Shares in rare earth-related companies soared on Tuesday, led by jumps in Chinese producers a day after Chinese President Xi Jinping visited a rare earth firm in southern China, sparking speculation the sector could be the next front in the Sino-U.S. trade war.
Xi on Monday visit JL MAG Rare-Earth Co Ltd in Jiangxi province, state media reported. The MVIS Global Rare Earth/Strategic Minerals Index, which tracks the shares of 20 producers from 10 countries, including China, Australia and Canada, jumped 6.4% in its biggest one-day gain since October 2011.
China accounted for 80% of the rare earths, a group of 17 chemical elements used in high-technology consumer electronics and military equipment, imported by the U.S. from 2014 to 2017.
So far, China's rare earths exports have been spared from recent tariffs by the United States, which has decided not to impose import duties on those and some other critical minerals from China as part of the trade war.
Beijing, however, has raised tariffs on imports of U.S. rare earth metal ores from 10 percent to 25 percent from June 1, making it less economical to process the material in China.
Analysts said that Xi's visit might indicate China is considering using rare earths as a weapon in the trade war, which provided support for the shares of the Chinese firms.
"No question it's saber rattling," said Ryan Castilloux, managing director of Adamas Intelligence, a consultancy that tracks the rare earths market. "I think China would be reluctant to cut off supplies to anyone just yet, but the optics are designed to send a clear message – we know your vulnerabilities."
Shares in JL MAG Rare-Earth Co Ltd surged the maximum limit of 10% on Monday following Xi's visit, and rose another 10% on Tuesday.
Shares in Innuovo Technology Co Ltd, a rare-earth permanent magnetic materials and products maker, also soared 10% to their highest since October 2017. The firm's shares have gained 54.7% so far in May.
Yantai Zhenghai Magnetic Material, Chengdu Galaxy Magnets Co Ltd and Jiangmen Kanhoo Industry Co Ltd rose by as much as 9%.
In Hong Kong, China Rare Earth Holdings Ltd soared more than 80%.
The gains were not exclusive to China-based producers. Canada's Largo Resources Ltd, Lithium Americas and Cobalt 27 Capital Corp all surged by double-digit margins. Brazil's Cia de Ferro Ligas da Bahia, known as Ferbasa, rose 7.5% in its biggest gain in six months.
Asked if China would consider limiting rare earth exports to retaliate against the United States, China's foreign ministry spokesman Lu Kang said on Monday that Xi's visit was normal and there was no need for over-interpretation.
Limiting rare earth exports to the United States would have an impact as U.S. consumption relies on China, said brokerage Pacific Securities.
However, RBC Capital Markets warned a Chinese ban could backfire by prompting the start-up of rare earths production from other countries, breaking China's hold on the market.
"Should China hike prices for the U.S. or shut it out completely, it would simply speed up that process, leading to rapid development of alternative supplies," it said. "Brazil, Vietnam, Russia, India and Australia currently stand out as key beneficiaries by having the world’s largest reserves and production."
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