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What's Behind the Recent Surge in Rare Earth ETF?

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The world is closely watching the exchanges between China president Xi Jinping and America’s Trump. Jinping’s latest trip to a major rare earth minerals company in Jiangxi province has stirred speculations and reactions.

VanEck Vectors Rare Earth/Strategic Metals ETF’s (REMX - Free Report) gain ofaround 5% to close at $15.25 on May 21 can also be the result of this visit. Per Reuters, MVIS Global Rare Earth/Strategic Minerals Index recorded the highest one-day gain of 6.4% since October 2011 on the day.

Does the Visit Signal Retaliation by China?

Following U.S. blacklisting of China’s telecom giant Huawei and China’s promise to strike back have given rise to rounds of discussions on China’s next move in the trade war. In such a scenario, Jinping’s visit to JL MAG Rare-Earth Co., Ltd. along with China’s top trade negotiator, Liu He has triggered fresh speculations. Interestingly, most speculations end at one conclusion — China might be targeting rare earth elements to retaliate.

However, Chinese officials are trying to keep the visit discreet. In this regard, China’s foreign ministry spokesman Lu Kang claimed the visit to be absolutely standard and urged not to draw inferences from it.

Rare Earth Elements & US Connection

According to The Rare Earth Technology Alliance, there are 17 elements that are deemed rare. Found in Earth’s crust, these elements are integral for the making of modern technologies, including consumer electronics, computers and networks, communications, clean energy, advanced transportation, health care, environmental mitigation, national defense, to name a few. Available in plenty in different regions, processing rare earth elements into materials is often extremely polluting. China has created well-developed production set-ups for the same.

United States once happened to be a major producer of rare earth elements. However, over the last decade, China’s aggressive pricing schemes helped it develop almost a monopoly in rare earth materials with United States and other miners in the world exiting the segment. In fact, per a Wall Street Journal article, the only mine in the United States producing rare earth minerals, Mountain Pass, is itself dependent on China for processing. Resultantly, the United States had imported around $160 million worth of rare earth elements in 2018, with majority imports from China. The figure excludes the price of finished goods and intermediate products made using rare earths.

However, United States understands its over-dependence on foreign resources for essential minerals. Thus, in March 2019, Congress introduced a bipartisan bill to ramp up mining of U.S. rare earth elements and other critical minerals.

Can Rare Earth be China’s ‘Trump Card’ in Trade War?

China is considered the largest producer of rare earth elements as it accounts for 90% of the global production with only one-third of the world’s rare earth deposits. In fact, it accounted for 80% of the rare earths imported by the United States from 2014 to 2017.

It is believed that if China targets the rare earths exports to the United States, the effects can be catastrophic for the latter with its manufacturers in major industries like defense, oil refineries and technology struggling with supply shortages, delay and soaring raw materials prices. China can also go to the extent of targeting U.S. firms manufacturing machinery and electronics within the Chinese regions from easily accessing rare earths

However, America might have alternative sources for some of the rare earth elements, like Australia for permanent magnets. Per Reuters, China’s move might end its so-called-monopoly and speed up the process of developing alternative sources with Brazil, Vietnam, Russia, India and Australia gaining the most.

History Repeats Itself?

It is worth mentioning here that this won’t be the first time when China will resort to rare earth element production. China curtailed its rare earth exports to Japan in 2010 following dispute over islands between both the countries. This resulted in China gaining an upper hand in the dispute.

REMX ETF in a Nutshell

Against this backdrop, let’s take a look at REMX ETF which gained impressively following the latest development.

The fund tracks the investment results that correspond generally to the performance of the of the MVIS Global Rare Earth/Strategic Metals Index. Notably, the fund provides exposure to companies involved in producing, refining, and recycling rare earth and strategic metals and minerals. It has 20 holdings with an AUM of $129.1 million. The fund charges 59 bps in fees (read: ETFs From Top and Flop Zones to Start May).

Caveat

Globalization has resulted in creating “weaponized interdependence” according to a political scientist at George Washington University, Henry Farrell. It is a general understanding that sharing of manufacturing advantage in one segment with some other country results in cost-effectiveness and production efficiencies. However, this advantage is now hugely being used as a weapon in geo-political wars. America’s move to blacklist Huawei can be cited as an example of this trend. In this regard, Farrell has also stated that America’s Huawei ban is “the opening of a new and much more dramatic stage.”

Anyway, a war takes its own shape, no matter which side wages it. In this scenario, it will be prudent for investors to wait and watch what this clash will unleash.

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