Are rare earth materials the new AI?

Investing.com -- The U.S.–China trade dispute has pushed rare earth materials into focus, as Beijing’s dominance in production and refining drives Washington to seek alternative suppliers, a shift that’s starting to move parts of the market.

According to the Sevens Report, rare earth materials have become a key flashpoint, with China controlling nearly 70% of global production and about 90% of refining capacity.
The U.S., aware of its dependence, is now seeking friendlier suppliers, creating “an interesting effect in certain stocks,” the financial research firm said in a Wednesday note.

The report drew parallels with the early phase of the artificial intelligence rally, when companies could lift their share prices simply by mentioning AI on earnings calls.

“If a company simply mentioned they were investigating incorporating AI into their business, the stock would typically jump,” it said. A similar pattern, it added, might now be developing in rare earths.

Cleveland-Cliffs provided a recent example. The steelmaker’s shares surged 20% after management said it was exploring commercial rare earth mines in Minnesota and Michigan.

The move had little to do with earnings, Sevens wrote, suggesting that “we could be on the cusp of an environment where metals/mining stocks get an additional boost because they begin to investigate rare earth materials mining and refining.”

Specialized rare earth investments have already surged this year. The VanEck Rare Earth & Strategic Metals ETF (REMX) and the Sprott Critical Materials ETF (SETM) have each risen more than 80% year-to-date, while direct exposure through MP Materials has gained over 400%.

Still, the Sevens Report pointed to larger, diversified miners such as Albemarle, Freeport-McMoRan, and Cameco as potential beneficiaries if investors begin to price in secondary exposure to the trend.

Broader metals and mining funds, including the SPDR S&P Metals and Mining ETF (XME) and the iShares MSCI Global Metals & Mining Producers ETF (PICK), could also see momentum, as they include companies with indirect exposure through industrial metals rather than precious ones.

Sevens added that U.S. efforts to build a more resilient supply chain are gaining policy support, citing an $8.5 billion agreement with Australia to expand rare earth production. But it warned that supply diversification will take time.

“Rare earths aren’t actually that rare,” it said. “The trick is finding them in commercially viable amounts and being able to refine them into useful components.”

“Bottom line, rare earth materials are not the new AI,” the report concluded.”But while tensions around rare earths are high, industrials focused metals/mining stocks could receive another tailwind from the rare earth drama.”