Rare Earth Shares Jump After China Bans Military-Use Exports to Japan
China's dual-use export ban to Japan, including rare earth-related items, lifts regional producers while pressuring Japanese auto and defense shares.
This article first appeared on GuruFocus. China's move to ban exports of military-use items to Japan has possibly shifted investor attention sharply toward rare earth supply chains, lifting related shares across Asia-Pacific. In Tokyo, Toyo Engineering Corp. surged 20% on expectations that its seabed rare earth recovery technology could become more strategically relevant, while cerium producer Daiichi Kigenso Kagaku-Kogyo Co. jumped as much as 27%. In Australia, Lynas Rare Earths Ltd. (LYSDY) climbed as much as 16%, its strongest rise since July, alongside a near-10% gain in Australian Strategic Materials Ltd., as markets weighed whether tighter Chinese controls could favor upstream producers outside China.
Warning! GuruFocus has detected 3 Warning Signs with LYSDY. Is LYSDY fairly valued? Test your thesis with our free DCF calculator. The rally followed Beijing's statement that all dual-use items would be banned from export to Japan for military purposes, with a China Daily report indicating that rare earth-related items are included. The decision represents the latest escalation in tensions linked to comments by Japanese Prime Minister Sanae Takaichi on Taiwan. Strategists at T&D Asset Management said fears of supply bottlenecks could lead to higher prices for critical materials, which could be a tailwind for rare earth manufacturers, particularly as Japanese auto and defense companies may look to diversify supply chains away from China.
China currently controls more than 90% of global rare earth refining capacity, according to the Japan Organization for Metals and Energy Security, underscoring the market's sensitivity to any shift in export policy. Not all sectors benefited from the news, as concerns about costlier and less predictable supply chains weighed on Japanese manufacturers with high China exposure. Toyota Motor Corp. slid 3%, its biggest decline since early November, contributing to a drop of as much as 1% in the Topix index, while Mitsubishi Heavy Industries (MHVIY) Ltd. and Kawasaki Heavy Industries Ltd. (KWHIY) fell more than 2%.
With China's latest export controls covering more than 800 items, from chemicals to sensors, some strategists warned that heightened caution around autos, machinery, and defense stocks could persist, even as analysts at SMBC Nikko suggested the environment may favor upstream rare earth players, and Citi Research noted that Chinese exporters could manage the potential loss of Japanese market share due to ongoing demand from Europe and other Asian markets.