China tightened its rare earth export rules on Thursday, the elements that are crucial to the manufacture of many high-tech products. The announcement from the Ministry of Commerce clarifies and expands sweeping controls announced in April, which had caused massive shortages around the world before a series of deals with Europe and the U.S. resumed shipments.
Rare earth minerals are crucial for electric vehicles because they are essential components in the powerful and efficient magnets used within EV propulsion motors. The magnets, typically composed of neodymium-iron-boron (NdFeB) or samarium-cobalt (SmCo), are the key to maximizing motor performance because they provide high-energy efficiency, compact size, and strong torque, which are all attributes vital for modern EV drivetrains.
To simplify the importance, rare earth magnets allow EVs to be smaller, lighter, and more energy-efficient compared to motors that use less powerful magnets.
Major automakers source most of their rare earth minerals from China, which overwhelmingly dominates global production and processing of these materials. Notably, China supplies over 60% of the world’s mined rare earths and controls around 90% of the processing capacity. General Motors (GM), Ford Motor (F), and Rivian Automotive (RIVN) usually obtain rare earth minerals through suppliers who hold Chinese export licenses, although recent export restrictions or licensing changes could trigger supply disruptions. Meanwhile, Lucid Motors (LCID) is trying to be proactive by actively building domestic supply chains for rare earth minerals through a partnership with U.S.-based mineral producers, including Alaska Energy Metals, Graphite One, and Electric Metals, as part of the Minerals for National Automotive Competitiveness Collaboration.
As for Tesla (NASDAQ:TSLA), Wedbush Securities analyst Dan Ives thinks the electric vehicle giant’s massive presence in China gives it a clear advantage in sourcing rare earth minerals and magnets. “While Tesla could still get dented by this raw material tightening in China, the company is best positioned among US automakers to navigate any speed bumps on this front,” he wrote.
Related ETFs include the VanEck Rare Earth and Strategic Metals ETF (NYSEARCA:REMX) and the Global X Lithium & Battery Tech ETF (NYSEARCA:LIT).