Rare Earth Metals: China’s Trump Card

China is finally playing its Trump card, so to speak.

In an editorial published in the People’s Daily earlier this week, China threatened to retaliate against U.S. trade tariffs by withholding rare earth metals from American manufacturers. Those materials are used in the production of smartphones, electric vehicles, and sophisticated military weapons.

It is no coincidence that China chose rare earth metals as its weapon of choice in the trade war. The industries affected are among the largest U.S. manufacturing exporters.

Investors take heed: the trade war has taken a serious turn for the worse. If you still don’t believe the trade war with China is real, consider these three examples of how the stock market is reacting:

  • Apple (NSDQ: AAPL), which reluctantly uses rare earth metals in its iPhone, has declined 16% during the month of May. That erased more than $150 billion of shareholder value that had accumulated over the past 18 months.
  • General Motors (NYSE: GM), maker of the electric vehicle (EV) Chevy Volt that requires the rare earth metal Dysprosium, fell 15%. At a share price below $35, is back to where it was trading five years ago.
  • BAE Systems (OTC: BAESY), which relies on rare earth metals to produce smart bombs, is down 13% since the end of April.

Do it Right

Adhering to its usual “forward looking” dynamic, the stock market has been anticipating this development since trade tensions escalated in early May. Nine months ago, the Pentagon notified Congress of its dependence on rare earth metals. Looks like someone on Wall Street was paying attention.

The Pentagon has been stockpiling rare earth metals for years. That’s why the share prices of U.S. weapon manufacturers such as Raytheon (NYSE: RTN), Lockheed Martin (NYSE: LMT), and Martin Marietta (NYSE: MLM) have held steady over the past month.

Unfortunately for Apple, its ideological opposition to mining may have left the company ill-prepared for the impending boycott. Also, Apple CEO Tim Cook’s chummy relationship with President Trump won’t make it any easier for him to source those materials from alternative suppliers that wish to remain in China’s good graces.

The problem is less intractable for General Motors. GM sold only 200,000 EVs in the United States last year out of more than 17 million vehicle sales. If necessary, GM can delay ramping up EV production until the trade war with China has abated.

It’s Elemental…

Unlike petroleum reserves, which are plentiful around the world, rare earth elements are only found in abundance in a few regions of the world, including China. Although China is bereft of other natural resources compared to its size, it controls roughly 80% of the world’s rare earth metals supply. That makes China the OPEC of rare earth metals in terms of its ability to limit supply on short notice.

China has held off playing its Trump card… until now. Keeping rare earth metals out of the hands of companies like Apple and GM is a direct attack on two of America’s most important manufacturing sectors.

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