Despite such wide-ranging uses in modern life, rare earths are surprisingly thinly traded in terms of total volume and dollar figures compared to other commodities that are of use to the global transition to a net zero economy. Current estimates show figures around the US$8-US$10 billion mark for total annual market value. This compares to more than US$200 billion for copper in 2022.

Rare earths are of course used in far lesser quantities, making up 0.5kg out of a total 207kg of critical minerals on average that are used to make an electric vehicle. This only makes them more sensitive to the factors that influence their prices.

Rare earths are extremely susceptible to volatile price swings when both significant geopolitical and economic events occur. 

When geopolitical risk is high, it positively affects the rare earth price, which potentially affirms a strategic and hedging value of rare earth during periods of turmoil caused by geopolitical events. They also tend to rise when they economy flourishes, and decline when it turns to doom and gloom.

As it currently stands, the best permanent magnets must have neodymium in them, usually with some dysprosium and terbium added, and they are a mainstay in the current electric vehicle and wind turbine economies. 

The idea of using different magnets without rare earths are being thrown around by the likes of Tesla. However the reality is that right now these critical minerals are such a crucial part of global supply chains that they are able to be used as political bargaining chips – and China’s dominance of their processing sees them continue to hold a strong deck of cards. The significance of this influence has been likened to the Middle East’s oil stronghold.

The likelihood of wars, terrorist attacks and state tensions are all measures of geopolitical risk and contribute to the potential panic that may arise among nations as a consequence. An instance of this was observed during a September 2010 territorial dispute that resulted in China delaying rare earth exports to Japan, which sent prices soaring. Beijing insinuated the export hold up was due to environmental concerns, but the market clearly took it as a message of China’s willingness to weaponise their dominance in the industry.

Further instances of rare earth price spikes were also observed during other geopolitical events such as the US elections, Brexit and the US-China trade war, while a significant surge in prices was seen during the Russia-Ukraine war.

Rare earth prices are strongly correlated to the price of renewable energy in a high-volatility market, and changes in rare earth prices are also strongly correlated to renewable energy indices. Trade embargoes between China and the US place additional pressure on renewable energy as a whole. Given how entrenched China is in not only downstream but upstream supply chains of these critical minerals, any negative perception of relations between China and the western world can result in rare earths spike prices, regardless of if they directly fall into political crosshairs.

The market got a solid dose of China’s dominance in a very direct matter just a few months ago. In July the country slapped export controls on some gallium and germanium products in response to the US’ restriction of technology sales to China. The two critical minerals are widely used in semiconductors and electric vehicles, and the new restrictions that threaten net zero targets around the world saw companies rushing to bulk up inventories which caused prices to spike once again.

In the coming weeks, we will be running The Insider: Rare Earths Summit, where an expert panel of fund managers, analysts and industry veterans will provide insights on market trends and how to identify potential opportunities. Click here to register your interest.

Past performance is not a reliable indicator of future performance.