China Buoys Rare Earth Exports -- Can ETF Reverse Course?

Dec.29.11 | About: VanEck Vectors (REMX)

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China is the world’s largest rare earth metals supplier and is reported to keep 2012 export quotas in line with 2011. Higher prices and a global slowdown are influencing this decision, along with an attempt to dominate the segment of the market.

The rare earth metals-focused exchange traded fund, Market Vectors Rare Earth/ Strategic Metals (NYSEArca: REMX), may have a chance to brea kout of the negative pattern seen in 2011 as China has announced that export amounts will remain steady. China is the key exporter of rare earth metals used in making defense systems, wind turbines and iPhones, among other things.

The rare earth ETF is down nearly 40% this year.

Dow Jones Newswires reports that China controls about 95% of the world’s rare earth metal supply. Export quotas had been reduced previously in an effort to control prices, which has led to a price surge in recent years.

“There is an economic war over the rare earths, with China on one side, and other industrialized nations on the other: Japan, the United States, and the Eurozone,” said Luisa Moreno, Jacob Securities analyst, in the report. “China is probably winning. It has decreased exports in the last few years and increased protection. It has attracted a great deal of the downstream business and it is positioning itself well.”

Rare earth metals as an investment are still a relatively new niche of the market. The rare earth market is not dominated by a simple supply and demand equation. The start-up period for companies specializing in exploring, developing, mining, and processing the metals is a long time in the works, according to The Business Insider.

“So it will not be economic logic that results in these companies getting bought out and having their deposits developed. It’ll be strategic logic linked to long-term security-of-supply and redundancy concerns,” John Kaiser, online editor of Kaiser Research, said. “And were seeing that sort of psychology at work in this market. It’s a bit of a niche in this market. Not as big as gold, but it is an interesting one because of the long term real economy link implications.”

Market Vectors Rare Earth/ Strategic Metals

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Tisha Guerrero contributed to this article.

Disclosure: None