The rare earths price disconnect

The RBA has a fitting day for its next big call.

The decision lands at 2:30pm on Tuesday, 3 November.

That’s half an hour before the Melbourne Cup jumps.

Ah, the timing…

And the odds of a hike are shortening.

The cash rate is already 4.60% after four increases this year, its highest level since 2011.

The market pricing for a fifth hike, to 4.85%, climbed above 40% this week after Deputy Governor Andrew Hauser said inflation was running materially higher than the bank’s August forecasts.

Hauser admitted rate rises are “laying pain on top of pain”.

He’s right about that much.

Unemployment has crept up to 4.7%, a five-year high.

If next Wednesday’s quarterly inflation figures run hot, the RBA could well hike into a softening jobs market regardless.

A lot of this is self-inflicted.

Years of government profligacy is running headlong into an economy too slow to build the homes and energy it needs.

Wall Street has its own jitters…

Over in the US, the AI trade is wobbling.

The Nasdaq fell 2.1% last Friday to a one-month low, on worries about borrowing costs and whether AI data centre spending will ever pay off.

If that turns into a proper crash, the ASX will feel it.

But I’m more sanguine about what comes after.

When the dust settles, the world will still need what Australia digs out of the ground.

And the ASX might just be the best-stocked toolshed on earth for whatever follows a US-led crash.

Rare earths are the clearest example right now.

Backing the drifter

Racing types have a word for a horse whose odds keep lengthening in the lead-up to a race.

It’s called “a drifter”.

Rare earth stocks are the biggest drifter on the board right now.

According to broker Canaccord Genuity, the price of NdPr outside China is up 23% this year.

That’s the rare earth oxide behind the powerful magnets in electric motors and robots.

Yet the rare earth producers Canaccord covers are down 28% on average, and its developers 17%:

Source: Canaccord Genuity, via ZeroHedge

[Click to open in a new window]

In racing terms, that’s a horse with a cracking form guide whose price keeps blowing out.

And the form guide is impressive.

The US has put a floor price of US$110 a kilogram under NdPr for key Western producers, and Japan has made an urgent plea to Washington as it runs short of yttrium, a rare earth used in jet engines and electronics.

Then there’s samarium, used in magnets for missiles and fighter jets.

In North America it’s fetching 346 times the Chinese price, according to analysis of Canaccord’s figures.

That’s what scarcity looks like when one country holds most of the cards.

And even by 2030, Canaccord expects China to control about 77% of global magnet-making capacity.

So why are the stocks so cheap?

On Canaccord’s numbers, producers trade at about 0.57 times their net asset value, and developers at 0.47 times.

Put simply, the market values these companies at roughly half what their projects are worth on paper.

The culprit is macro.

These projects cost a fortune and take years to pay off, and investors tend to sell that kind of stock first when rates rise and tech wobbles.

Odds can shorten in a hurry

The last time Washington stepped in, back in July 2025, rare earth stocks caught up with a vengeance.

The current US-China trade truce expires on 10 January.

One headline out of Beijing or the Pentagon could change the odds overnight.

And a Cup Day hike would add to the gloom here.

A US tech crash would add a lot more.

But in racing and in markets, form tends to win out in the end.

Well worth considering, as things threaten to get gloomier still.