Trade war could see China spark a rare earths price rally

13th July 2018
Tim Treadgold

Trump’s trade war rocked global markets this week, but for investors in Australian mining stocks there could be a window of opportunity that no-one seems to have yet peaked through: the opportunity in rare earths, or more specifically the fact that China has them and US industry must have them.

Past periods of tension between the two super-powers have produced some remarkable price movements with rare earths, such as neodymium and praseodymium, doubling and tripling in a matter of weeks.

A similar reaction to China limiting exports of the metals, which are used in everything from electronics, magnets and glass to rocket guidance systems, was seen in the share prices of Australian stocks exposed to the sector.

Lynas, the local leader, rose by 400% in 2011, the last time China played the rare-earth card and US companies were forced to beg for supplies, a situation which is yet to be repeated but with US President Donald Trump ratcheting up tariffs it might only be a matter of time before rare earths enter the equation.

Two numbers highlight the likelihood of China limiting rare earth exports to the US: 18 and 10,000, with 18 the original number of products on which higher tariffs were applied by the US a few weeks ago, and 10,000 the number of products on which higher US tariffs are now being applied.

Under the tit-for-tat rules of Trump’s tariff game, China has the right to make the next move, and with each Chinese change so far focussed on materials needed in politically sensitive areas, it’s a fair bet that rare earths will feature because so many industries need them and the US doesn’t produce any.

Lynas, a perfect proxy for the global rare earths business, has not reacted to the prospect of China adding rare earths to its trade weapons, with the stock losing 18% over the past month, including 6% this week to trade around $2.04, perhaps a result of fear that the trade war will limit demand for all commodities.

Compare that fall with what happened the last time rare earths were weaponised by China, sending the Lynas share price up to $25, enough for the company to briefly claim a spot in the ASX top 150 by market capitalisation.

That fear could also be seen in most minerals, metals and fuels over the past few days as the trade war appeared to be spiralling out of control, with secondary skirmishes being experienced in Europe, where Trump lectured on the need for increased defence spending, and Iran, where Trump is enforcing sanctions designed to limit that country’s oil exports.

Despite a wild week on the international diplomatic and political front, most ASX-listed resource stocks weathered the storm in reasonable shape, with falls cancelled out by periods of recovery.

BHP was a useful example of what happened, opening the week at $33, rising to almost a 12-month high of $34.39 on Tuesday before sliding to $33.64 – down on the peak price, by up over the week.

Uncertainty about what happens next in Trump’s war with everyone has played havoc with commodity prices. Most metals lost ground over the past week with some, such as zinc, copper and nickel down heavily.

Gold and oil were not immune to the orchestrated chaos, though in both cases a continued fall in the value of the Australian dollar to less than US74c cushioned local stocks. In US dollar terms, gold at $US1244 an ounce is now $US108/oz less than it was three months ago, but in Australian dollar terms the fall has been limited to $A71/oz, with the latest price set at $A1686/oz.

Other news-making events and price moves of interest (up or down) included:

  • Anson Resources adding 6c (60%) to 16c after reporting the first production of lithium carbonate from its Cane Creek brine project in the US State of Utah.
  • Sayona Mining rose by 1.5c (50%) to 4.5c after announcing that permits had been issued and government funding awarded for a drilling program at the company’s Mallina Area C lithium prospect in the Pilgangoora region of WA, home to new lithium mines.
  • Danakali gained 6c to 72c after reporting that its shares would start trading on the London stock exchange on July 24, adding that political and business conditions in Eritrea where is has its most important assets continue to improve.
  • Chalice Gold said it had identified two 12km-long gold-in-soil anomalies at its Pyramid Hill project near Bendigo in Victoria. On the market, the stock was steady at 14c.
  • Todd River added 1.2c to 9.2c after reporting the intersection of thick zones of base metal-rich material at its Mt Hardy discovery in the Northern Territory with a best assay of 25.15m at 2.4% copper, 4% zinc and 3.1% lead from a depth of 184m.
  • Artemis Resources slipped another 1c lower to 17c after the release of the latest news from its super-deep hole designed to test the Pilbara nugget-gold theory. At 943.5m the hole is approaching the one-third mark of its target depth. Artemis has been in decline since peaking at 55c late last year.
  • Carawine Resources reported encouraging drill results from its Hill 800 gold prospect in north-east Victoria, including 93m at 3.22g/t from just 2.3m below the surface, with a 31m section in the hole assaying 6.64g/t. One the market, rarely-mentioned Carawine initially added 2c to 30c but later slipped back to 28c.
  • Neometals moved up by 1c to 31c after reporting encouraging test results from its ongoing work on the Barrambie polymetallic project in WA which is rich in titanium, vanadium and iron, and
  • Regis Resources added 11c to $5.16 after releasing an early peak at its June quarter gold numbers which revealed that 92,008 ounces were produced in the latest three-month period, taking the 12-month total to a record 361,373oz.

Image via Shutterstock

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