In a late 2022 Barchart article on the REMX ETF and rare earth metals, I highlighted the technological reliance on rare earth minerals, China’s supply dominance, and the mining and processing challenges. The REMX ETF was trading at $88.72 per share on November 21, 2022, when I wrote, “The price has declined to below $90 per share, which could make REMX a bargain given the growing importance of these metals.” The price was far from a bargain, as nearly two years later, REMX was below $50 per share after trading as low as $36.01 in September 2024.
Meanwhile, REMX’s exposure to lithium and recent developments could be reasons to consider adding the ETF to portfolios at the current price level.
REMX’s lithium exposure
While the REMX ETF product has some exposure to rare earth metals, its primary exposure is to lithium-producing and processing companies.
The chart highlights the dominance of lithium-related companies in REMX’s portfolio.
A bearish trend in lithium, but signs of a significant bottom
Lithium prices have plunged since the 2022 high.
The chart highlights the substantial price decline in lithium over the past two years.
REMEX shares have followed lithium prices lower since the April 2022 $127.50 high. At $48.24 per share, REMX had just over $275 million in assets under management. REMX trades an average of 151,354 shares daily and charges a 0.53% management fee.
Commodity cyclicality favors higher lithium
Commodities are cyclical assets. Bear market trends take prices to levels where production declines as producers experience reduced profit margins or losses. As output drops, inventories decrease, and consumers increase buying and stockpiling at bargain-basement prices, leading to price bottoms.
Conversely, bull markets take prices to levels where production increases as producers take advantage of higher profit margins. As output rises, inventories begin to build, and consumers stop buying at sky-high prices, leading to price tops.
Meanwhile, commodities are volatile assets, meaning prices can often rise or fall to levels that defy reasonable, rational, and logical fundamental and technical factors, leading to extreme highs or lows during bull and bear markets.
The lithium market has experienced commodity cyclicality in its decline since 2022 which should eventually lead to a recovery rally.
China remains critical for rare earth metal and lithium supplies
The following visual highlights the world’s 2023 lithium production by country.
While Australia is the leading lithium producer, China is third. However, Australia’s geography has made China the mineral-rich country’s most significant trading partner. Economic weakness in China has weighed on lithium consumption and Australian exports to China. Since lithium is a critical ingredient in EV batteries, weakness in the Chinese EV manufacturing business has weighed on lithium demand and prices.
Meanwhile, China continues to dominate annual rare earth metal production.
The chart highlights China’s over 68.5% share of 2023 rare earth metals output. Moreover, trade agreements and investments boost China’s control to a much higher share.
Economic weakness in China has weighed on lithium and rare earth metals prices. However, the Chinese government rolled out a significant stimulus program in late September to achieve the country’s 5% growth target. China cut interest rates and bank reserve requirements to boost economic growth. The government said it is ready to provide further stimulus if necessary. A Chinese economic rebound could increase the demand for lithium and rare earth metals in the world’s second-leading economy.
Rio Tinto believes lithium is at or near a bottom with its recent Arcadium (ALTM) acquisition
Rio Tinto Group (RIO) has been a commodity producer since 1873. In October 2024, RIO announced it would acquire U.S. lithium producer Arcadium (ALTM) in an all-cash transaction valued at $6.7 billion or $5.85 per share. While the deal may not be a bargain, it reflects the experienced commodity producer’s view that lithium prices are near a cyclical price bottom. If RIO is correct, rising lithium prices could lift the REMX ETF.
While REMX remains in a bearish trend at $48.24 per share, a rise above the May 2024 $57.05 per share high could end the pattern of lower highs and lower lows, shifting the technical trend from bearish to bullish.
We may have seen a bottom in REMX at just over $36 per share. Given the potential for a recovery in China’s economy and the power of commodity cyclicality, I favor a long position in the ETF.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
