These are the stocks in the chip sector most at risk from China’s rare earths clampdown, says Evercore ISI

China has implemented new export controls on rare earth metals, requiring licenses for products containing over 0.1% domestically sourced elements, which Evercore ISI warns could create significant headwinds for semiconductor capital equipment (SemiCap) companies. Analyst Mark Lipacis specifically identified ASML, Applied Materials, Lam Research, and KLA as vulnerable, citing their reliance on restricted rare earths like samarium-cobalt and neodymium-iron-boron for critical components such as turbopumps in their advanced tools. Although the full impact on inventories and alternative sourcing is unclear, these restrictions, effective December 1st, introduce additional supply chain risk for the sector, despite a potential US-China resolution before implementation.

Analysis

China has implemented new export controls on rare earth metals, requiring licenses for products containing over 0.1% domestically sourced elements, effective December 1st. Evercore ISI warns this could create significant headwinds for semiconductor capital equipment (SemiCap) companies, specifically identifying ASML, Applied Materials (AMAT), Lam Research (LRCX), and KLA (KLAC) as vulnerable. These companies rely on restricted rare earths like samarium-cobalt and neodymium-iron-boron for critical components such as turbopumps, essential for advanced tools and atomic-scale precision in sub-10nm geometries.

The new regulations introduce additional supply chain risk for SCE stocks, as the clarity on existing inventories or alternative sourcing remains uncertain. While President Trump initially threatened "massive" tariffs in response, he later toned down his rhetoric, indicating a potential for de-escalation.

A key mitigating factor is the December 1st effective date, which provides a window for a potential resolution during the scheduled US-China leadership meeting on October 31st and November 1st. Despite the underlying supply chain concerns, the highlighted SemiCap stocks demonstrated strong market performance, with ASML, AMAT, LRCX, and KLAC all up at least 4% in Monday trading and significantly outperforming the S&P 500 year-to-date.

Key Decisions for Investors

• Monitor the progress of US-China trade negotiations closely for any resolution regarding rare earth export controls.
• Assess the supply chain resilience of SemiCap companies, particularly ASML, AMAT, LRCX, and KLAC, for potential inventory buffers or alternative sourcing capabilities.
• Consider the long-term geopolitical risks impacting critical raw material access for technology sectors and their potential effect on valuations.