Rare Earth Rivalry: Navigating Supply Chain Risks and Opportunities in the US-China Trade War

The U.S.-China rare earth trade negotiations have reached a critical juncture, with global industries teetering on the edge of shortages. Rare earth elements (REEs)—critical for EV motors, defense systems, and advanced semiconductors—are now geopolitical pawns. As China's export controls clash with U.S. sanctions, the scramble to secure diversified supply chains has never been more urgent. Here's how investors should position for this high-stakes game.

The Current Stalemate: A Delicate Balance of Power

China's April 2025 export restrictions on seven key rare earths (including terbium and dysprosium) have exposed the fragility of global supply chains. While the U.S. claims progress after recent talks, Beijing maintains its dual-use licensing system as a permanent lever. The result? A 45-day approval backlog and 75% of U.S. firms facing stockouts within three months.

This data reveals the sharp decline since 2024, underscoring the urgency for alternatives.

Industries on the Brink: Automotive and Defense Lead the Charge

• Automotive: EV manufacturers rely on neodymium-praseodymium (NdPr) for magnets. A shows spikes to $120/kg amid shortages, squeezing margins.
• Defense: Missiles, drones, and radar systems depend on heavy rare earths like gadolinium. The U.S. Department of Defense's $439 million investment in domestic refining (via Lynas and MP Materials) highlights the urgency.
• Semiconductors: China's control over yttrium and europium, used in chip manufacturing, adds another layer of vulnerability.

The Path to Diversification: Companies to Watch

1. Lynas Rare Earths (ASX: LYC)

Australia's Lynas is the largest non-Chinese producer, with a Texas refinery (funded by the U.S. DoD) and a new Kalgoorlie plant. Its stock has surged 60% since 2023 as geopolitical risks mount.

Risk: Malaysia's demand for waste removal by 2026 could disrupt operations.

2. MP Materials (NYSE: MP)

Owner of the U.S.'s sole rare earth mine (Mountain Pass), MP is building a $1.2B magnet factory with GM. Its “mine-to-magnet” strategy aims to cut China out of the value chain.

Risk: Scaling magnet production competes with Chinese giants.

3. Arafura Rare Earths (ASX: ARU)

Australia's Nolans project supplies NdPr to Hyundai and Kia. Its stock rose 40% in 2024 after securing automaker partnerships.

Risk: Remote location and radioactive waste management complicate execution.

4. Mkango Resources (TSXV: MKA)

Pioneering rare earth recycling via HyProMag's technology, Mkango offers a circular economy solution. Its Songwe Hill mine in Malawi adds feedstock diversity.

Risk: Pre-revenue status and scaling challenges.

The Wildcards: China's Unyielding Edge

Despite Western efforts, China retains 90% of refining capacity. State-backed giants like China Rare Earth Group leverage subsidies and vertical integration. Investors should pair long bets on diversification plays with short positions in China-exposed firms like Shin-Etsu Chemical (TSE: 4063), which still sources 80% of feedstock from China.

Investment Thesis: Play the Long Game

• Buy: Lynas (LYC), MP Materials (MP), and Mkango (MKA) for their strategic positions.
• Avoid: Firms relying solely on Chinese supply chains, like Hitachi Metals (TSE: 5491).
• Hedge: Use futures contracts on NdPr or Yttrium to offset price volatility.

Conclusion: A New Era of Resource Nationalism

The rare earth war isn't just about tariffs—it's a race to control the backbone of the 21st-century economy. Companies with end-to-end supply chains or disruptive recycling tech will thrive, while those clinging to old models face obsolescence. Investors must act now: the next supply shock is just one delayed export license away.

The clock is ticking. Position for resilience.