Rare Earth Elements: The New Frontier in Investing

Nearly every piece of modern technology contains rare earth elements. Hybrid car electric motors feature permanent magnets made of neodymium-iron-boron while electrical sensors may use yttria-stabilized zirconia.

But as demand for these essential minerals surges, supply has become more constrained - offering investors new opportunities.

What Are Rare Earth Elements?

Rare earth elements (REEs), found at the bottom of the periodic table, play an indispensable role in both modern commercial and national security technologies. Their components can be found in high-tech gadgets like Apple AirPods and iPhones; green energy sources like General Electric wind turbines and Tesla electric cars; medical tools such as Philips scanners; military equipment like F-35 jet fighters - they even receive protection under U.S. tariff laws imposed on $300 billion worth of Chinese imports! Due to their enormous value, REEs are listed by US tariff exemption from tariffs imposed by tariffs imposed on Chinese imports.

Rare earths are distinguished by their special properties: Their atomic structures are closely interlinked, rendering them virtually indistinguishable from one another, and concentrations in natural deposits tend to remain stable over time. While rare earths rarely exist as pure forms, they frequently occur as part of minerals or alloys containing multiple metals or elements at once.

Due to their difficulty of separation and refining, rare earths are usually extracted by mining sedimentary rock formations or natural deposits. China is the primary producer of rare earths; Japan, Australia, India, Brazil and Russia also extract significant quantities. Mining rare earths is an intensive activity; resources may be extracted from igneous, metamorphic or sedimentary rocks as well as seawater or freshwater deposits; more advanced methods require underground mining methods for extraction.

Recently, there has been increasing concern regarding China's mining operations and processing facilities. For instance, Chinese restrictions of rare earth exports to Japan in 2010 spurred automakers to design hybrid car motors which significantly reduce or even eliminate their need for neodymium iron boron magnets; oil refinery equipment manufacturers and glassmakers also found ways to decrease usage of rare earths.

Recycling rare earths is one way of increasing their supply. Japan, for instance, has begun using electronic waste as one source of rare earths since 2010. A more sustainable option would be extracting rare earths and valuable materials from products containing them and recycling these through closed circuit recycling systems - according to estimates by Union of Concerned Scientists this could meet 30% of future demand for neodymium, praseodymium, and dysprosium elements.

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Where Are Rare Earth Elements Found?

Rare earth elements can be found all around the world, with certain elements more abundant than copper and tin. Rare earths rarely occur in high concentrations but often co-occur with other metals and minerals; geologically speaking they're not particularly rare either - usually extracted from placer deposits which contain sedimentary minerals eroded from beneath the ground and collected mechanically through water or wind flow.

Due to their unique properties, elements are used for an array of applications. But because they're so ubiquitous and crucial, they can also be vulnerable to supply disruptions if one country controls most mining operations, processing plants and refining facilities; companies reliant on these minerals should establish mechanisms to ensure reliable supply chains.

China may control much of the global production capacity, yet has not managed to completely sever supply chains. Demand signals for products made with rare earths have increased drastically and manufacturers must find solutions when shortages arise.

Thus, both government and industry are working on methods of increasing domestic production capabilities. Las Vegas-based MP Materials, for instance, has received grants and contracts from both Departments of Defense and Energy to research rare earth separation capabilities at Mountain Pass mine in Colorado before shipping the concentrate off to China for further processing.

China has historically been reluctant to allow other nations to tap into its abundant resource, but is gradually loosening export quotas in response to complaints by Japan, the US and EU at the World Trade Organization that claimed China unfairly restricted exports. Loosened restrictions could increase demand and open doors for other companies while building infrastructure is needed for extraction and production is taking longer than anticipated.

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What Are the Applications for Rare Earth Elements?

Rare earths gained prominence with advancements in atomic physics during the early 20th century, when chemists discovered ways to differentiate the elements using spectroscopy--a technology enabling scientists to identify individual components within minerals and metals by analyzing their light spectrums.

Rare earths are frequently found combined in mineral combinations that must be separated out. Rare earths played an essential part in the Manhattan Project's efforts to build an atomic bomb by finding ways to control nuclear fission, with their chemical composition helping solve impurity issues that hindered chain reactions necessary to power it.

Since that time, technological developments have produced even more applications for rare earths. Now incorporated into high-tech products like cell phones, lasers and LED lights as well as industrial machinery used for oil refining and wind turbines, rare earths play an essential part in modern society.

Rare earths are increasingly vulnerable to supply disruptions. Their 16 naturally-occurring elements tend to be concentrated into difficult-to-mine deposits that are hard to access; furthermore, many are found mixed together with other minerals or metals making extraction more challenging than expected.

Further, the production process for rare earth metals generates vast quantities of toxic waste that may require years to dispose. Thus, environmental concerns have led some nations to limit or prohibit production or manufacturing using rare earth elements.

As demand for rare earths increases, their supply needs to keep pace. This will be especially true of those rare earths used extensively in military technology.

Scandium, for example, is an indispensable element for aluminum-alloy baseball bats and other sports equipment made from this alloy; additionally, capacitors designed to accommodate microwave frequencies as well as special glass coatings can utilize this material. Furthermore, scandium magnets for NiMH batteries, metallurgical applications, and some specialty alloys also use scandium magnets.

Rare earths have increasingly become an instrument of international trade negotiations. When one nation controls almost all available resources and makes a firm decision not to export, their price tends to skyrocket as consumers panic buy before supplies run low - as was seen with China restricting exports of rare earths in 2010, leading to panic buying that drove prices up by hundreds of percent or more in some instances.

How Do I Invest in Rare Earth Elements?

Rare earth elements may not be as "rare" as their name implies, but they are certainly difficult to obtain and extract. Most often found in geologic deposits mixed with other metals and rarely in concentrations high enough for economic mining operations. Yet their utility in modern technology makes their mining essential despite any associated difficulties; also offering potential long-term returns.

An effective strategy for investing in rare earths is buying stocks of companies that mine them. This allows you to directly participate in their supply chain and gain exposure to industry trends; however, be mindful that mining firms may experience production issues or pricing pressure from competing firms that wish to enter their market.

Purchase physical oxides of rare earths through a metal trading company is another viable option due to the rising demand. But keep in mind that pricing for rare earth oxides differs from mining company share prices and will fluctuate according to supply and demand.

Due to their relative scarcity, rare earth prices tend to fluctuate and cycle regularly. They can also be affected by supply chain disruptions, political events and technological advancements that compete or replace existing rare earth metals - all factors which could potentially produce unpredictable returns for investors.

UBS has just introduced Europe's inaugural ETF on rare earths: UBS STOXX Global Rare Earths Index ETF. This passively managed fund follows non-Chinese companies which generate revenues from rare earths, with two share classes and an expense ratio of 0.53 percent.

Rare earth elements vary in physical and chemical characteristics, yet are chemically related. Many introductory science books consider them so similar as to be considered one element; most trivalent metals belong to this family, while cerium, praseodymium, lanthanum, neodymium and ytterbium are all four-valent metals and some trivalent ones (samarium europium and ytterbium are divalent). Although found separately geologic deposits, they often exhibit similar characteristics which allow extraction as mixed oxides.