Yet another front in the widening trade war between the U.S. and China may be rare earth materials, which are critical in the manufacture of many products, including electronic devices, automotive parts, and in advanced technology used by the U.S. military. About 80% of the rare earth materials used in the U.S. are imported from China, per data from the U.S. Geologic Survey cited by a detailed story in Bloomberg.

Based on rising concerns that China may restrict exports to the U.S. to gain leverage in the trade war, investors have been scooping up stocks of five Chinese-based rare earth mining companies, whose share prices have posted sharp advances recently. Some of these stocks have doubled this year, and are likely to rise higher as the trade war continues.

“It’s unlikely that China will impose a total ban on rare earth exports to U.S., but it can boost the prices of the resources by imposing stricter production quotas at home,” Dai Ming, a Shanghai-based fund manager with Hengsheng Asset Management Co., told Bloomberg. “It won’t hurt demand much as the materials are irreplaceable in some high-tech industries, meaning the U.S. will just have to stomach the higher costs. No matter what kind of curbs China will consider on rare earths, domestic miners would be the biggest winners,” he added.

5 Rare Earth Stocks May Rise To Rarified Levels

  • China Rare Earth Holdings Ltd. (0769.Hong Kong)
  • JL Mag Rare-Earth Co. Ltd. (300748.Shenzhen)
  • China Northern Rare Earth Group High-Tech Co. Ltd. (600111.Shanghai)
  • Xiamen Tungsten Co. Ltd. (600549.Shanghai)
  • China Minmetals Rare Earth Co. Ltd. (000831.Shenzhen)

Sources: Bloomberg, Reuters

Significance For Investors

The growing speculation that China may restrict exports of rare earth metals to the U.S. has been spurred by several developments, including a visit by President Xi Jinping to a rare earth facility, and comments by various figures affiliated with the Chinese government or the ruling Communist Party, Bloomberg indicates.

Even a decline in U.S. demand isn't likely to hurt the price of rare earth materials or stock prices. “Prices and margins rising as a result of a decrease in supply would far outweigh the impact of a dent in demand from the U.S.,” as Wang Daixin, a fund manager at Bristlecone Pine Asset Management Ltd. in Guangzhou, China, told Bloomberg. “I don’t think the price moves in the sector are anything near rational by this point," he added.

Rare earth metals constitute a group of 17 chemical elements used in a variety of products such as computers, cell phones, rechargeable batteries, catalytic converters, magnets, and fluorescent lights, among others, and for which worldwide demand has been explosive, per Geology.com. They also are critical to the U.S. military, given their use in the manufacture of night vision goggles, precision-guided weapons, communications equipment and GPS equipment.

China has about 37% of the world's reserves of rare earth metals, while Brazil is second at 18% and Russia is third at 15%. Meanwhile, the U.S. has only about 1%, per the same source.

Looking Ahead

China has sought to manage the global market for rare earth metals, such as with a 40% cut in exports in 2010 that sent prices soaring, the article notes. This, in turn, has spurred development of manufacturing processes that use less of these materials. But for the moment, China's leverage with rare earth materials makes it likely that prices will soar, creating handsome profits for stock investors in rare earth companies while boosting the cost of many U.S. products.