As tensions in Ukraine and Russia continue, rare earth metal prices will soar

The conflict between Ukraine and Russia could lead to higher prices for rare earth metals in major application industries.

Author: Abizer Shaikhmahmud, Future Market Insights

Industry frontier compilation

At a time when the supply chain crisis caused by the covid-19 pandemic has not yet recovered, the international community has ushered in the Russian-Ukrainian war. Against a backdrop of rising prices becoming a major concern, the impasse could extend beyond gasoline prices, including industrial sectors such as fertilizers, food and precious metals.

From gold to palladium, the rare earth metals industry in both countries and around the world can experience bad weather. Russia could face significant pressure to meet 45 percent of the world's palladium supply, as the sector is already in trouble and demand exceeds supply. In addition, restrictions on air transport since the conflict have further exacerbated the difficulties for palladium producers. Globally, palladium is increasingly being used to produce automotive catalytic converters to reduce harmful emissions from oil or diesel engines.

Both Russia and Ukraine are important rare earth metals powers, with a considerable share of the global market. According to esomar-certified Future Market Insights, the global rare earth metal market is expected to grow at a CAGR of 6% by 2031, and both countries are likely to dominate. However, given the current situation, the above forecast could change significantly. In this article, we will delve into the expected impact this impasse could have on key end-sectors deploying rare earth metals, as well as insights into its expected impact on key projects and price volatility.

Problems in the engineering/information technology industry can harm the interests of the United States and Europe

As a major hub for engineering and IT technology, Ukraine is considered a lucrative region for nearshore and offshore third-party services. Thus, Russia's invasion of former Soviet partners is bound to affect multiple interests – especially the United States and Europe.

This disruption of global services could affect three main scenarios: businesses outsource workflows directly to service providers across Ukraine; Outsourcing work to companies in countries such as India, which complement their capabilities by deploying resources from Ukraine, as well as to businesses with global commercial service centers made up of war zone employees.

The fact that rare earth elements are widely used in key electronic components such as smartphones, digital cameras, computer hard disks, fluorescent and LED lights, computer monitors, flat-screen TVs and electronic displays further emphasizes the importance of rare earth elements.

This war has created widespread uncertainty and serious concerns not only in securing talent, but also in the manufacture of the raw materials needed for information technology (IT) and communications infrastructure. For example, Ukraine's divided territories in the Donbass region are rich in natural resources, the most important of which is lithium. Lithium mines are mainly located in the Kruta Balka mine in Zaporizhzhia Oblast, the Shevchenkivse mine in Dontesk and the Pookhivsk mine in the Dobra region of Kirovohrad. Mining operations in these areas have now been halted, which could lead to large fluctuations in the price of rare earth metals in the region.

Increasing global defense spending has led to higher prices for rare earth metals

Given the high level of uncertainty caused by the war, countries around the globe are working to strengthen their defense and military capabilities, especially in areas within Russia's sphere of influence. For example, in February 2022, Germany announced a $100 billion allocation ($113 billion) for the establishment of a special armed forces fund to keep its defense spending above 2 percent of GDP.

These developments will have a significant impact on the outlook for rare earth manufacturing and pricing. The move further strengthens the country's commitment to maintaining a strong defense force, complementing several key developments in the past, including a 2019 agreement with Northern Minerals, an Australian high-tech metal producer, to mine rare earth metals such as neodymium and praseodymium.

At the same time, the United States is ready to protect its NATO territory from open Russian aggression. While no troops will be deployed on Russian territory, the government has announced that it has decided to defend every inch of territory where defensive forces need to be deployed. As a result, the allocation of defense budgets is likely to increase, which will greatly improve the price prospects of rare earth materials, deployed in systems such as sonar, night vision goggles, laser rangefinders, communications and guidance systems.

Could the impact on the global semiconductor industry be worse?

The global semiconductor industry, which is expected to turn around by mid-2022, faces enormous challenges due to the confrontation between Russia and Ukraine. As a key supplier of components needed for semiconductor manufacturing, this apparent competition could lead to manufacturing restrictions and supply shortages, as well as significant price increases.

Given the widespread use of semiconductor chips in a wide range of consumer electronics, it's not surprising that even a slight escalation of conflict can throw entire supply chains into chaos. According to the Future Market Watch report, by 2030, the global semiconductor chip industry will show a compound annual growth rate of 5.6%. The entire semiconductor supply chain consists of a complex ecosystem of manufacturers from different geographies who offer a wide range of raw materials, equipment, manufacturing technologies and packaging solutions. In addition, it includes distributors and consumer electronics manufacturers. Even a small dent in the entire chain creates foam that affects every stakeholder.

If the war worsens, the global semiconductor industry is likely to experience severe inflation. Companies will begin to protect their interests and hoard semiconductor chips in large quantities. Eventually, this will lead to a widespread shortage of inventory. But one thing is certain, there is a chance that the crisis will eventually be alleviated. This is good news for the overall market growth and price stability of the semiconductor industry.

The global electric vehicle industry could face significant headwinds

The global auto industry is likely to feel the most significant impact of this conflict, with the European market in particular descending into madness. Globally, manufacturers are concentrating on determining the scale of this global supply chain war. Rare earth metals such as neodymium, praseodymium and dysprosium are often used as permanent magnets for the production of lightweight, miniaturized and high-efficiency traction motors and may be undersupplied.

According to the analysis, due to the disruption of car supply in Ukraine and Russia, the European automotive industry will be hit the hardest. Since the end of February 2022, several global automotive companies have stopped shipping orders from local dealers to Russian partners. In addition, some automakers are curbing production activity to offset this austerity.

On February 28, 2022, German automaker Volkswagen announced that it had decided to stop production at two electric vehicle plants for a full week due to the intrusion disrupting the delivery of parts. The automaker has decided to stop production at the Zwickau and Dresden plants. In other components, the delivery of cables has been severely interrupted. In addition, the supply of key rare earth metals, including neodymium and dysprosium, may also be affected. 80% of electric vehicles use these two metals to make permanent magnet motors.

The war in Ukraine could also seriously affect the global production of electric vehicle batteries, as Ukraine is the world's third-largest producer of nickel and aluminum, two very valuable resources necessary for the production of batteries and components for electric vehicles. In addition, Ukraine produces nearly 70 percent of the neon gas needed for components such as chips worldwide, and there is already a shortage of these parts, causing the average transaction price of new cars in the United States to rise to incredible new heights. That number is likely to be only higher this year.

Will the crisis affect commercial investment in gold?

The political stalemate between Ukraine and Russia has raised serious concerns and concerns in major terminal industries. However, when it comes to the impact on gold prices, the situation is different. Russia is the third largest gold producer in the world, with an annual production of more than 330 tons.

The report shows that as of the last week of February 2022, gold prices have risen sharply as investors seek to diversify their investments in safe-haven assets. Spot gold prices reportedly rose 0.3 percent to $1912.40 an ounce, while U.S. gold prices are expected to rise 0.2 percent to $1,913.20 an ounce. This suggests that investors are very optimistic about the performance of this precious metal during the crisis.

Arguably, the most important end-use of gold is to manufacture electronics. It is an efficient conductor for connectors, relay contacts, switches, solder joints, connecting wires and connection strips. As for the actual impact of the crisis, it is unclear whether there will be any long-term effects. But as investors seek to shift their investments to a more neutral side, short-term contradictions are expected, especially between warring parties.

Given the highly volatile nature of the current conflict, it is difficult to predict the direction of the rare earth metals industry. Judging from the current development trajectory, it seems certain that the global market economy is heading for a long-term recession in the production of precious and rare earth metals, and key supply chains and dynamics will be interrupted in the short term.

The world has reached a critical juncture. Just as the situation was just beginning to normalize in the wake of the Covid-19 pandemic, political leaders seized the opportunity to relaunch their ties with power politics. To protect themselves from these power games, manufacturers do everything they can to protect existing supply chains, stop production wherever necessary, or cut distribution agreements with warring parties.

At the same time, analysts expect a glimmer of hope. While supply-side constraints from Russia and Ukraine may prevail, there is another strong region where producers are looking to get involved – China. Given the wide range of precious metals and raw materials mined by the East Asian powerhouse, the restrictions as understood could be set aside. European manufacturers may re-enter into production and distribution contracts. Everything depends on how the leaders of the two countries handle the conflict.

Abizer Shaikhmahmud is a content author and editor for Future Market Insights, an esomar-certified market research and consulting market research firm.

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