China has warned Western companies about a potential shortage of rare earths due to stockpiling. The country plans to limit the export of these vital materials.

China’s Strategy With Rare Earths

China aims to gain an advantage by controlling the supply of rare earths. This insight comes from an anonymous source cited by the Financial Times. With China indicating it may use rare earths as a negotiating tool, we expect certain industries to experience increased volatility. Companies that rely on these materials for manufacturing, like electric vehicle makers and wind turbine manufacturers, will likely face rising costs. This situation sets the stage for price fluctuations in the upcoming weeks. We suggest considering investments in non-Chinese rare earth producers. For example, Australian-based Lynas Rare Earths (LYC) and US-based MP Materials (MP) have shown increased trading activity after similar news in the past. MP Materials stock has already risen over 8% in early August trading as the market begins to account for this supply risk. On the other hand, now is a good time to explore put options on companies with weak supply chains. Major tech firms and automakers that have not diversified their sources will be most at risk. Recent data from early 2025 indicated that over 85% of permanent magnets used in U.S. industries come from China, showcasing a reliance that can be exploited.

Historical Precedent of Rare Earths Export Restrictions

A similar situation occurred in 2010 when China restricted exports, leading to a 700% surge in prices for elements like neodymium within a year. This historical context suggests we should be prepared for a rapid price shock again. Traders in derivatives should brace for potential volatility, even if it’s less extreme than before. The futures market for these elements also presents a direct opportunity. Neodymium and dysprosium futures contracts have jumped nearly 15% in the past thirty days purely on speculation. We expect this trend to speed up if China follows through on its warning with official quota cuts for the fourth quarter. This scenario also challenges Western governments’ multi-year efforts, including initiatives backed by the 2022 Inflation Reduction Act, to create alternative supply chains. The market’s response will indicate how much confidence traders have in these new, non-Chinese sources. Implied volatility in major auto ETFs has reached levels not seen since the supply chain challenges of 2023. Create your live VT Markets account and start trading now.

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