Fisher Investments Editorial Staff
Alternative Investments, Emerging Markets, Market Cycles

Rare Earths

By, 09/02/2009
 

Story Highlights:  

  • Rare earths, a small segment of the Materials sector, exemplify what's likely to drive growth in Materials and Emerging Markets as a whole. 
  • Though not particularly scarce in the Earth's crust, rare earths don't often form commercially viable deposits. Operational and political forces further limit supply.
  • Due to environmental concerns, production has shifted to China, which accounted for 97% of rare earth production as of 2007 and limited supply over the last eight years via quotas.
  • Increasing demand for raw materials—matched with stable supply—and production centered in emerging markets like China may prove an explosive combination.

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Materials and Emerging Markets stocks are likely to rise fast as the global economy returns to growth mode. Though likely too concentrated an investment for diversified global investors, rare earths, a small subset of Materials, exemplify what's likely to drive growth in the sector and region as a whole.

 

Rare earths are the elements at the bottom of the periodic table used in high-tech applications like glass polishing and ceramics (34%), automotive catalytic converters (30%), and computer monitors, lighting, radar, televisions, and x-ray film (14%). What makes rare earths "rare"? Most elements get cooked inside stars and willed to the universe at large when they die. But the heaviest elements require even more extreme conditions—anything heavier than iron (including rare earths) is formed in the massive stellar explosions known as supernovae. Due to the rarity of these events, heavy elements make up just 2% of the matter in our galaxy, and rare earths only a fraction of that 2%.

 

Though rare earths may be scarce universally, that's not at all the case in the Earth's crust. Some occur as frequently as copper, lead, or tin, and the two rarest (Thulium and Lutetium) are 200 times more common than gold. Yet rare earths don't often form commercially viable deposits, and other terrestrial forces work to limit supply too. The extraction process is complicated and environmentally (thus politically) toxic. But as environmental groups have pressured politicians to shut down rare earth extraction in developed countries, production has shifted dramatically to more politically viable producers.

 

Due in large part to lighter regulatory requirements, China accounted for 97% of rare earth production as of 2007. Further limiting global supply growth, China has decreased its rare earth exports for the last eight years via trade quotas. Yet as long as high tech gadgets and gizmos proliferate, demand from the rest of the world is likely to continue growing. New rare earth processors outside China may stage a comeback eventually. But because competition will be hindered by operational and political obstacles, prices will likely rise in the interim, and big producers (China being the largest) will benefit.

 

Outsized exposure to rare earths is a risky bet for diversified global investors—they're only a very narrow slice of the overall Materials sector. Yet their story offers an instructive look at the themes likely to send Materials and Emerging Markets stocks higher in the near- to mid-term. Increasing demand for raw materials—matched with stable supply—and production centered in emerging markets like China may prove an explosive combination.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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