Why rare earths are key to investing in transition materials

As global decarbonisation efforts intensify, the spotlight is turning to the raw metals that make the green transition possible. Among these, rare earth elements (REEs), such as scandium and neodymium, play a disproportionately large role despite their misleading name. These metals are not particularly rare in the Earth’s crust, but they are exceptionally hard to extract, process, and refine in a clean and cost-effective way. That’s what makes them one of the most compelling, and complex, investment frontiers today.

Demystifying rare earths: why it matters

Rare earths comprise 17 chemically similar elements essential to modern technologies. They power the permanent magnets in electric vehicles (EVs) and form the rotors of wind turbines and components in smartphones, camera lenses, military systems, medical devices, and satellite communications. Neodymium, for example, is central to high-performance magnets that enable lighter, more efficient EVs and turbines, while scandium strengthens aluminium alloys used in aerospace and enhances fuel cell performance, making it increasingly relevant to low-carbon transport and energy systems.

To understand why rare earths are central to the energy transition – and why their name is misleading – watch our short film produced in partnership with the Financial Times:

Demand is forecast to nearly double to 240,000 tonnes annually by 2030, according to industry researchers¹. Lombard Odier estimates that the energy transition alone will trigger USD 24.5 trillion in capital expenditure this decade, fuelling an insatiable appetite for rare earths, lithium, copper, and other transition-critical materials.

Read also: Inside Mercedes-Benz’s EV and sustainability strategy

Despite their critical role in clean and defence technologies, REEs face a highly concentrated and fragile supply chain

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Supply chain pressure

Despite their critical role in clean and defence technologies, REEs face a highly concentrated and fragile supply chain. China dominates the rare earth landscape, accounting for approximately 70% of global mining and 90% of processing capacity², creating market imbalance and exposing the rest of the world to significant geopolitical and regulatory risks. Recent export restrictions on several REEs, including heavy rare earths like dysprosium and terbium, as well as refined magnets, prompted price hikes and supply concerns across global manufacturers³.

In response, the United States is turning its sights towards other significant deposits of rare-earth metals and actively expanding its domestic capacity. Its efforts reflect a multi-pronged strategy to diversify rare earth supply, reduce dependence on Chinese processing, and spur innovation in lower-impact extraction and recycling⁴.

Europe is also actively expanding its rare earth processing capacity to reduce its reliance on China, with several new facilities reported in Poland, Germany, France and Norway⁵. Western automakers, who are heavily reliant on rare earths, are said to be working on rare-earth-free motor designs. But even with redesign efforts, substitution hasn’t kept pace⁶.

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Adding to the complexity is the steep environmental cost of extraction. Separating rare earths from ore involves solvents that often create toxic byproducts. These environmental costs have made many nations reluctant to host processing facilities on their home soil, compounding global dependence on just a handful of processing hubs.

Read also: The geoengineering solutions that could help limit global warming

While the world is not running out of critical materials, the gap between supply and projected demand, especially for lithium, copper, and rare earths, is widening

Risk and opportunity

For investors, the rare earth dilemma presents both supply-chain risk and an opportunity for forward-thinking capital allocation. The scarcity is not in the physical availability of rare earths, but in the capacity and willingness to extract and process them sustainably and at scale. This is where new technologies come in. Investment in rare earth recycling, urban mining, and cleaner extraction processes is gathering pace. Companies are developing solvent-free methods and advancing circular economy models to recover REEs from end-of-life electronics and magnets. These innovations are crucial not only for meeting demand but also for aligning supply chains with increasingly stringent ESG requirements.

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While the world is not running out of critical materials, the gap between supply and projected demand, especially for lithium, copper, and rare earths, is widening. This imbalance is already driving upward pressure on prices, repositioning these materials as not only essential to the net-zero transition, but also as potentially compelling long-term investment opportunities. We are likely in the early stages of a long-term commodity supercycle for transition materials⁷, a wave that is being shaped by four converging forces:

• Climate and ESG imperatives
• Global net-zero targets
• Fractured and reshoring supply chains
• Rising geopolitical competition for strategic resources

These dynamics suggest that rare earths, and their enabling technologies, will remain core transition materials for decades to come

The path ahead: beneficiaries of the technological revolution

The widening gap between demand and supply points to a sustained structural premium for key REEs, and some metals are emerging as clear frontrunners in the race to enable the energy and technology revolutions underway. Unlike more volatile or substitutable materials like lithium and cobalt, scandium and neodymium possess unique physical properties that make them technically and economically difficult to replace at scale. Despite active R&D into rare-earth-free technologies, current alternatives are still at an early stage of development, with challenges in cost, performance, or regulatory hurdles.

Read also: Out of thin air: how Twelve is closing the carbon loop by turning emissions into products

These dynamics suggest that rare earths, and their enabling technologies, will remain core transition materials for decades to come. For forward-looking investors, the opportunity extends far beyond extraction. It lies in building out the enabling infrastructure; allocating to alternative materials as complementary, not as substitutes; and advancing circular innovations that will define the next chapter of industrial growth.

Scandium and neodymium, and other REEs, may not be ‘rare’ in geological terms, but they are central to the net-zero, tech-enabled economy that is taking shape before us.