China’s foreign ministry has stated that its rare earth export policy aligns with global standards. The country aims to cooperate with other nations to ensure supply chains remain stable and secure.
China’s dominance in the rare earth market gives it considerable influence in trade discussions. This control affects not only the US but also the EU, leaving other nations reliant on Beijing for these crucial materials.
We view the foreign ministry’s remarks as a signal for increased volatility, not stability. The reassurance itself draws attention to the underlying risk that Beijing can restrict supply at any moment. This geopolitical tension is a key factor we must now price into our strategies.
Recent history validates this concern, as we saw with the export controls on gallium and germanium implemented in August 2023. Statistics show China refines nearly 90% of the world’s rare earths, giving them immense leverage over critical industries. Therefore, we treat these official statements as a thin veil over a very real economic weapon.
Historically, this playbook has caused massive price shocks, such as the 2010 incident when supply to Japan was cut and prices for elements like dysprosium surged over 4,000%. Given the current trade friction, we believe the risk of a similar, targeted supply squeeze is elevated. This makes defensive positioning a priority.
For traders, this situation makes us consider put options on ETFs heavily weighted with companies reliant on these materials, like the VanEck Rare Earth/Strategic Metals ETF (REMX). We are also watching the stocks of electric vehicle makers and semiconductor firms, as they are most exposed to a supply disruption. Any hint of actual export curbs could trigger a sharp downturn in these names.
Conversely, we see a clear opportunity in call options for the few non-Chinese producers. Companies like U.S.-based MP Materials and Australia’s Lynas Rare Earths would become critically important in a supply crunch. Their stock prices are highly sensitive to this exact geopolitical narrative.
The core takeaway is the heightened uncertainty, which should translate to higher implied volatility in options for all related sectors. This makes strategies that profit from large price swings, regardless of direction, particularly appealing. We must be prepared for sharp, headline-driven moves in the coming weeks.
