Rare earths prices have been in a serious slump for nearly a decade now, reflected in the downward trajectory of the VanEck Rare Earths ETF (NYSEARCA:REMX) since 2011. But that may finally be about to change. The combination of an enervating trade war with China, producer of over 60% of the world’s supply of rare earths, and a booming electric vehicle industry could see prices slingshot once economic conditions return to normal post COVID-19 pandemic.
Adding to the potential squeeze factor in this class of metals essential for electric vehicle manufacture is the fact that Tesla (NASDAQ:TSLA) is aiming to produce about 30 million cars within the decade. There isn’t nearly enough supply to satisfy that demand, so if and when electric vehicles achieve mass adoption, rare earths prices must rise significantly by necessity in order incentivize production.
The runner up in rare earths production behind China is the United States, but it is significantly behind the leader, producing only about 12% of the world’s supply versus China’s 60%+. That is going to have to change if trade relations with China continue to deteriorate as they have been over the last 4 years. The good news though is that the US rare earths industry is projected to grow at an annual rate of 10.4%, and could exceed that if supply from China is disrupted in the coming years.
Market leaders in the industry are growing significantly, and more domestic companies are joining the fray and setting up shop to find and produce the needed elements for what the EV industry is aspiring to become over the next 7-10 years.
Signs of a surge in EV metals-focused miners are already reaching the front pages. At the end of September, Australia’s Piedmont Lithium (NASDAQ:PLL) signed a lucrative deal with Tesla for a 5-year supply of spodumene, a lithium ore. Lithium is the main metal component of EV batteries. While Piedmont is Australian, the supply of lithium will be sourced from deposits in North Carolina.
The news hasn’t helped all companies equally though, as the deal has had a muted affect on Albemarle (NYSE:ALB), with Piedmont stealing its thunder, so to speak. A leading producer of lithium ores as well, Albermarle missed out on the Tesla deal, though shares are still just off their 52-week highs around $97. The good news for Albemarle and by extension the rest of the industry though is that the COVID-19 shutdowns have not affected top line revenues significantly. Sales were up 3.4% for Q2 of 2020, during the peak of the COVID-19 pandemic and the most acute stage of national shutdowns.
The ongoing trade war with China is also spurring executive action from the Trump Administration to secure the domestic supply of other EV battery components. Westwater Resources (NASDAQ:WWR), a producer of graphite, also a major component in lithium batteries, has exploded almost 10x since the Tesla deal with Piedmont, and has gotten an extra push from an executive order supporting the development of domestic US sources of graphite. China produces 60% of the world’s supply of graphite, almost the same percentage as its share of rare earths production.
Besides graphite and lithium for batteries though, the EV industry is going to need a much higher supply of lanthanide metals including neodymium and praseodymium, critical to the manufacture of permanent magnets used to magnetically push the axles that spin the wheels of the car. The two metals are generally mixed together for this purpose. Neodymium prices are still around their 2020 highs, but are still about 30% below where they were in 2011.
Miners producing these rare earths metals for the US market are on the move as well. American Resources Group (NASDAQ:AREC), focused on lanthanide rare earths for the manufacture of permanent magnets, just announced the formation of subsidiary American Rare Earth, currently developing 10 sites in Kentucky with funding from the Department of Energy. The company is planning to develop and eventually either spin off assets or execute joint ventures, with the aim of no dilution for existing shareholders.