Rare Earth Realities: How the US-China Deal Mitigates Short-Term Risks but Leaves Defense Vulnerabilities Unaddressed

The recent U.S.-China rare earth trade deal, finalized in June 2025, has calmed immediate fears of a strategic supply chain meltdown for critical defense materials like samarium. Yet beneath the surface lies a stark reality: while the agreement buys time for U.S. defense contractors, it does little to resolve the nation's long-term dependency on China's near-monopoly over rare earth processing. For investors, this creates a paradox: short-term opportunities in rare earth processing and magnet manufacturing firms are real, but complacency is dangerous. The path to defense industrial resilience remains fraught with geopolitical risks and industrial underpreparedness.

The Deal's Immediate Wins for Defense Supply Chains

The agreement's most urgent contribution is its resolution of a crisis that threatened U.S. military production. China's April 2025 export restrictions on samarium—a rare earth essential for high-temperature magnets used in F-35 fighter jets, Virginia-class submarines, and Tomahawk missiles—posed an existential risk to Pentagon contracts. The deal's “supply upfront” commitment ensures these materials flow freely again, averting production halts for systems like the Columbia-class submarine, which requires 9,200 pounds of rare earths per unit.

The tariff adjustments—reducing U.S. rates to 55% and Chinese tariffs to 10%—also ease the cost of importing rare earth oxides and magnets. This directly benefits U.S. firms like MP Materials (NYSE:MP), which relies on Chinese imports for its Texas magnet plant, and USA Rare Earth (NASDAQ:USAR), which partners with PolarStar Magnetics to produce DFARS-compliant magnets.

Long-Term Vulnerabilities Loom Larger

While the deal alleviates immediate shortages, it does nothing to address the root cause of U.S. vulnerability: China's 90% control over global rare earth refining. Even with Pentagon-funded initiatives like the Manufacturing Capability Expansion and Investment Program (MCEIP), domestic processing capacity remains embryonic. MP Materials' Texas plant, for instance, will produce just 1,000 tons of neodymium-iron-boron magnets annually by 2025—a fraction of China's 138,000-ton output in 2018.

The Pentagon's goal of a “mine-to-magnet” supply chain by 2027 faces steep hurdles. For example:
- Samarium: No alternative global source exists. The U.S. has zero domestic production capacity.
- Processing Gaps: While the U.S. can mine raw ores, it lacks the infrastructure to separate and refine elements like dysprosium (critical for missile guidance systems).

MP Materials' stock has surged 140% since 2020, reflecting investor optimism about domestic rare earth production. But can it deliver on scale?

Investment Playbook: Prioritize Resilience, Not Just Profits

The deal creates a window of opportunity for investors in firms building U.S. rare earth infrastructure, but success hinges on selecting companies with both government backing and scalability:

1. MP Materials (NYSE:MP): The only U.S. rare earth miner and magnet producer, MP is a linchpin of the Pentagon's strategy. Its Mountain Pass mine and Texas magnet plant are funded by $45 million in MCEIP grants. However, its margins remain thin until it scales to 10,000 tons/year by 2027.

2. USA Rare Earth (NASDAQ:USAR): Partnering with PolarStar Magnetics, USAR's Oklahoma facility aims to produce 5,000 tons/year of rare earth oxides by 2026. Its focus on samarium and neodymium positions it to serve defense contracts, though execution risk remains.

3. Lynas Corporation (LYC.AX): While Australian, Lynas' U.S. subsidiary (Lynas USA) is a key partner in the Pentagon's supply chain. Its Malaysian refinery supplies 10% of global rare earths and benefits from the truce's tariff relief.

Caution: China's Leverage Persists

Investors must recognize that this deal is a temporary truce, not a permanent solution. China's dominance in processing allows it to weaponize exports in future disputes, as seen in its 2020 ban on gallium shipments to the U.S.

• Geopolitical Risk: A face-to-face summit between Trump and Xi (critical for long-term stability) is far from guaranteed.
• Industrial Lag: U.S. firms are years behind China's vertically integrated supply chains. For example, China's Baotou region alone employs 100,000 workers in rare earth refining—compared to fewer than 1,000 in the U.S.

Conclusion: Invest Strategically, but Plan for Turbulence

The 2025 trade deal is a lifeline for U.S. defense contractors, but investors should treat it as a starting point, not a finish line. Firms like MP Materials and USA Rare Earth offer exposure to a sector with clear growth drivers—$439 million in Pentagon funding since 2020, bipartisan policy support, and EV-driven demand.

However, the U.S. military's reliance on China for 100% of samarium and 90% of refined rare earths means geopolitical flashpoints (e.g., Taiwan, South China Sea) could reignite supply crises. Investors should:
- Diversify: Pair rare earth plays with companies in alternative supply chains, like Australia's Arafura Resources (ASX:ARU).
- Monitor Policy: Track the Pentagon's 2027 “mine-to-magnet” milestones and U.S.-Saudi rare earth joint ventures.
- Avoid Overconfidence: China's dominance isn't eroded overnight.

In short: the rare earth sector is a must-watch for defense investors, but success requires patience—and a realistic view of China's enduring grip on the industry.

China's 60% share of mining and 90% of refining highlight the scale of U.S. dependency.