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Investing.com - The overall rare earth market does not deserve the elevated prices or valuations it has achieved and investors should be cautious when engaging with the sector, according to analysts at Bernstein.
Trade conflicts between the United States and China this year have fueled volatility in rare earth stocks.
Shares of U.S. rare earth miner MP Materials, for instance, have jumped by more than 14% over the past three months, but fallen by over 14% in the past one-week period. Peer Critical Metals has also surged by roughly 246% in the last three months, yet have slipped by about 23% in the last week.
On Monday, shares of these companies were lower in premarket U.S. trading after U.S. Treasury Secretary Scott Bessent suggested that, following negotiations, China’s government is open to "concessions" on potentially expanded rare earth export restrictions.
China has long dominated the global rare earth industry, producing almost 70% of the world’s supply of these minerals from mines and processing around 90%. The minerals are viewed as vital to range of businesses, from electric vehicle manufacturing to defense systems.
In a bid to reduce U.S. reliance on China in the sector, Washington has promised to roll out more government intervention, with President Donald Trump saying earlier this month that a landmark deal with Australia will lead to both countries having "so much critical mineral and rare earths that you won’t know what to do with them."
However, the Bernstein analysts argued, "hopes of a rare earth demand supercycle are misguided given reviewing historic cycles, modest growth from conventional demand sources, technology substitution, thrifting, overstated belief in humanoid robots, and innovation in permanent magnets from rare earths to other chemistries."
They stressed that they were not arguing that any specific stocks were overvalued. They added that firms which have already guaranteed themselves government support and so-called "offtake agreements," or long-term deals that set a price floor to incentivize plants to keep operating even amid market volatility, "clearly have an edge over companies fully exposed to the public market."