The recent volatility in USA Rare Earth stock—surging nearly 90% before a sharp pullback—is a microcosm of the intense geopolitical and economic forces shaping the strategic metals market. As the world pivots towards green technologies and national defense priorities clash with supply chain realities, understanding the deep historical context of rare earth dominance and the speculative nature of emerging players is crucial for any long-term investor.
In the intricate world of commodities, rare earth metals (REMs) are rapidly moving from the shadows of oil to center stage. These seventeen elements, crucial for everything from cutting-edge defense systems to the batteries powering our electric vehicles and smartphones, are no longer just an industrial footnote. They represent a significant point of geopolitical tension and a high-stakes investment frontier. The recent rollercoaster performance of companies like USA Rare Earth (NASDAQ: USAR) exemplifies this dynamic, highlighting the urgent global scramble to secure vital supplies.
The Indispensable Role of Rare Earth Metals
The “green technologies of the future,” from advanced batteries and new engines to essential consumer electronics like iPods, heavily rely on rare earth elements. Furthermore, their applications extend deeply into national security, including components for fighter jets, missile guidance systems, and satellite technology. Metals like neodymium, praseodymium, and dysprosium are foundational for powerful permanent magnets, while tantalum and niobium are vital for medical scanners and aerospace applications. This broad utility underscores why access to these elements has become a matter of national strategic importance, not just economic convenience.
For investors seeking broad exposure to this pivotal sector, the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) offers a diversified approach. As VanEck analyst Meghana Pakala notes, REMX provides an opportunity to participate in the rare earth metals arena “without as much of the risk presented when investing in individual rare earth stocks,” tracking companies involved in producing, refining, and recycling these crucial materials.
A History of Shifting Dominance: How the US Lost the Plot
It might surprise many to learn that the United States was once the world’s leading producer of rare earths, primarily through the Mountain Pass mine in California. This dominance, however, began to erode in the 1980s and 90s. A confluence of factors contributed to this decline:
- Regulatory Hurdles: A critical misclassification in 1980 placed rare earth mining under the same stringent regulations as radioactive thorium, making domestic extraction economically unfeasible.
- Labor Costs and Environmental Concerns: Higher operational costs and increased environmental scrutiny in the US pushed companies to relocate.
- Chinese Ascent: As American production dwindled, China aggressively invested in its own rare earth industry, establishing research facilities, filing patents, and acquiring foreign technology. By 2019, China controlled an estimated 80% of global supply.
- Strategic Acquisitions: A notable turning point was the mysterious sale of Magnequench, a division of General Motors responsible for developing world-leading neodymium-iron-boron (NdFeB) magnets, to entities linked to the Chinese government. The facility was subsequently moved to China, effectively ceding critical magnet technology.
- Defense Stockpile Sale: The US national defense stockpile sold its entire strategic reserve of rare earths in 1998, further exacerbating the dependence.
This historical trajectory has led to a stark reality: the US military, for example, relies on Chinese-made magnets for critical components in advanced weaponry like the F-35 Joint Strike Fighter. This dependence on a potential adversary for national security elements is a profound vulnerability that US policymakers are now urgently trying to address, as highlighted by various reports from organizations like Defense One and concerns from the U.S. Department of Energy regarding critical mineral supply chains.
The Geopolitical Chessboard and China’s Power Play
China’s near-monopoly on rare earths, holding over half of the world’s reserves and producing over 90% of the global output in 2008, grants it immense leverage. Unlike OPEC, which struggles to coordinate output cuts among multiple nations, China can act as “a cartel of one.” This power was dramatically demonstrated in 2010 when China banned rare earth exports to Japan following a territorial dispute, sending global prices “into the stratosphere.”
While the US, EU, and Japan successfully challenged these export restrictions at the World Trade Organization, the incident underscored China’s willingness to weaponize its rare earth dominance. The subsequent collapse in prices post-WTO ruling, fueled by a torrent of Chinese exports, even contributed to the bankruptcy of Molycorp, the company that had reopened Mountain Pass.
According to the US Geological Survey (USGS), while the United States possesses one of the largest reserve bases of rare earths (14 million metric tons), it had “absolutely no mining whatsoever in recent years” as of 2008, a situation the US Congress is keen to reverse. Efforts include subsidizing domestic players like Molycorp to restart mining operations in California and exploring new sources within North America, including in Canada.
USA Rare Earth: A Speculative Play in a Strategic Market
Against this backdrop of strategic competition and supply chain vulnerability, companies like USA Rare Earth emerge as potential game-changers, albeit with significant risk profiles. The recent surge and subsequent decline in USAR’s stock, while not directly tied to any new news, reflects the market’s high hopes and inherent caution regarding pre-revenue ventures in this capital-intensive sector.
Unlike more established players like MP Materials, which operates the revitalized Mountain Pass mine and is already generating revenue and cash flow from neodymium-praseodymium oxide production, USA Rare Earth is still in development. The company is actively working to establish a facility to produce rare-earth magnets, with operations projected to commence in early 2026. This forward-looking timeline positions USAR as a speculative investment, appealing to those with higher risk tolerances who believe in the long-term imperative for domestic rare earth magnet production.
Looking Ahead: Opportunities and Challenges for North American Supply
The imperative to secure a resilient rare earth supply chain for North America is clear. The proposed solutions often include:
- Removing Regulatory Barriers: Streamlining the permitting process, which can currently take 7 to 10 years in the US.
- Increased Investment: Dedicating more defense and government funding to rare earth mining, processing, and refining.
- Centralized Processing: Establishing cooperative rare earth refineries, potentially focusing on heavy rare earths and even exploring thorium-based nuclear energy by-products.
- Exploration and Development: Identifying and developing new deposits in North America. Companies like Defense Metals Corp in British Columbia, Canada, are progressing promising light rare earth deposits. Cypress Development Corp in Nevada, focusing on lithium, also shows potential for producing rare earth oxides like neodymium, dysprosium, and scandium as by-products, which could significantly offset processing costs.
For long-term investors, the rare earth sector presents a unique opportunity driven by macro trends like decarbonization, technological advancement, and national security. While individual stocks like USA Rare Earth carry higher risk due to their developmental stage, they offer significant upside if they can successfully contribute to breaking China’s monopoly. The overall trend suggests that rare earth metals will only grow in importance, making strategic investments in this space a compelling consideration for the future.
