China has cautioned Western companies about the potential shortage of rare earths due to stockpiling. The country plans to restrict the export of these essential materials.
Chinas Strategy With Rare Earths
China’s strategy aims to provide it with leverage by controlling the availability of rare earths. This information was sourced anonymously by the Financial Times.
With China signaling its intent to use rare earths as leverage, we expect heightened volatility in specific sectors. Companies heavily reliant on these materials for manufacturing, such as EV makers and wind turbine producers, will likely face significant cost pressures. This creates an environment ripe for trading on price swings in the coming weeks.
We believe a prudent move is to look at long positions on non-Chinese rare earth producers. For instance, we’ve seen Australian-based Lynas Rare Earths (LYC) and US-based MP Materials (MP) show increased trading volume following similar announcements in the past. MP Materials stock, for example, has already climbed over 8% in early August trading as markets begin pricing in this supply risk.
Conversely, this is a time to consider put options on companies with vulnerable supply chains. Major tech firms and automakers that have not diversified their sourcing will be most exposed. Recent data from the first half of 2025 showed that over 85% of permanent magnets used in US industry still originated from China, highlighting a critical dependency that can now be exploited.
Historical Precedent Of Rare Earths Export Restriction
We saw a similar playbook back in 2010 when China restricted exports, causing prices for elements like neodymium to surge over 700% within a year. That historical precedent suggests we should not underestimate the potential for a rapid and dramatic price shock. Derivative traders should prepare for a repeat of that volatility, even if on a smaller scale.
The futures market for the elements themselves presents a more direct play. Neodymium and dysprosium futures contracts have already spiked nearly 15% over the last thirty days on speculation alone. We anticipate this trend will accelerate if China follows its warning with official quota reductions for the fourth quarter.
This situation also tests the multi-year effort by Western governments, including the initiatives funded by the 2022 Inflation Reduction Act, to build alternative supply chains. The market’s reaction will reveal how much faith traders have in the resilience of these newer, non-Chinese sources. Implied volatility on major auto ETFs has already reached levels not seen since the supply chain shocks of 2023.
