The retaliations from the China/US trade war are starting to echo on Australian shores. And while the numbers are positive, it’s not necessarily a good sign for ASX listed company Wesfarmers Ltd [ASX:WES] shares.
China has recently threatened to cut off their rare earth supply to the US, which could have an ongoing effect into the prices of a range of electrical goods including mobile phones, electric cars, high-tech consumer electronics and US military equipment, the ABC reports.
This new ban has seen a decline in the Wesfarmers share price, currently at a decrease of 1.22% (trading at $36.88 a share), as it complicates their takeover plans of Lynas Corporation Ltd [ASX:LYC]. Lynas seems to be performing better than its suitor, jumping up 15.5% on Tuesday, and sitting around a 4% increase at time of writing (trading at $2.87 a share). The major jump seen on Tuesday was the largest we’ve seen from Lynas since 2013, which is interesting.
Rare earths now in demand
The threat has shaken the market considerably into buy mode. Yesterday, we saw junior rare earth miners skyrocket — including Peak Resources Ltd [ASX:PEK] (+20.5%), Alkane Resources Ltd [ASX:ALK] (+12.3%), Northern Minerals Ltd [ASX:NTU] (+9%) and Hastings Technology Metals Ltd [ASX:HAS] (+10.7%).
Rare earth products were excluded from the conditions of the recent US tariffs initially posed. And as China accounted for 80% of all rare earth imports into the US during 2014–2017, it seems Xi Jinping does have something to hold over Trump’s head to force a Chinese-favourable deal.
And China knows the power they hold — this isn’t the first time China has suspended rare earth exports for the forcing of an agreement. In 2010, we saw Japan’s supply cut off due to a clash over the South China Sea — something we’re seeing again now with the US and now Australia crossing through waters that are believed to be Chinese territory. And this recent threat, while mainly aimed at the US, has been a warning to technology companies alike that are dependent on these minerals.
What will this mean for Wesfarmers investors?
According to The Australian, rare earth companies Arafura Resources, Alkane Resources, Northern Minerals and Lynas participated in an Austrade mission earlier to the US this year, imploring them to recognise the potential disruption that could occur should the government and industry continue to rely on China.
‘We’ve been working to try to say to them “look, there’s a strategic requirement here for the US, and unless you start developing projects outside of China these kind of things might happen”,’ Gavin Lockyer, managing director of Arafura Resources said.
For Lynas, we don’t expect Wesfarmers should scare so easily. However, it is definitely a space to watch as the tariff drama continues.
When it comes to the balancing out of these stocks, we’re really at the mercy of this deal. But like Mr Lockyer said, this tension could come as a pressing reminder not to rely so heavily on external resources.
For Money Morning
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