Why Rare Earth Minerals Are Key to the US-China Trade Conflict

Attention toward the commodities known as rare earth metals has spiked in recent weeks due to increased talk of China limiting exports to the U.S. As you'll learn in the paragraphs below, rare earth metals are commonly used in modern conveniences ranging from mobile phones to dishwashers. A change in the trading relationship between the mobile phone in terms of supply and demand of rare earth elements represents a threat to global growth and is one of the dominant themes that should be watched closely for the remainder of 2019 and beyond.

What Are Rare Earth Metals?

As alluded to above, the collection of 17 elements – consisting of names such as dysprosium, erbium, europium, gadolinium, and holmium – is commonly used by manufacturers of products including cell phones, automobiles, military equipment, and dishwashers. While the name rare earth may be a bit of a misnomer since the elements are commonly found in the earth's crust, the challenge of processing them is quite real since it requires an intense amount of heat, and therefore, only China and a few other nations are able to provide these materials.

Why Are Rare Earth Metals Important?

For most global mining operations, the low concentrations of rare earth metals and the associated high cost of processing deflects interest to other areas that are relatively more profitable such as gold, silver, and copper. Since usage of rare earth metals is essential to innovative U.S. tech companies and the development of modern products that are used around the world, changes in supply would affect the economics of many North American businesses.

Trade Disputes

According to the U.S. Geological Survey, China provides about 80% of U.S. rare earth metal supply and is the world leader in terms of mine production. China produces more than 120,000,000 metric tons (not including undocumented production), which is about 100,000 tons more than second-place Australia. Given the time lag that would be required by U.S. companies to have a significant presence in the global supply of processed rare earth elements, China finds itself threatening to restrict the flow of the metal should it be provoked into a major trade war with the U.S.

How Do Retail Investors Buy Into Rare Earth Metals? 

Since most elements on the periodic table aren't popular enough to warrant the underwriting of futures contracts on major exchanges, publicly traded miners or niche exchange-traded products such as the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) are the next best choice.

Taking a look at the chart below, you can see that the fund has been trading within a defined downtrend, as shown by the dotted trendline. The recent break above the trendline earlier this year suggests that the bulls are now in control of the momentum. In particular, notice how the volume has spiked in recent weeks, shown by the blue circle, and how the price is about the test the resistance of its 200-day moving average. From the perspective of an active trader, a break above $15.81 would be the next major signal of a significant shift in the underlying fundamentals and could signal a massive move higher over the summer months and leading into the fall.

The Bottom Line

Rhetoric and political appearances from China's leaders on the topic of rare earth metals have investors from around the globe on heightened alert. Since China controls much of the supply of rare earth metals the U.S., it will undoubtedly be an important topic to keep on top of over the coming months. More specifically, those companies reliant on rare earth metals will likely experience extreme volatility depending on the outcomes of further political discussion. 

At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.