China is the worlds largest extractor of Rare Earth Elements (REEs). The United States’ ever increasing dependency on China, has caused the Trump administration to declare this dependency as a national security vulnerability.
Other factors include the electric car and technology industry whose engines require a massive amounts of Neodymium magnets. Additionally, the recent rise in interest rates by the Federal Reserve make this commodity investment a good idea.
As investors, we must have eyes for the future. As of this writing the VanEck Vectors Rare Earth/Strat Metals ETF sits at a low point. Looking back in 2010, it was a new fund with an all time high due to low interest rates set by the Federal Reserve.
Here are the three main reasons why REE investment in the US are set to rise in the next 5 years.
US Dependence on Chinese REE’s
Remembering the US political arena during the presidential of 2008 and 2012, American Energy Independence was one of the hottest topics discussed among Republicans and Democrats.
Today it is no longer a topic of discussion. American energy dependence hit a 30 year low in 2016. While this is not directly related, we must take note of the times and how dependent our economy is on foreign markets.
Even though today we may not worry about oil and energy dependence, a future political debate will likely take place on America’s dependence on commodities abroad (just as today the main topic is dependence on Asian manufacturing).
While past presidencies have embraced the global economy and trade, the Trump administration continues to place tariffs on foreign goods — especially on Chinese trade.
Only recently has the political landscape been filled with trade disputes. In the past 3 decades, regardless of Democrat or Republican, no president has combated foreign trade as hard as the Trump administration.
This means that the economy will need to find supply in other countries or domestically to fulfill market demand. Looking at this history we can see that it is a top priority for American companies and policies to create more effort in extracting REEs domestically or with allies.
Note that China is not necessarily dominating the REE industry, but Trump’s tariffs and future demand for REEs will force domestic companies to wake up and extract.
Technological Shifts in 2020
The biggest consumer of REEs are in advanced technological hardware. In 2020 and beyond, the electric car is set to become the revolution in transportation.
Electric car motors requires the use of large Neodymium magnets.
Tesla’s recent rise to profitability highlights the success of the electric car industry. This confirms the electric car industry’s permanence in the market for the future decade. Electric Cars will number 125 million by 2030.
I foresee the demand for Neodymium to be the main driver for REE investment, but it must be noted that every computing and tech device requires such metals. And in 2020, with every electric car built, there also accompanies the electronics to control such vehicles.
Self Driving Cars (SDC) are on the horizon and have great synergy with electric vehicles. If the SDC industry takes off, every car will in itself contain a powerhouse of computing power.
Every car today contains low cost and abundant small computers (Microcontrollers) which only serve to handle basic tasks for control and actuation.
In SDC’s high end computing devices and sensors must be included in the car for the computational power required in artificial intelligence.
When economically scaled to the number of cars that must be produced, this will drive the demand for REEs and semiconductor materials even further.
Current Economic Stage of the Business Cycle
Low interest rates give green signals for industries to concentrate on producing capital goods and make long term investments. This in turn consumes a large amount of commodities, when businesses put their capital towards building new factories and machinery.
Currently, the Federal Reserve is set to raise interest rates. This will drive the economy to produce lower order goods for consumption (consumer goods). In the macro economic sense, it will shift capital away from long term investing and production, to more short term ventures to fulfill economic consumption.
How does this relate to commodities?
It takes less metals to produce short term goods like foods, plastic wares, and other products while buildings and machinery consumes more commodities and metals.
This means that currently, commodities as a whole are on the downturn.
Which means it is the perfect time to buy, with an outlook to the future.
While I don’t have a glass ball, the outlook for the future is that, if the rates are high NOW and the prices are low, an investment opportunity arises because in the FUTURE interest rates are set to lower again and commodities to go high.
The three main factors, supply, demand, and time preference, play a key role in speculating future economic demand. For supply, while there is ample REE production in China, the current US policy of tariffs and trade disputes shifts the extraction of REEs domestically or to allies.
On the demand side, EV’s and technological advancements into the 2020’s signal large growth for computing and hardware, further consuming REE’s.
Lastly betting on future modes of production, we are at the consumption stage of the business cycle where rising interest rates shift industry investments to short term preferences. This means that currently, commodities are consumed at a lower rate and thus are at a low point. But by 2022+ we will see another shift where commodities are on the rise and that would be the time to sell.
In short, today, buy low. Tomorrow sell high.
Finance and Purpose contributor James Sanders has no position in any stocks mentioned.