Rare Earths

There are two primary reasons why we like rare earths for 2023, particularly Neodymium (Nd) and Praseodymium (Pr):

• Provides exposure to energy transition - rare earths Nd and Pr, are needed for the manufacture of permanent magnets found in wind turbines and electric vehicles. With electric vehicles to make up a big chunk of future demand:

• Ties in with our localisation of supply chains macro theme - rare earths mining is still currently dominated by China (~63%) and as a result Western and friendly countries are working hard to shore up their rare earths supply chain. In the event of heightened tensions with China or potential conflict, these countries don’t want to be beholden to Chinese rare earths supply - they don’t want a repeat of 2010/2011. As a result, we expect new sources of supply from friendly and aligned countries to attract premium pricing. In 2022, the US rolled out funding initiatives for future Australian rare earth suppliers, something we expect to continue in 2023, further bolstering capital flows to rare earths companies.

Niobium is worth a mention too, as this rare earth is used in a range of high tech applications and can improve the performance of EV batteries - there are only 3 mines in the world that produce it, and it's been showing up on Western governments’ critical minerals lists in the last couple years.

So despite the geopolitical flavour to the rare earths outlook for 2023 - we are long term Investors and believe over the next decade demand from the energy transition will be the primary driver of capital flows into the rare earths industry.

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What the analysts say

Macquarie analysts said NdPr accounts “for around a third of global rare earth demand by volume but more than 80 per cent by value at spot prices as the market remains in deficit amid strong EV demand.”

China raised the country’s production quota 20% in 2022, but this wasn’t enough to keep up with supply.

“The rare earth quota for the calendar year 2022 was higher than we had expected, however we still believe the NdPr market remains in deficit despite the increased supply.”

UBS analyst Levi Spry “estimates the NdPr market will grow steadily at 8 per cent a year over the next decade. But there are risks posed by potential substitution by other materials.”

What about the bear case?

China could flood the market, demand could fail to appear or new supply could come into production.

Alternatively, rare earths could face risk from substitution, i.e new materials being used to perform the same function.

In October, Bloomberg noted that, “scientists may have discovered a method for making magnets used in wind turbines and electric cars without the rare-earth metals that are almost exclusively produced in China.” The material is called tetrataenite, an iron-nickel alloy.