Investors are slowly waking to the opportunities created by China’s ban on the export of rare earths but a modest uptick in the share prices of non-Chinese miners of the material could be just the start of something much bigger.
Since earlier this month, when China said it would suspend the exports of rare earths which are used extensively in commercial and military technologies, the share price of U.S.-based MP Materials has risen 20% while Australia’s Lynas Rare Earths is up 17%.
Welcome as those gains are they pale alongside moves in previous periods of tight supply caused by earlier Chinese threats to withhold supply material, or during economic uncertainty, such as the early stages of the Covid pandemic in 2020.
There is also yet to be a significant reaction in the market for rare earths, a 17-member family of metals with unique properties needed in technologies such as permanent magnets, night vision goggles and rocket guidance systems.
Neodymium, one of the most widely traded rare earths, has edged higher to around $82 per kilogram roughly where it was two years ago when supply and demand were broadly balanced and a full-blown China v U.S. trade war seemed unlikely.
But with both sides now engaged in a destructive exchange of tariffs and other threats it’s interesting to look back at what happened in previous periods of geopolitical tension and trade embargoes.
The starting point to see what can happen with rare earths is 2010 when China, which dominates global supply of the material, banned shipments to Japan over a shipping incident, sending rare earth prices sharply higher while boosting the Lynas share price by 300%.
As the dust settled on that dispute China used its supply and pricing power to flood the market, driving out most competition, including the once world-leading Mountain Pass mine in California which has been revived under a new own, MP Materials.
The Chinese squeeze did not work with Lynas and its Mt Weld project in Australia which was saved by funding from Japanese trading companies actively supported by the Japanese Government.
History never repeats exactly but what’s happening now in the China v U.S. trade war seems likely to produce a similar boom in rare earth prices with non-Chinese producers riding high, led again by MP and Lynas with a long line of other companies trying to break into a complex market.
Share Prices Rising
MP’s share price has risen by 67% over the past 12-months to $27.59 as speculation grew about a possible trade dispute with the U.S. but even with that rise the stock is only about half-way back to its 2022 peak of $56.54.
It’s the same with Lynas in Australia which has risen by 30% over the past 12-months but is still short of its 2022 peak.
While it is uncertain how far China will go with its ban on the export of rare earths it is likely that the focus of the cutback will be on material with military uses.
Easier to forecast is that prices for all rare earths will rise as the embargo bites with another certainty being that countries without access to Chinese material will be actively seeking alternative supply possibly sparking a rush for resources and government sponsored processing and refining facilities.
Buyers of rare earths know how that Chinese game will be played with supply being flicked on and then turned off in a classic exercise of market manipulation.
But this time around it is likely that governments will do what Japan did in 2020, picking and backing their own preferred supplier, effectively underwriting new entrants into a tough market.
It’s those new entrants, along with established non-Chinese producers such as MP and Lynas which could deliver fat profits for investors.
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