The embedded risk of REMs is reflected in the financial markets. The prices of REMs have experienced huge fluctuations in the past years and are expected to do so in the future because of huge demand growth, supply constraints, geopolitical risk, and market disruptions 4 Proelss et al. Due to their strategic significance, REMs possess huge potential to evolve as a separate commodity asset class, which may be intrinsically risky Cox and Kynicky, ; Fernandez, ; Proelss et al.
Notably, the COVID outbreak makes the subject more critical because companies are now actively looking to diversify their supply chains away from China. Moreover, the market for renewable energy has shown higher resilience compared to other fossil fuel markets, which have witnessed a slump in demand during the pandemic Kim and Karpinski, Apergis and Apergis argue that rare earth prices are determinists of renewable energy consumption, whereas Baldi et al.
However, research investigating the interlinkages of the rare earth index with various market indexes such as base metals, global commodities, and gold has not garnered sufficient attention in the academic world, barring a few works Chen et al. Notably, these studies overlook the study of both return and volatility spillovers and the effects of stressful periods such as the COVID outbreak on the dynamics and network of connectedness.
Such a detailed analysis is important for portfolio managers in terms of diversification benefits and investment protection by showing the time-variation of both return and volatility connectedness between REMs and key financial instruments during normal and stressful periods such as COVID, which helps refine investment and risk management decisions.
Our analysis also assists policymakers in evaluating policy decisions regarding investments in clean energies and REMs. The findings carry especially meaningful implications for investors and policymakers in the clean energy domain. Our study advances the academic literature in the following ways. Firstly, the study is timely as the data span encompasses not only the peak of US-China trade tensions starting in but the outbreak of COVID in , during which financial markets experienced large price swings and extreme volatility.
The beginning of the data period also marks a critical juncture for rare earth markets when China introduced a stringent export policy. In light of the COVID pandemic, the current study is very relevant because of two countervailing effects. A possible cartelization of these critical metals may increase their price, dampening the prospect of clean energy projects. On the contrary, the higher resilience of the renewable energy market compared to the fossil fuel market during the pandemic poses potential future challenges to REMs Kim and Karpinski, So, the COVID outbreak, coupled with increasing tension in the US-China trade relationship, may alter earlier empirical findings, revealing a new dynamic between rare earth and other financial instruments.
Secondly, unlike previous works Chen et al. Thirdly, we explore the time-varying return and volatility connectedness of the rare earth index with other market indexes in total and net connectedness spillover, where the role of each index is evaluated as a receiver or a transmitter. So, unlike previous studies, we delve into the return and volatility dynamics of the network of six indexes in every possible way e.
Our study offers some intriguing empirical evidence for both return and volatility connectedness. During the entire sample period, results of return connectedness suggest that the REM index shares the utmost connection with the base metal index, followed by the world equity index, both as a receiver and a transmitter. Gold appears to be the least connected instrument in the system. Overall, the base metals, world equity, and crude oil indexes play a transmitter role more than a receiver role.
In contrast, the REM index is the largest receiver of return spillovers, followed by gold and clean energy. The volatility connectedness results indicate stronger connectedness among the world equity index, base metal index, and crude oil index. The crude oil index is the largest net transmitter, followed by the world equity index, while the gold and rare earth indexes remain the largest net receivers of volatility spillovers.
The clean energy and REM indexes do not seem to be closely connected in either return or volatility. They stay mostly on the receiver side, catching volatility spillover from the world equity, crude oil, and base metal indexes. Crude oil leads the list in volatility transmission to others, followed by world equity and base metals. A separate return and volatility transmission analysis for the COVID period indicates a stronger level of system-wide connectedness, with a noticeable change in the roles of the clean energy and crude oil indexes.
Our main findings corroborate with Reboredo and Ugolini , who find an interdependence among these indexes during unstable periods. During COVID, clean energy becomes a net transmitter of return spillovers altering the dominance of the crude oil index.
However, the crude oil index takes the lead in net volatility transmission during the pandemic period. After playing a marginal role during the full sample period, the REM index becomes more central to the network of connectedness during the COVID period for both return and volatility. Importantly, during COVID, the REM, clean energy, and MSCI indexes are interconnected strongly, transmitting return and volatility spillovers to each other, unlike in the full sample period during which the world equity index plays a central role connecting with the REM and clean energy indexes.
This outcome concords with the findings of Chen et al. The emergence of rare earth metal as the central nodal point, which starts to share a strong connection with clean energy during the COVID outbreak, is a significant addition to the existing limited literature.
The results are logical because of the well-established and strong association of the rare earth market with the clean energy index, world equity index, and base metal index, which are intrinsically connected elements in the financial markets. These findings are not in line with previous studies e. We believe that the finding shall hold true in normal circumstances because a surge in demand for REMs is expected as many governments put clean energy transitions at the heart of their economic stimulus packages Kim and Karpinski, For the rest of the paper, Section 2 reviews the related literature on rare earth and financial markets.
However, over the same period it forecasts that global production of neodymium, praseodymium, dysprosium and terbium will collectively increase at a slower CAGR of only 5. The mismatch between demand and supply has already led to a jump in REE prices and it could get worse in coming years as new mined supply is unable to keep pace with surging demand. Obstacles to rare earth production There are two key issues with the production of REEs. First, all the rare earth deposits are mixed together, so it is hard and expensive for processors to separate them and to take advantage of their individual properties and to split up the more valuable ones, such as terbium, from those of little value, like lanthanum.
Second, REEs are bound up in mineral deposits with the low-level radioactive element, thorium, exposure to which has been linked to an increased risk of developing lung and pancreatic cancer. These obstacles create a huge challenge for any Western company that wants to become involved in the industry. The real short-term gap may be the lack of processors outside of China. If prices continue to climb or stabilise at the high price, there will be a strong incentive for other nations with proven deposits to begin mining and processing.
For three decades, the Chinese government has had a strategic vision for the REE industry — something the West has lacked — and it now dominates the supply chain. China is also introducing new environmental standards for the industry, which could constrain supply. The West also needs the capacity to make rare earths metals, rare earths magnets, and other products and technologies.
Investments are needed to open or reopen rare earths mines and processing in Europe and the US, following a decade or more of underinvestment. More exploration is taking place and there is greater investment happening in processing and separating the elements. In five years' time, I think there will be less dependence on China on the mining side as new mines become operational in other parts of the world.
However, China's dominance of the refining stage is likely to remain very robust for many years to come. Afghanistan has been receiving attention recently due to the existence of a rare earths deposit in that country, but there are many parts of the world where it would be more cost-effective to operate a mine. Mt Weld Central Lanthanide Deposit, inside an ancient collapsed volcano, in Western Australia is one of the highest-grade rare earth deposits in the world and is the largest rare earths mine outside China.
It is owned by the Lynas Corporation, an Australian REE mining company, and produced 7,t of rare earth oxides in the second half of It plans to open a new cracking and leaching plant in Kalgoorlie in Western Australia. It is part of a plan to shore up the defence supply chain.
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Here is a look at them: Each of the 17 rare earth elements highlighted above is unique in its own ways. Some are far more useful than others. That is both true and wildly incorrect. There are tons of these 17 elements scattered throughout the ground. Their rarity is based on extremely low ore grades.
In other words, there are no juicy, thick veins of these underground like there are for some other commodities and elements, like coal or gold. As such, you have to move a lot of dirt to even get access to trace amounts. It is doubly hard because of the processes involved.
Some will never be more than a byproduct of companies hunting for some of the other rare earth elements. Those byproducts just get dumped on the market, and that will probably never change. For example, no one is scrambling to secure a supply of yttrium oxide. Gadolinium oxide, though?
Three are trading above the six-digit range. Gadolinium oxide is just a moonshot for mining operations. In , China bought Magnequench, the largest American rare earth magnet company, which was based in Indiana. In doing this, China took control of the most important portfolio of rare earth patents in the world. In , China tightened its export quotas, shrinking supplies to the rest of the world.
Prices for rare earth metals and their corresponding stocks shot through the roof as a result. That alone was problem enough. But this was also a matter of national security. Rare earth metals are an integral part of cutting-edge civilian and military technology.
The F fighter jet, for example, contains nearly a half ton of rare earth metals. As tensions cooled, China relaxed its regulations and rare earth prices crashed back down. This devastated rare earth companies outside of China. The biggest example of that is what happened to Molycorp. But it was unable to service that debt when prices crashed back down. Molycorp filed for Chapter 11 bankruptcy protection in and now focuses on refining rare earth metals, as opposed to mining them.
What happened with Molycorp is a prime example of what can go wrong for rare earth metal companies. China demonstrated its capacity and willingness to make sure its hegemony can and will be maintained. For one thing, governments — including the United States government — seem to have learned that China is less than reliable as a partner. As a result, governments have issued directives to prioritize domestic rare earth production.
The U. However, it will not be at market rates. A premium will be paid for basic economic scaling and the costs of production. The biggest risk for that cost of production? Rare earth mines and refineries spew out huge amounts of toxic chemicals that are incredibly expensive to sequester and dispose of, especially when it comes to surface water and groundwater contamination.
Dysprosium oxide helps keep nuclear reactors cool, and terbium is in TV screens and solid-state hard drives. Because of its differences in properties, scandium is in a class by itself. The primary use of scandium in the U. The Risks of Investing in Rare Earth Metals With such a long list of industrial applications, you might assume that rare earth metals are a safe bet due to their demand.
However, the production is much lower than other mining operations: about , tons a year. Even with comparatively low production, most are in surplus supply. Heavy rare earth metals are in higher demand since they are harder to find, but China has nearly exclusive production of these elements. Although companies in other countries are pursuing their own mining initiatives, they can take several years to become operational.
Relatively low and unstable supply and demand, combined with the scarcity, environmental impact of extraction and challenging purification process, make investing in rare earth metals risky. Not to mention that China controls enough of the market to dictate prices as its leaders see fit. A beginner investor would find safer diversification opportunities in precious metals like gold, silver, and platinum.
How To Invest in Rare Earth Metals Despite the risks, rare earth metals are valuable and in high demand across many industries. Most rare-earth mining ambitions fizzle out as companies struggle to find the funds while searching for higher concentrations of elements. Lynas mines rare earths in Australia and processes them in Malaysia and, recently, the United States. In the U. The fund focuses not only on investing in rare earth metals but also in strategic metals like cobalt and titanium.
Another fund is the Dolefin Rare Earth Elements Fund in Switzerland, which invests in rare earth element companies and platinum group metals producers. One of these ways is through recycling facilities, primarily for magnets. Companies such as American Resources Corp.
Even though China still has a stranglehold on rare earth supply and production, experts are optimistic about the future of rare earth elements in terms of supply and demand. The year also brought a major announcement from MP Materials: the opening of a magnet plant and a deal with General Motors.
Analysts predict that if the global chip shortage eases, certain rare metals should see a healthy increase in demand as automakers need them for catalytic converters. Additionally, as renewable energy technologies continue to grow in the U.
Since the industry is so complex and politically turbulent, investing in rare earth metals is not for the faint-hearted. For investors determined to get their foot in the door, experts recommend watching EV sales and other green energy statistics to get a read on the rare earths market. At Oxford Gold Group , we want to help educate you about your investment options. For personalized advice and information on investing in rare earth metals, contact us at GOLD.
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