HardAssetsInvestor

Written by Julian Murdoch  |

November 08, 2010

REMX: A Beefed-Up GDXJ?

Details

The explosive launch of the new rare earth metals ETF late last month brought these 17 oddball metals into sharp focus. But is REMX really a pure REE play?

 

Last week saw an explosive debut for the Market Vectors Rare Earth/Strategic Metals ETF (NYSE Arca: REMX), an ETF whose ins and outs we covered on a recent podcast episode.

The ETF, which tracks miners involved in the production of the 17 REEs and 32 "strategic" metals, is now up to over $22 million in assets under management in just two weeks' trading.

Maybe it shouldn't be so surprising, given that investors finally seem to be waking up about REEs' critical role in 21^st-century technologies. These metals, most of which have names that wouldn't sound out of place in a "Doctor Who" episode, appear in everything from DoD radar defense systems to that smart phone you're reading this article on.

But is REMX the right ETF for the rare earth space? Let's take a look under the hood.

 

Rare, Or Just Undersupplied?

Currently, China is the world's main supplier of rare earth elements and is responsible for anywhere from 95 to 97 percent of rare earth metals produced globally. Other countries produce various metals, of course, but China is king.

That makes the rest of the world nervous when China begins talking about cutting REE export quotas, like it did in October. But the truth is, China has reduced exports of these metals for years to meet increases in domestic demand. Mark Smith, CEO of rare earth miner Molycorp (NYSE: MCP), estimates export quotas have dropped by an average of 6 percent every year for the past nine years.

Of course, reductions this year have been much higher. In July, China cut exports for the second half of 2010 by a whopping 72 percent, and by October, either those export levels had been met or further restrictions were being imposed—no one was really sure.

This uncertainty of what was behind slowing exports resulted in a bit of a political kerfuffle between Japan and China, with Japan accusing China of blocking shipments to the country after Japan arrested a Chinese fishing boat captain. Still, China recently reiterated that it had no desire to politicalize rare earth metals, and that it would maintain its existing rare earth exports in 2011.

Given rising demand and unsure Chinese supply, various companies outside the country with dormant rare earth mines now have plans to reopen those mines, according to Bloomberg. Molycorp Inc. owns a mine in California it plans to reopen, and possibly increase capacity while doing so. In addition, an Australian mine owned by Lynas is scheduled to come online within the next two years.