220519 MineM 220519 MineM 220519 MineM

There's a trade war upside for this Aussie rare earths miner

Macro 5 minutes to read
Strats-Eleanor-88x88
Eleanor Creagh

Australian Market Strategist

Summary:  As in independent miner in an environment overwhelmingly dominated by Chinese interests, Australia's Lynas is poised to benefit as the trade war heats up and the market realises the weapon potential of rare earth minerals.


This is an update on our previous trade recommendations to buy Lynas Corp (ASX:LYC), a company that explores, mines and produces rare earth minerals.

Australia-based Lynas still remains in a pivotal position as it is only miner and processor/producer of rare earths worldwide outside of China. As we said in March, in a world of heightened geopolitical tensions, a non-Chinese supplier has a significant competitive advantage for manufacturers and businesses wishing to diversify supply chains away from China, making it a supplier of choice for non-Chinese customers. 

On Monday (May 20), Lynas revealed plans to develop rare earths separation capacity in Texas together with Blue Line, a US rare earths processor. This is a strategic move as trade tensions ratchet higher and speculation that rare earths could be weaponised grows. The company also announced on Tuesday (May 21) at its investor day that it will spend AU$500 million by 2025 to build up its operations in Western Australia in order to transition cracking and leaching away from Malaysia. 

Trade tensions continue to escalate, and negotiations have entered a more dangerous phase, but the market continues to underestimate the geopolitical risk. The trade war is obviously not the only driver of equity market returns but it could be a key decider in whether the S&P 500 ends the year higher or lower.

The uncertainty paralyses decision making for multinational companies, burdens capex intentions and forces supply chains to be unravelled in order to remove risk. The assumption among most participants is that a deal will eventually be reached, this could still be the case, although it is likely a long way off. Given the trajectory of the rhetoric a G20 deal would be nothing short of a miracle. On that basis we stand by previous observations that it would be complacent to rely on the hope of a deal as an appropriate risk management strategy.
  
It has become ever more apparent that trade is a sideshow for a long-running economic conflict and battle for tech dominance and hegemony.  We first visited this last year, where we highlighted that there was an increasing probability of a “cold war” emerging fought through technological supremacy. The tech cold war has now begun, as the US moves to blacklist China’s tech champions, and rare earths could be in the crosshairs of China’s retaliation.

Last week Chinese President Xi Jinping’s visit to a rare earths mining base in China was no accident and was meant to send a message to the US. This has fuelled speculation that the strategic materials will soon be weaponised as China may exercise its dominant status in the rare earths industry.

Rare earths are crucial for a number of high growth, high-tech commercial industries including hybrid and electric vehicles, renewable energy (wind turbines), energy-efficient lighting, advanced electronics, military devices, chemicals, and medical equipment. Without rare earths a number of high-tech industry applications would not be viable. Take the iPhone as an example: screens are polished with lanthanum and cerium and within the phone is a magnet made with neodymium and praseodymium.  

As demand for magnetic materials grows Improved pricing for REO is expected to continue, benefitting Lynas. Permanent magnets, containing NdPr which Lynas is the second largest producer of globally, are a key enabler of electric vehicle technology, wind turbines, automation, electronics and medical equipment
220519 magnetic products
Source: Shades of Grey, Wikipedia
The rare earth market is dominated by low-cost producer China and Chinese rare earth producers have benefited from government support and huge subsidies aimed at providing a competitive advantage.
220519 Rare earth giant
Source: Bloomberg
The US imports 80% of its rare earth needs from China and with rare earths crucial to so many industries; defence, autos, renewable energy, smartphones, batteries and more, there is no doubt that if China were to weaponise these materials with an export ban this would cause serious disruption to US industry. But this wouldn’t come without consequence for China, they would shoot their own industry in the foot and cripple confidence in China as a supplier of rare earths. Not to mention this would take the trade war escalation to another level.
220519 CHina Dependent
Source: Bloomberg
There is precedent for China to exercise its dominant position in rare earths as geopolitical leverage. In 2010, China limited rare-earth exports to Japan, while the two countries were scrapping over disputed islands. This menace to the rare earths supply chain caused prices to spike (see below chart) something Lynas would benefit from as the second largest producer of NdPr globally. As prices picked up investment flowed back into both new and old rare earth mining projects. If you look back to 2010/2011 when prices were soaring there were over 500 companies listed on the ASX with rare earths prospects, there is no doubt if any export ban was implemented a similar reaction would ensue rendering the political leverage short term at best. 

Rare earths are counterintuitively not very “rare” but are difficult to find in deposits that are not contaminated enabling them to be mined economically. The rare earth element cerium is actually the 25th most abundant on Earth, making it about as common as copper! Other countries like Australia, US, Japan, Brazil, India, Vietnam and South Africa also have rare earth deposits and even now, when the threat is just thinly veiled, there are likely mines scrambling to ramp up production to hedge against any potential move from China and take advantage of increased prices. A potential problem for these countries is rare earths are often found in conjunction with thorium, a radioactive metal, that requires special handling.

The simple threat of China implementing an export ban on critical industrial materials highlights a vulnerability that is ripe for exploit, however short-term the strategy may be. Globalisation has created global networks and supply chains that are under assault as the trade war escalates. As tensions ratchet higher so does the potential for China to exploit this vulnerability for geostrategic gain leaving Lynas poised to benefit. 
220519 Mid price
Source: Bloomberg NdPr Prices

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.