Will China loosen its grip on critical mineral exports?

Capital Economics analysts note that while China's rare earth element exports more than doubled in June from May, fulfilling a commitment to ease license approvals, overall shipments remain nearly 40% below last year's levels, and other critical mineral exports continue to decline. The firm concludes that despite a warming U.S.-China relationship, Beijing is unlikely to loosen its strategic control over critical metals, using export controls to benefit domestic industries and maintain a competitive edge.

Analysis

Recent data indicating that China's rare earth element exports more than doubled between May and June should be viewed with significant caution. While this fulfills a commitment to accelerate export license approvals, the increase is from a low base and fails to reverse a broader, strategic trend. According to Capital Economics, June's export volumes remain nearly 40% lower than the previous year and are still weak in a historical context. Furthermore, exports of other critical minerals have continued to fall sharply since the beginning of the year, a trend that predates the most recent export controls. The analysis from Capital Economics suggests China's actions are not merely a tool for trade negotiations but serve a strategic purpose to provide Chinese manufacturers a competitive advantage. Therefore, despite any apparent warming in U.S.-China relations, the prevailing evidence indicates Beijing will maintain a tight grip on its control over the global supply of critical metals, creating persistent supply-side uncertainty for international firms.

Key Decisions for Investors

• Investors should scrutinize companies in the technology, automotive, and defense sectors for supply chain vulnerabilities tied to Chinese critical minerals and rare earth elements.
• Consider increasing exposure to non-Chinese miners and processors of critical materials, as they are positioned to benefit from ongoing efforts by Western economies to diversify supply chains.
• Monitor Chinese export data and policy statements for further signs of strategic tightening, as this could act as a negative catalyst for dependent industries.
• Factor in the strategic control of these materials as a persistent geopolitical risk, potentially warranting a premium for companies with secure, vertically-integrated, or diversified supply sources.