China has restricted exports, and rare earth prices have skyrocketed.

Rare earth metal prices have reached record highs in a matter of weeks following China's announcement of export controls on seven categories of medium and heavy rare earth-related items. As of May 1, the price of dysprosium in Europe has tripled since early April to $850/kg; The price of terbium rose from US$965/kg to US$3,000/kg, a cumulative increase of more than 210%.

How will the market change if exports are restricted?

What are rare earths? Why is it so important?

Rare earths are known as "industrial vitamins", and although they have the word "earth" in their name, they are anything but ordinary. It is a very special metal element, which is widely used in high-tech fields such as new energy vehicles, wind power generation, robots, aerospace, military weapons, and electronic equipment. To put it simply, without rare earths, many of the high-tech products we take for granted may not be able to be built or their performance will be greatly reduced.

And, most crucially, rare earths are non-renewable resources, which means that they cannot be "regenerated" and cannot be mined anywhere.

Recently, China imposed export restrictions on seven rare earth elements. These 7 elements belong to medium and heavy rare earths, which are rarer and more precious than ordinary light rare earths. Most of the world's medium and heavy rare earth supply actually comes from China.

In other words, China can almost be said to be "one big company" in this area, and the market voice is very strong.

Jingtai believes that after China restricts exports, there may be a certain shortage of rare earths in overseas markets. This imbalance between supply and demand is likely to lead to a rapid rise in overseas rare earth prices in the short term, even higher than domestic prices.

However, in the medium term, as supply chains adjust and alternatives emerge, prices at home and abroad may slowly converge. However, on the whole, the "benchmark price" of rare earths will continue to move upward, that is, it will be bullish in the long run.

Rare earth prices soared after export controls

On April 4, China announced export controls on seven categories of medium and heavy rare earth-related items. These include: samarium, gadolinium, terbium, dysprosium, lutetium, scandium, yttrium. These names may sound awkward, but they are very rare, and most of the world's supply comes from China.

The result? The market immediately became nervous.

According to Nikkei Asia, in just one month:

The price of dysprosium in Europe has tripled, from about $300 per kilogram to $850;

The price of terbium has soared by more than 210%, from $965 to $3,000;

This is the largest monthly increase since 2015 and the highest price level on record.

Why is the impact so big this time?

Because this time the export restriction is medium and heavy rare earths, which are rarer and more precious than light rare earths. They are widely used in high-end fields such as high-performance motors, permanent magnet materials, and military equipment.

Takahiro Sato, an analyst at Mizuho Bank, put it bluntly: "It's hard to replace restricted rare earths with materials produced in other countries. ”

In other words, in the short term, many countries cannot find alternative sources and can only "do it in a hurry". The increase in rare earth prices has a direct impact on manufacturing costs. For example, the permanent magnet motor used in electric vehicles is inseparable from terbium and dysprosium. Professor Toru Okabe of the University of Tokyo pointed out, "Long-term supply constraints may make it impossible to carry out the entire production of electric vehicles. ”

But it's not just a business issue, it's a national security issue.

A recent report by Govini, a U.S. defense intelligence company, pointed out that more than 1,900 U.S. military weapons systems rely on China's rare earth resources. In other words, if the supply of rare earths is cut off, the supply chain of the US military will be significantly impacted.

For example:

Among the various subsystems used by the F-47, the sixth-generation fighter of the US Air Force, there are at least four restricted rare earth elements (gadolinium, terbium, yttrium, dysprosium); Each F-35 stealth fighter needs to consume about 417 kg of rare earth materials; These materials are used in several key components such as electronic warfare systems, radars, rudder motors, and more.

According to the Congressional Research Service, about 5% of rare earths in the United States are used in the defense industry, while almost all of them are imported, and a large part of them come from China.

What do you think about the investment perspective?

For investors, rare earths are a typical track of "supply and demand mismatch + strategic value".

In the short term, price volatility caused by export controls is likely to continue, especially as key industries that rely on rare earths (e.g., new energy vehicles, wind power, and military) may face upward cost pressure.

In the medium to long term, in order to get rid of China's dependence on rare earths, countries may accelerate the deployment of their own or allies' rare earth mining and processing capacity. This means that investment opportunities may arise not only in China, but also in the construction of new supply chains overseas.

|The performance of rare earth enterprises in the first quarter was outstanding

Chinese rare earths

First of all, look at China's rare earth, which achieved revenue of 728 million yuan in the first quarter, a year-on-year increase of 141.32%; The net profit attributable to the owners of the parent company was 72.6181 million yuan, compared with a net loss of 289 million yuan in the same period last year, successfully turning losses into profits. The main reason is that the price of rare earths in the market has rebounded, and the company has adjusted its sales strategy, resulting in a significant increase in operating income.

Northern Rare Earths

Let's take a look at Northern Rare Earth, which achieved revenue of 9.287 billion yuan in the first quarter, a year-on-year increase of 61.19%; the net profit attributable to the parent company reached 431 million yuan, a year-on-year surge of 727.30%; The non-net profit after deduction was as high as 435 million yuan, a year-on-year increase of 11622.98%. That's an astronomical increase!

Sheng and Resources

Shenghe Resources was not to be outdone, achieving revenue of 2.992 billion yuan in the first quarter, a year-on-year increase of 3.66%; the net profit attributable to the parent company was 168 million yuan, a year-on-year increase of 178.09%; The net profit after deduction was 166 million yuan, a year-on-year increase of 175.37%.

Rising Nonferrous Metals

Finally, although the revenue in the first quarter was 1.506 billion yuan, a year-on-year decrease of 14.05%, the net profit attributable to the parent company was 47.2712 million yuan, and the net loss was 304 million yuan in the same period last year, successfully turning losses into profits. Mainly due to the stabilization and rebound of the rare earth market in the first quarter.

Judging from the annual report of Northern Rare Earth, the market trend may have reversed to a certain extent since the fourth quarter of last year.

Since some of the processed rare earth products are not within the scope of this export control, the profit margins of enterprises can be expanded, which in turn will promote the rise of domestic rare earth prices. In the future, the domestic and foreign rare earth hub prices will move upward, and it is expected that overseas rare earth prices will be higher than domestic ones in the short term, and the medium-term prices are expected to gradually converge, and the overall hub prices will continue to rise.

In addition, emerging fields such as downstream humanoid robots and low-altitude economy are expected to continue to open up new demand in the field of rare earths. As China's pricing and the world's leading advantageous industry, in the current context, the overall attention of the rare earth sector is expected to increase significantly.