commodities overall as a weakened dollar, supply concerns, and strong growth in emerging markets, have combined to keep many products in high demand. While key commodities such as corn, gold, and copper often dominate the spotlight, a group of metals known as ‘rare earths’ have truly been the star performers so far this year. In fact, some of the top metals in the group, such as Neodymium, Dysprosium, Yttrium, and Erbium, have put up gains that would make metals such as silver or gold’s performances in 2011 look down-right bearish. For example, of the four rare earths outlined above, the worst performer has put up a gain of ‘just’ 50% while several have seen their prices surge by over 200% in year-to-date terms, suggesting to many investors that a bull market is alive and well in some commodities despite the global economic malaise.
Unfortunately, due to their spread out nature in the earth’s crust– which makes these metals more rare than their actual abundance might suggest– and the often environmentally-unfriendly ways in which some of these products are obtained, the metals are hard to find from a futures or physical ETF perspective. In fact, it is estimated that China currently produces close to 95% of the world’s total supply of this group of metals, further preventing the group from receiving the liquidity and accurate pricing that comes from being traded on a major exchange [read Top Seven Strangest Commodity Futures].
Why You Should Care
While China’s dominance of the rare earth metal trade may make it tough to invest in the metals, it is making it downright impossible for westerners to get the access to the products that they so sorely need. While you may not have heard of many of the products that constitute rare earths, they are pretty much ubiquitous in every day life. These metals find their way– in small quantities– into everything from wind turbines and guided missiles, to consumer goods like home electronics and kitchen appliances. Without unfettered access to these metals, prices for pretty much everything that can be considered high tech will go through the roof.
This is especially troubling when considering China’s attitude towards exports of the metals in recent years as the country has begun to heavily clamp down on shipments to other nations. Export quotas have fallen down to about 30,000 tons a year, well below world demand which is currently at about 40,000 tons. Given that China may close down more mines in the future to attempt to protect the environment or further tighten exports in order to provide for its domestic economy, more cuts from the nation are certainly not out of the question [see Powerhouse Producers: Cocoa, Platinum, and Rare Earths].
REMX: The Only Pure Play
Thanks to this precarious situation, as well as rising demand for these key products thanks a focus on ‘green’ technologies, many western nations have been scrambling to find or restart mines that can provide the world with fresh supplies at a reasonable price. This could start a new golden age for the mining sector making investments in rare earth metal miners an interesting proposition for commodity-focused investors seeking to venture off of the beaten path. With there are a few major publically traded rare earth miners in the U.S., the space remains fraught with individual company risk and a basket approach is probably warranted for the time being. As a result, many investors should take a closer look at a relatively new ETF from Van Eck as a way to cheaply and easily play the space, the Market Vectors Rare Earth/Strategic Metals ETF (REMX).
REMX tracks a rules based, modified capitalization weighted, float adjusted index intended to give investors a means of tracking the overall performance of publicly traded companies primarily engaged in a variety of activities that are related to the mining, refining and manufacturing of rare earth/strategic metals. Currently, the fund consists of 28 holdings with the biggest weights going towards Iluka Resources, Kenmare, and Molycorp, all of which make up at least 7% of the fund. In terms of country exposure, the fund mostly consists of developed, Western markets with Canada, Australia, and the U.S. all making up about 20% of the holdings, although some emerging markets, including China, Mexico, and Chile, do find their way into the fund as well [check out our new Commodity Trading Center].
So far in 2011, REMX hasn’t matched the performance of its underyling commodities– much like other miners– and is posting a year-to-date loss of about 18.2%. Investors should also note that the fund is relatively volatile and has a beta of 1.5. With that being said, the fund from Van Eck has a P/E ratio of 17.5 and charges investors just 57 basis points for its services. Thanks to this, the fund could be a decent long term play for investors who are bullish on rare earths but are looking to take a basket approach when it comes to investing in this increasingly important sector [read Commodity Investing: Physical vs. Futures].
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Disclousre: No positions at time of writing.