Will Toyota’s Plans Sink Rare Earth Metal ETFs?

by on January 19, 2011 | ETFs Mentioned:

With oil once again approaching $100/bbl., investors are becoming increasingly bullish on everything alternative as solar, wind, and clean tech companies have all seen 2011 start off much better than 2010 ended up. This renewed optimism for clean tech investing has caused many investors to take another look at some of the industries most vital to the production of these components, such as rare earth metals and lithium.

This is especially important in the hybrid and electric car industry, where rare earths and lithium are increasingly crucial. Rare earths are used in the Nissan Leaf, the Chevy Volt, Honda Insight, and Toyota Prius, creating a broad base of companies in needs of rare earth metals to drive growth of new product lines. Lithium also plays a very important role as well; virtually all of the cars listed above rely on lithium-ion batteries to store power for their propulsion systems, ensuring that the production and development of these battery systems remain crucial for the next generation of autos as well [also read Ten Commandments Of ETF Investing].

However, many companies are growing increasingly concerned over the markets for these elements as a few choice countries–China for rare earths and the Andean nations of South America for lithium–control vast quantities of the world’s known supply, potentially putting a number of industries at the mercy of foreign governments. Due to this reality, many firms have begun to look for alternatives to rare earths in order to power new technologies that will not have to be victims to future supply disruptions. One company that is at the forefront of this development is Toyota, the world’s largest seller of hybrids, thanks in large part to the popularity of its Prius vehicle [see Dude Where's My Car ETF?].

Toyota is sinking vast sums into research and development of new technologies which seek to limit the needs for rare earth metals. This is especially important for Toyota, since the Japanese have had a long-standing rivalry with the Chinese who are rapidly developing a car industry of their own. Toyota would hate to fall prey in the future because of this scenario, and as a result is rapidly developing alternatives to the current system. Recently announced plans call for Toyota to completely phase-out rare earth metals from its increasingly popular alternative-power cars . “This is something that we have to address as more manufacturing of electric vehicles and hybrids come on line,” said Jana Hartline Toyota’s environmental communication manager in regards to rare earth metal supplies. “Does that mean next week? No. It becomes a legitimate thing to consider when you talk about production in the order of millions over several years.”

Toyota is also planning on developing a new battery to replace the current industry standard of lithium-ion as well. These new magnesium-sulfur batteries can potentially hold twice as much energy as their lithium-based counterparts–as much as 4,000 watt hours/liter of electricity according to Toyota engineers. According to some sources, Toyota does not believe that lithium can really be a viable power storage device for cars on a mass scale and that better alternatives will need to be developed in order to truly bring electric cars to the masses. “Going from nickel-metal hydride to lithium ion, you essentially double the energy capacity,” Jeffrey Makarewicz said. “Lithium ion theoretically, under ideal conditions, has a capacity of about 2,000 kilowatt hours. That’s still not enough to really make a very competitive battery that’s necessary for future plug-in, electric and hybrid-electric vehicles.” [also see Three ETFs To Play The Coming Energy Storage Boom]

If these plans take off as some are expecting them to, it could create an obstacle for the still young rare earth metal and lithium industries, potentially choking off growth in the not-to-distant future. While it is true that both will still be extremely important to a variety of key applications that are crucial to modern life no matter what happens in the car industry, the fact remains that their exclusion from the next generation of automobiles would be a tremendous blow to the industry at large. Below, we profile the two ETFs tracking this increasingly important industry and how they could be impacted by this news from the world’s hybrid car leader.

Market Vectors Rare Earth/Strategic Metal ETF (REMX)

For investors seeking exposure to the broad rare earth metal sector REMX makes for a compelling choice. The fund tracks the Market Vectors Rare Earth/Strategic Metals Index, a rules based, modified capitalization weighted, float adjusted index intended to give investors a means of tracking the overall performance of publicly traded companies primarily engaged in a variety of activities that are related to the mining, refining and manufacturing of rare earth/strategic metals. The ETF offers exposure to 24 securities in total including heavy exposure to companies based in Australia, Canada, and the U.S. Top individual holdings go towards two Australian firms, Lynas Corp and Iluka Resources, with Canada’s Thompson Creek Metals trailing not far behind. Despite being relatively new, REMX has already caught on with investors trading roughly 1.3 million shares a day with an AUM of just over $300 million, making it already one of the most popular ETFs in the Commodity Producer Equities ETFdb Category.

Global X Lithium ETF (LIT)

This fund has a more narrow focus than its counterpart from Van Eck, targeting the lithium industry. LIT tracks the Solactive Global Lithium Index which is comprised of companies engaged in some aspect of the lithium industry such as lithium mining, exploration and lithium-ion battery production. The fund strives to maintain a 50/50 split between lithium miners and battery producers and currently has its top holding in Chilean mining firm SQM, which makes up roughly 23% of the fund’s total assets, and its second biggest holding in FMC Corp (19%), a company known for its lithium compound production prowess [see more on LIT's Holdings page].

Death of an Industry?

Assuming Toyota’s plans to replace rare earths and lithium succeed, it will represent a large setback for the sector since a major area of growth will likely be choked off. However, thanks to the extremely well-diversified nature of uses for these products the industries are likely to survive and even prosper for decades to come. Rare earth metals remain crucial for a variety of other in-demand products including jet engines, flat-panel TVs, and precision-guided weapon systems. Lithium finds its way into roughly 90% of laptops and 60% of cell phones as well as a variety of less advanced uses such as glass. These markets are likely to retain their needs for the metals far longer than the ultra-competitive car industry where vast quantities of the elements must be used, a scenario which forces the automakers to always be considering alternatives in order to keep costs low and profits high. The metals in the above ETFs are simply too important to too much of modern society to fall by the wayside without a seismic technological shift that even Toyota is unlikely to be able to bring to bear on the markets, suggesting that although the recent developments are not great news for the industry, they are far from the death-kneel that some are forecasting it to be [see Strategic Metal ETFs Head-to-Head: REMX vs. LIT].

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Disclosure: Eric is long LIT.