Rare-earth metals: Rising demand from advanced technologies
The date of：
2022-05-05
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source:The Business Times
COMMODITY prices have climbed significantly since the start of the year, amplified by supply concerns arising from the Russian invasion of Ukraine. Within the commodity complex, we turn our attention to rare-earth metals (REMs), a specific group of metals with chemical properties that are considered “rare” due to large extraction costs. REMs are vital for advanced technologies, and their unique chemical properties mean that they cannot be easily substituted by traditional metals. We believe investors should not overlook REMs when investing in commodities.Supply-demand dynamics of REMsThe US Geological Survey (USGS) estimates that China accounts for 61 per cent of global REM production in 2021, while the International Energy Agency (IEA) estimates that China is even more dominant in REM processing with an 80 to 90 per cent market share. Therefore, China continues to be a clear market leader across the REM supply-chain.Key end-uses for REMs include magnets, glass, and catalysts, and these should continue to account for majority (around 70 per cent) of REM demand due to REMs’ unique chemical properties and strong demand. Demand for REMs is set to grow by around 7 per cent a year to 2025.In our view, the demand-supply dynamics remain supportive of REM prices. Moving ahead, we see a confluence of demand tailwinds and positive governmental support for miners, which anchor our positive view of REMs and the REM mining industry.Bullish on REM structural growth story due to emerging green technologiesWe believe the push towards renewable energy will fuel strong long-term REM demand, as they are used to manufacture rare-earth magnets, which are permanent magnets that can generate strong magnetic fields without an external power source. Coupled with their naturally high durability, rare-earth magnets are able to generate magnetic fields efficiently and at a relatively lower maintenance cost, giving them an edge over traditional magnets.As a result, they are used in many emerging technologies. For example, many electric vehicle (EV) motors utilise rare-earth magnets. More notably, they are required in large quantities to manufacture wind turbines, as the strong magnetic field from rare-earth magnets can generate large amounts of electricity when the turbines rotate.BP estimates that renewables will form 64 per cent of our energy mix by 2050, and IEA estimates that demand for REMs could increase from 3 to 7 times between 2020 and 2040 (CAGR of 6 – 10 per cent) as a result of green technologies. Therefore, we believe REMs will see robust structural growth in the medium to long term.Established technologies support steady demand for REMsIn addition to emerging green technologies, we also expect established technologies to underpin steady REM demand.For example, REMs are used in catalytic converters (e.g. cerium (IV) oxide) to convert toxic emissions into less-toxic products. Catalytic converters are legally mandated in most traditional vehicles. Despite the trend towards electrification, demand for conventional vehicles will likely remain strong in the near to medium term, given their affordability and some Covid-induced pent-up demand.REMs are also used in everyday electronics, such as smartphones. For instance, sound systems in devices use rare-earth magnets. In addition, glass screens on phones, laptops and billboards among others, also use rare-earth phosphors like yttrium. The American Geosciences Institute also estimates that lanthanum makes up almost 50 per cent of digital camera lenses, including those on phones.Race towards self-reliance driving REM industryIt is clear that REMs see a wide array of applications, and governments have begun to acknowledge their importance. Furthermore, the ongoing Russia-Ukraine War has exposed Europe’s over-reliance on energy, and will likely accelerate the push towards self-reliance in raw materials like REMs.China is the clear market leader across the REM supply chain. We note that China previously imposed an embargo on Japan in 2010 and threatened to cut off exports to US in 2019 following geopolitical tensions. Countries have therefore acted to reduce this over-reliance on China for REM exports.US and Australia have separately offered generous grants to homegrown companies like MP Materials and Iluka Resources, respectively, to encourage the development of their own REM industries. We expect financial support and investments from governments to pick up over time, which will help to improve REM processes within existing companies, ultimately improving their margins and profits.Investors can consider REMs as part of their commodities portfolioIn this environment of rising inflation, investors may be considering an exposure to commoditie which are seen as an inflation hedge. While the rare-earth industry is not as well covered as commodities such as oil and steel, we believe it is an industry with a strong growth potential.As investing in commodities futures is relatively complex and involves leverage, an alternative is to buy stocks of REM mining companies, or funds such as ETFs giving a broad-based exposure to these companies. Higher REM prices will generally increase the revenues and margins of the mining companies, and an improvement in fundamentals can be a catalyst for price upside. In short, investors should not overlook REMs in their commodity allocations, and may consider investing in them through various stocks and funds.The writer is a Research Analyst of the Research & Portfolio Management Team at FSMOne.com. FSMOne.com is the Business-to-Consumer (B2C) division of iFAST Financial Pte Ltd., the Singapore subsidiary of SGX Mainboard-listed iFAST Corporation Ltd.
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