Rare-earth metal prices will skyrocket as Ukraine-Russia tensions continue

As the world barely recuperates from Covid-19-induced supply chain crunches, the international community braces for yet another crisis – the Russia-Ukraine War. Occurring against a background wherein price inflations are a big worry, the standoff may extend beyond gasoline prices, encompassing such industrial sectors as fertilisers, food products, and precious metals.

From gold to palladium – the rare-earth metals industry across both countries and across the world are likely in for rough weather. Meeting 45 per cent of global palladium supply, Russia is likely to face significant pressure with the already struggling industry, where demand has outstripped supply. Furthermore, curbs on air transport since the genesis of the conflict have further heightened difficulties for palladium manufacturers. Globally, palladium is being increasingly used for producing vehicle catalytic converters, designed to reduce noxious emissions for petroleum or diesel-fuelled engines.

Both Russia and Ukraine are important rare-earth metal powerhouses, contributing a significant share in the global market. With ESOMAR-certified Future Market Insights projecting a 6 per cent value CAGR for the global rare-earth metals market until 2031, both countries will likely occupy an important position. However, given the present circumstances, the said forecast may alter significantly. In this article, we shall delve into the anticipated impact the standoff is likely to have across key end-use industries deploying rare-earth metals, along with insights on its anticipated impact on key projects and price fluctuations.

Kinks in the engineering/IT industry may hamper American and European interests

Emerging as the primary hub of engineering and IT skills, Ukraine is considered a lucrative region for near-shore and offshore third-party services. Consequently, Russia’s invasion of its former Soviet companion is bound to affect multiple stakes – especially American and European ones.

Such a disruption of global services is likely to impact three major scenarios: corporations directly outsourcing workflows to service providers across Ukraine; companies that outsource work to countries such as India who supplement their capabilities by deploying resources from Ukraine, and enterprises that have their Global Business Service centres comprising of employees from the warzone.

The importance of rare-earth elements has been accentuated by the fact that they are extensively deployed across key electronics components such as smartphones, digital cameras, computer hard disks, fluorescent and LED lights, computer monitors, flat-screen television, and electronic displays.

The war has generated widespread uncertainties and significant concerns, not only with regard to securing a talented workforce, but also with regard to raw materials, which are necessary for manufacturing IT and telecommunications infrastructure. For instance, Ukraine’s breakaway territories in the Donbass region possess abundant natural resources, most importantly, lithium. Lithium fields are concentrated across Kruta Balka in the Zaporizhzhia oblast, the Shevchenkivse field in Dontesk, and the Polokhivske field in the Dobra area of Kirovohrad. Currently, mining operations have ceased in these regions, which may lead to significant price fluctuations in the region for rare-earth metals.

Escalating defence expenditures globally to escalate rare-earth metal prices

Given the extremely high degree of uncertainty due to the war, countries globally are striving to enhance their defence and military capabilities, especially the regions within the Russian Sphere of Influence. For instance, in February 2022, Germany announced an allocation of €100bn (US$ 113bn) for establishing a special armed forces fund, keeping its defence spending above 2 per cent of its GDP.

Such developments would have significant impacts on rare-earth manufacturing and pricing prospects. The aforementioned move further reinforces the country’s commitment to maintain a strong defence force, supplementing several key developments in the past, including a 2019 deal with Australian high-tech metal producer Northern Minerals for mining rare-earth metals such as neodymium and praseodymium.

Meanwhile, the US is already preparing to safeguard its NATO territories from overt Russian aggression. While no troops would be deployed on Russian soil, the government has announced its decision to defend every inch of their territory for which defensive troops would need to be deployed. As a result, there is likely to be an increase in defence budget allocation, which would significantly improve price prospects for rare-earth materials, to be deployed across such systems as SONAR, night-vision goggles, laser range finders, and communications and guidance systems.

Impact on the global semiconductor industry likely to be worse-off?

The global semiconductor industry, which was anticipated to take a turn for the better by mid-2022, is expected to face significant challenges in the wake of the Russia-Ukraine standoff. Being key suppliers of components deployed for semiconductor manufacturing, the visible aggression is likely to result in manufacturing constraints and supply shortages, along with major price hikes.

Attributed to the extensive use of semiconductor chips for various consumer electronics, it is no surprise that even a slight escalation of the conflict could put the entire supply chain out of gear. As per Future Market Insights report, the global semiconductor chips industry is poised to exhibit a 5.6 per cent CAGR until 2030. The entire semiconductor supply chain comprises of a complex eco-system, involving manufacturers from different geographies who offer various raw materials, equipment, manufacturing technologies, and packaging solutions. In addition, it also comprises of distributors and consumer electronics manufacturers. Even a small dent in this entire chain can generate bubbles, impacting every stakeholder.

If the war were to take a turn for the worse, the global semiconductor industry might generate highly inflationary trends. Businesses will begin protecting their interests, hoarding semiconductor chips in large quantities. Eventually, this would cause widespread shortages in inventory. However, there is reassurance in the fact that there is a possibility the crisis may stave off eventually, which would mean good news for overall semiconductor industry market growth and price stability.

Global EV industry may face significant headwinds

Perhaps the most significant impact of the conflict is likely to be felt across the global automotive industry, with European markets especially going into a frenzy. Globally, manufacturers are putting their minds together on ascertaining the magnitude of the war on the global supply chain. Typically used as permanent magnets for producing light, compact, and high-efficiency traction motors, rare-earth metals such as neodymium, praseodymium and dysprosium are likely to become deficient in supply.

It is apprehended that the European automotive industry will likely be hit the hardest, as supply lines from both Ukraine and Russia freeze. Several global automotive companies have stopped shipments of local dealer orders to Russian partners since late February 2022. Additionally, several automotive manufacturers are curbing production activity to offset this crunch.

On 28 February 2022, German automaker Volkswagen announced its decision to halt production for the entire week at two electric car plants, after the invasion disrupted component delivery. The automaker has decided to halt production at its Zwickau plant, as well as in its plant in Dresden. Among other components, deliveries of electric cables have been significantly disrupted. Moreover, the supply of critical rare-earth metals, including neodymium and dysprosium, which 80 per cent of EVs use to manufacture permanent magnet-based motors, are also likely to be affected.

The war in Ukraine could also severely impact global EV battery-cell production, as the nation is the world's third-largest producer of nickel and aluminium, two highly valuable resources necessary in battery and EV components. Additionally, Ukraine produces almost 70 per cent of the world’s neon gas needed for components like chips, which are already suffering a shortage that has driven the average new-vehicle transaction price in the US to unbelievable new heights. It will likely only grow higher this year.

Will the crisis impact commercial investments in gold?

The political standoff between Ukraine and Russia has generated significant fears and apprehensions across major end-use industries. However, there is a different story when it comes to the impact on gold prices. Russia is the world’s third largest producer of gold, amounting to over 330 tonnes.

Reports suggest that as of the last week of February 2022, gold prices experienced a considerable upsurge, as investors sought to diversify stakes in safe-havens. It was reported that spot gold prices increased by 0.3 per cent to $1,912.40 per ounce, while US gold price prospects rose by 0.2 per cent to reach $1,913.20 per ounce. This indicates that investors are highly optimistic about the performance of this precious metal throughout the course of the crisis.

Arguably, the most important end-use of gold is in the manufacturing of electronics. Being a highly efficient conductor, it is used in connectors, relay contacts, switches, soldered joints, connecting wires, and connection strips. When it comes to the actual impact of the crisis, it is unclear as to whether there will be any long-term implications. But a short-term kink is anticipated, especially across both warring parties, as investors seek to shift their investments to more neutral parties.

Given the highly precarious nature of the ongoing conflict, it is highly difficult to predict as to where the rare-earth metal industry is headed. Given the present trajectory of events, it appears highly certain that the global market economy with regards to precious metals and rare-earth metals production is headed for a prolonged recession, with key supply chains and dynamics in for short-term disruption.

The world has reached a critical juncture. Just when things were beginning to normalise in the aftermath of the Covid-19 pandemic, political leaders grabbed the opportunity to reinitiate the nexus on power politics. In order to safeguard themselves from these power games, manufacturers are leaving no stone unturned to secure existing supply chains, halting production output wherever necessary, or curtailing distribution agreements with players across the belligerent parties.

Simultaneously, a silver lining is anticipated by analysts. Although supply-side constraints from Russia and Ukraine may prevail, there is another potent region where producers are looking to set foot – China. Given the immense scope of precious and raw material mining across the East Asian giant, the apprehended constraints may stave off. European manufacturers are likely to forge renewed production and distribution contracts. Everything is dependent on how the leaders across both countries handle the conflict.

Abizer Shaikhmahmud is a content writer and editor at Future Market Insights, an ESOMAR-certified market research and consulting market research company.