CME Group plans first Rare Earth Futures Contract to reduce western dependence on China

The CME Group, an American financial services company based in Chicago, is preparing a plan to introduce the world’s first futures contract for rare earth elements. This initiative would enable governments, companies, and banks to safeguard price risks in the rare earth sector, which China currently dominates.

Another American multinational financial services company, Intercontinental Exchange, is also considering the introduction of rare earth futures. However, it is reported to be at a less advanced stage of planning compared to CME.

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One of the major obstacles in the West’s effort to reduce dependence on China, which controls around 90 per cent of the rare earth processing, is the hesitance of banks to finance Western projects because of the constant oscillation of prices, making future revenues uncertain and increasing financial risk.

The new future contract includes combining the two most important rare earth elements, neodymium and praseodymium (NdPr), reported by an anonymous source. These two alloys are usually traded together as a combined product and are essential for manufacturing permanent magnets, widely used in electric vehicle (EV) motors, generators in wind turbines, voice coils for hard drives, drones, and fighter jets.

Though the key difficulty is that rare earths are traded in small volumes, and their market is much smaller than most metals’ future markets, it holds great importance for Western efforts to increase the supply of these critical minerals. Regarding this, the United States recently announced a preferential trade arrangement with allies and created a USD 12 billion investment to supply security, creating a strategic stockpile.

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In one of the most significant US agreements in the rare earth sector, the government reached a multibillion-dollar deal last July with MP Materials Corp, an American rare earth materials company headquartered in Las Vegas. Under this agreement, Washington acquired a 15 per cent ownership stake in the company and established a price floor linked to the NdPr price to provide financial stability.

At present, NdPr prices are largely determined in China and are reflected in price indexes published by agencies such as Fastmarkets, Benchmark Mineral Intelligence, and Shanghai Metals Market. Benchmark Mineral Intelligence has begun publishing rare earth price assessments for Europe and North America, although trading volumes in these regions remain limited.

China has two main exchanges for spot trading in rare earths, the Ganzhou Rare Metal Exchange and the Baotou Rare Earth Products Exchange. These platforms facilitate the buying and selling of physical rare earth materials and help in domestic price formation and market transparency. In addition, the Guangzhou Futures Exchange has announced plans to introduce rare earth futures contracts. 

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NdPr prices in China have risen by about 40 per cent so far this year, reaching their highest level since July 2022. However, these prices are highly volatile, they had previously fallen by around 50 per cent during the 15 months leading up to May 2023. This sharp fluctuation highlights the instability of the rare earth market.

Many rare earth projects outside China struggle to obtain financing because banks cannot predict future revenues, and producers cannot protect themselves from price declines without futures contracts.

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The CME Group has already introduced successful futures contracts for critical minerals such as lithium and cobalt, which are widely used in EV batteries. Recently, CME reported that its fourth-quarter profit exceeded Wall Street expectations. It also recorded a 7.5 per cent increase in average daily trading volume, reaching a record 27.4 million contracts.