Earlier in the year when trade tensions had reached a feverish pitch, one area where both the U.S. government as well as the financial press jumped on was the area of rare earth metals. This group of metals are crucial for a variety of different sectors, such as electronics and defense, and have few viable substitutes.
With China producing around 90% of the world’s rare earth metal supply and the U.S. relying almost exclusively on Chinese exports, it’s not surprising that this quickly became a hot topic. Just recently, China announced that it was going to increase its national rare earth output to record levels.
China said on Friday that it was increasing its annual rare earth metal output by 10%, hitting a record-high for 2019 and simultaneously helping ease international worries of a supply restriction. Beijing alluded to the possibility of supply cuts in this sector, using its dominant position as a rare earth exporter as a bargaining chip against the U.S. in the ongoing trade war. This recent development seems like the government is throwing a bone to the U.S., although the ongoing Hong Kong protests are undoubtedly an inflection point that could jeopardize relations further.
China’s overall rare earth quota has been raised to 132,000 tonnes for the year, while its smelting quota is at 127,000. This also happens to be the second year in a row where China has continuously increased its output.
However, while this helps reassure international governments that there won’t be a restriction in supply, this increased level of output will also depress prices for rare earth metals at a time when nations like the U.S. are trying to build up their own domestic rare earth industry.
For the past few months, the U.S. government has been pushing through legislation that would help rare earth companies looking to get started in the industry with additional incentives and even direct support from organizations such as the Department of Defense. Lowered prices would end up hurting the efforts of new rare earth producers.
David Merriman, an expert from commodity research firm Roskill, said that these hikes are a message that China possesses “the capability to increase supply, making life difficult for (rare earths) under development in regions such as the Americas, EU and Australia.” He added that it also a lot “to do with the domestic Chinese supply-chain situation” as the nation begins to tackle some of its environmental issues.
The main reason why the U.S. is behind in the development of this area comes down to a variety of factors, but one of the main ones is the environmental impact of rare earth mining. China’s willingness to develop industries that are more environmentally taxing naturally led the nation to monopolize the rare earth sector as other developed countries scaled back its own output.
As for investors looking to get in on this market, there aren’t too many pure-play rare earth stocks in the market right now. Most producers are based in China, and a handful that do operate in Canada or the U.S. produce only a minority of their total revenue from rare earths. One of the few companies that dos focus mainly on rare earths is Australian-based Lynas Corp (OTC: LYSCF), which is expanding into the U.S. aggressively.
