REMX: Invest in these metals that are vital for advanced technologies

• We are bullish on the structural growth story for rare-earth and strategic metals (RESMs), due to their widespread usage in emerging green technologies like electric vehicles and renewable energy.
• Traditional end-uses of RESMs, such as catalytic converters and electronic devices, will continue to form the backbone of steady growth in RESM demand.
• Due to the widespread usage of RESMs, countries are moving towards greater self-reliance. This push towards self-reliance will likely be accelerated by the recent Russia-Ukraine War, which has exposed Europe’s over-reliance to Russian energy.
• The VanEck Rare Earth/Strategic Metals ETF (NYSE:REMX) gives investors exposure to companies that supply these RESMs.
• Using a fair PE ratio of 20X, we project a target price of USD170 for REMX, giving an upside potential of +47% by FY24.

The world is slowly but surely moving towards a greener and more sustainable future. In this article, we look at the outlook for rare earth and strategic metals, and we believe that demand for these metals will remain strong as we move towards a greener future.

An introduction to rare-earth and strategic metals

Rare-earth and strategic metals (RESMs) are necessary for the production of many frontier technologies like electric vehicles (EVs) and electronics (semiconductors), especially as they typically have few substitutes. We now look at rare-earth metals and strategic metals separately.

Rare-earth metals

Rare-earth metals (rare-earths) are a group of 17 metals with similar chemical properties and are generally in short supply due to the high costs associated with extracting and processing them.

On the supply-side, China is a clear market leader across the supply-chain, helped by expertise and supply-chain knowledge accumulated over decades. China accounts for 35% of global rare-earth reserves (Chart 1) and majority (61%) of global rare-earth production in 2021 (Chart 2). China is even more dominant in rare-earth processing and has an 80 - 90% market share estimated by the International Energy Agency (IEA). 

Chart 1: China dominates global rare-earth mine reserves

Chart 2: While China still dominates rare-earth production, more players have emerged

On the demand-side, key end-uses of rare-earths include magnets, glass, and catalysts (Chart 3). These three end-uses account for majority (65%) of rare-earth demand in 2019 and are expected to remain key drivers of demand of rare-earths in 2025 (70%). Due to the importance of rare-earths in the technologies listed above, global demand as a whole is estimated to grow at a CAGR of 7% from 2019 – 2025 (Chart 4).

Chart 3: Magnets, glass, catalysts are the main end-uses for rare-earths

Chart 4: Demand for rare-earths expected to see robust growth (CAGR: 7%)

Strategic metals

Strategic metals generally refer to RESMs that do not fall under rare-earths. They are chemically different from rare-earths, but their end-uses make them similarly important for advanced technologies. Common examples include lithium and cobalt, though we will use lithium as an example for our analysis below, given its large representation in the ETF we are considering (NYSE:REMX).

On the supply-side, lithium production is dominated by Australia. Production has risen significantly in the past decade and Australia now accounts for majority (52%) of the world’s lithium production as of 2021 (Chart 5). On the demand-side, lithium-ion batteries are the key driver, accounting for 74% of end-use demand (Chart 6). As EVs require these batteries and are becoming increasingly popular, analysts generally expect the lithium market to grow at a CAGR of about 10 – 20% in the next 5 years.

Chart 5: Australia accounts for majority of world’s lithium production

Chart 6: Lithium is mainly used for battery manufacturing

Summarising supply-demand dynamics for RESMs

To summarise, China is the market leader in supplying rare-earths, while demand for rare-earths is mainly led by magnets, glass and catalysts. As for strategic metals, looking at lithium (for reasons outlined above), Australia is a leader in production with demand driven mainly by lithium-ion batteries.

We also note that existing technologies cannot adequately replace RESMs with other cheaper metals. Rare-earths are difficult to replace due to their chemical uniqueness. As for strategic metals, using lithium as an example, lithium-ion batteries are preferred by EV companies like Tesla due to their superior charge capabilities, despite alternatives like zinc-based or lead-based batteries.

Therefore, we believe that any structural increase in RESM demand will lead to long-term increases in RESM prices due to the lack of substitutes, and support margins and earnings of RESM-related mining companies. With this understanding of both REMs and lithium, we now look at some positive drivers for these metals and their related companies.

Bullish on RESM structural growth story due to emerging green technologies

We believe that the push towards emerging green technologies will fuel strong long-term demand for RESMs. We look at some end-uses that help to make our world more environmentally sustainable, and how rare earth and strategic metals fit in this picture.

Green technologies that make use of RESMs

First, electric and hybrid vehicles require rechargeable batteries that use RESMs. For example, the nickel-metal hydride battery uses a lanthanum-based alloy. More recently, lithium-ion batteries have been shown to have higher energy densities and longer lifespans, and these batteries utilise other strategic metals like manganese and cobalt too. As EVs become increasingly popular and begin accounting for a larger proportion of automobile sales (Chart 7), demand for lithium should correspondingly increase as well.

Second, renewable energy production requires equipment that utilise RESMs. Wind turbines use rare-earth magnets like neodymium (NdFeB) and praseodymium as they can generate strong magnetic fields without requiring external power sources, resulting in greater efficiency and lesser maintenance costs. Solar panels use compound semiconductors, which typically contain strategic metals like gallium, indium, cadmium, and tellurium. While renewable energy only accounts for a small portion of our total energy production at the moment, they are expected to grow massively in the coming decades (Chart 8), boosting demand for their respective metals.

IEA has constructed different plausible scenarios, such as whether technologies will shift towards more or less RESM usage, or how supportive government policies will be in future. Based on these scenario, they believe that due to clean energy technologies, demand for rare-earths could increase from 3x to 7x between 2020 and 2040 (CAGR of 6 – 10%), while demand for lithium could increase 13x to 51x (CAGR of 14% - 22%).

Chart 7: New EV sales account for increasing proportion of overall auto sales

Chart 8: Renewable energy share expected to grow massively

Environmental concerns will be increasingly mitigated

Nonetheless, there are environmental concerns surrounding the extraction processes of RESMs. While we acknowledge these concerns, we believe they will be increasingly mitigated by stringent regulations and emerging technologies. Firstly, companies are usually mandated by law to build waste management facilities (e.g. Lynas’s license in Malaysia was previously paused until it had built a waste treatment plant). Secondly, emerging technologies such as bioleaching and phytomining (using microbes / plants respectively) could potentially reduce the net environmental impact of rare-earths. Therefore, we do not expect these environmental concerns to weigh significantly on RESM demand.

Green benefits outweigh the drawbacks – expect strong growth in RESM demand

To summarise this section, RESMs are vital for many different green technologies. While they have their individual environmental drawbacks, these generally remain well-managed, and their green benefits should outweigh their costs. As a result, we believe that the RESM structural growth story is very positive due to the increasing adoption of emerging green technologies, and remain bullish on both RESMs and RESM-related companies.

Traditional technologies support steady demand for RESMs

While emerging green technologies can drive the structural growth in RESM demand, we also believe that traditional technologies can act as the backbone for steady RESM demand.

For example, catalytic converters typically use cerium (IV) oxide or ceria-zirconia. Catalytic converters have been legally mandated in most traditional vehicles since the 1970s, as they help to convert toxic emissions into less-toxic products. While the world is moving towards greener forms of transportation (e.g. EVs), we believe that demand for traditional vehicles should remain strong in the near-medium term given their affordability, as well as pent-up demand and supply-chain disruptions from the pandemic.

Apart from green applications, RESMs are also commonly used in our everyday electronics. Looking at a typical smartphone, its lithium-ion battery uses lithium, its sound system uses rare-earths like neodymium and praseodymium, and its touchscreen uses indium, while the semiconductors in its phone chips also use metals like gallium. In addition, our glass screens (on smart devices, laptops etc.) require rare-earth phosphors (e.g. yttrium), and the American Geosciences Institute also estimates that lanthanum makes up almost 50% of digital camera lenses (including those on phones). With electronics becoming increasingly ubiquitous, we believe that RESM demand should also increase over time from such end-uses.

In summary, RESMs are also critical for established technologies we use every day, like transportation and electronics, which can contribute to steady growth in demand for RESMs. Coupled with the strong growth potential arising from green technologies (in the previous section), we believe that the overall demand outlook for RESMs remains very positive.

Race towards self-reliance driving the industry

As RESMs are crucial to both established and emerging technologies, we expect governments to focus increasingly on self-reliance across the entire supply chain of RESMs. This race towards self-reliance should be further accelerated by the recent Russia-Ukraine War, which has highlighted the risks of an over-reliance on a single trading partner (Europe’s over-reliance on Russian energy).

For example, in the US, Trump issued Executive Orders 13817/13953 in 2017/2020 to highlight the over-reliance on RESM imports. Biden’s 2021 infrastructure bill also contained multiple grants for RESM companies. In 2022, Biden has also issued a USD35 million grant to MP Materials, and has authorised the Defense Production Act (USD750 million of funds) to support mining companies involved in strategic metals like lithium.

Another example is Australia, which is a key supplier of RESMs. The Minister of Resources and Water has published a “Critical Minerals Strategy” report, which includes several government initiatives, such as a AUD2 billion Critical Minerals Facility and a AUD1.3 billion Modern Manufacturing Initiative. It was also recently announced that Iluka Resources would be getting a AUD1.25 billion federal loan to boost its rare-earth-refining capabilities (which is currently monopolised by China).

This race towards self-reliance is even more relevant given that production of RESMs is relatively concentrated compared to some “traditional” metals. We highlighted above that 61% of rare-earths production was in China, while 52% of lithium production was in Australia. In contrast, using copper as an example of a “traditional” base metal, the extraction of copper is much more diversified geographically (Chart 9), making self-reliance in copper less crucial given the larger number of sources.

Countries are realising that the over-reliance on any one country could be detrimental to their interests. For example, China imposed a rare-earth embargo on Japan in 2010 following disputes in the East China Sea, and threatened to cut off rare-earth exports to US in 2019 amidst US-China tensions. This push towards self-reliance will likely be accelerated by the recent Russia-Ukraine War, which has exposed Europe’s over-reliance on Russian energy exports. As such, we expect individual governments to take steps towards building supply-chain self-reliance for RESMs.

Through these two examples, it is clear that major economies like the US and Australia are beginning to put a strong emphasis on self-reliance regarding RESMs. We expect them to continue introducing new supportive policies and initiatives to improve their own supply chains, which should ultimately benefit the companies involved in this sector.

Chart 9: Copper production is relatively diversified

One ETF to gain exposure to this important industry

With multiple catalysts that could drive demand for rare-earth and strategic metals, investors may want to consider the VanEck Rare Earth/Strategic Metals ETF (NYSE:REMX). We have included some key details of this ETF in the table below (Table 1).

Table 1: Key details of REMX

This is a passive ETF that has a portfolio of 20 equity holdings. Investors can consider this ETF for a broad-based equity exposure to rare-earth and strategic metals. Looking at the listing countries of its constituents, this ETF is concentrated in Australia and China (Chart 10), due to their respective dominances in lithium and rare-earths respectively (explained above). Its top 10 holdings are also well-established names in their respective industries (Table 2).

Chart 10: REMX is tilted towards Australia and Greater China

Table 2: Top 10 holdings of REMX – mix of rare-earth and strategic metals

Summary: Investors can consider REMX for rare-earth and strategic metals exposure

With rare-earth and strategic metals looking to see strong growth ahead, driven both by green technologies and supportive government policies, as well as due to geopolitical factors, investors can consider the VanEck Rare Earth/Strategic Metals ETF (NYSE:REMX) which offers a broad-based exposure into different important metals. Using a fair PE ratio of 20X, we project a target price of USD170 for REMX, giving an upside potential of +47% by FY24.

Table 3: Rare-Earth and Strategic Metals Projections 2022 - 2024

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.