The Chinese government is taking steps that are driving up the prices of rare-earth metals and creating an opportunity for investors who are willing to take a risk. Indeed, I am watching a fast-rising exchange-traded fund (ETF), the Market Vectors Rare Earth Strategic Metals (REMX), which tracks those metals.

A key reason for the fund’s gains is that the Chinese government recently announced plans to cut the amount of rare-earth metals and related alloys that can be exported outside the borders of the world’s most populous country to customers in the United States, Japan, Europe and elsewhere.

It seems clear to me that the Chinese government’s existing quotas on rare-earth metals will be tightened further to continue a trend that has taken hold in the past several years. Although the Chinese government only is offering vague public statements that cloak its exact plans, policymakers there appear intent on further restricting the export of such metals.

Those actions are boosting the price of REMX, which seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Rare Earth/Strategic Metals Index. The fund offers investors a way to profit from the stock-price performance of publicly traded companies engaged in the mining, refining and manufacturing of rare-earth/strategic metals.

The fund, launched on October 27, 2010, pulled back a bit this week but it is up substantially since it began trading. The chart below shows the relatively new fund’s rapid rise late last year.

Rare-earth/strategic metals are industrial metals that typically are mined as byproducts in operations focused on precious metals and base metals. Such rare-earth/strategic metals have more specialized uses and are often more difficult to extract than base metals. Currently, 49 elements in the periodic table are considered rare-earth/strategic metals. They include cerium, manganese, titanium and tungsten.

Strategic metals are becoming increasingly important components in jet engines, hybrid cars, steel alloys, wind turbines, flat screen televisions and cellular phones. Rare-earth metals, a subset of strategic metals, consist of 17 chemical elements that are essential in many advanced technologies, such as electronics.

Stocks that are involved in rare-earth/strategic metals could be lifted yet higher if China imposes separate export quotas for heavy and light rare earths in a bid to better manage exports of such materials. Such additional quotas are a genuine possibility, according to a Wall Street Journal article published December 29, 2010.

China currently uses a single quota for rare earths, giving exporters incentive to ship the more precious and lucrative heavy rare-earth metals overseas for higher returns. If new quotas are imposed, it would mean increasingly strict control by Beijing officials on the export of the metals and related alloys. Since the Chinese government has been tightening annual export quotas for rare earths in recent years, certain companies outside of the country are looking into developing alternative supplies elsewhere, but such initiatives could take years. As a result, REMX has been bid up by investors. However, this fund is speculative, so be wary if its momentum weakens further in the days and weeks ahead.

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