Guosheng Securities has released a research report indicating that China possesses a comprehensive industrial chain from mining and separation to deep processing, granting it control over product pricing. On the demand side, the trend towards "electrification of everything" is inevitable, with downstream magnetic materials likely benefiting long-term from growth in applications such as electric vehicles and robotics.
With comprehensive upgrades in rare earth controls, resource scarcity is becoming increasingly prominent, and rare earth prices are expected to trend higher. Given their strategic attributes, the equity side may benefit from a dual expansion in earnings per share and price-to-earnings ratios.
Rare Earths: The "Modern Industrial Vitamin" and a Non-Renewable Strategic Resource
Rare earths refer to a group of metallic elements with similar chemical properties that are relatively dispersed in the Earth's crust. They can be categorized into light rare earths and heavy rare earths. Due to their unique electron shell structures, rare earth elements exhibit distinctive optical, electrical, and magnetic properties. They are used in permanent magnets, luminescent materials, catalytic materials, metallurgical additives, and other applications, finding widespread use in new energy, electronics and information technology, national defense, and other sectors.
Supply: China Leads the Global Chain, Overseas Supply Chain Development Accelerates
In terms of total volume and structure, China accounts for a significant portion of global rare earth resources and production. While supply has diversified over the past decade, China remains the dominant player in global supply. China's rare earth policies directly determine the global supply volume. The country has long implemented total control over rare earth mining and smelting separation, with quota growth entering a "slow lane" from 2024.
The recent release of new management measures signals a comprehensive upgrade in rare earth regulation, which may control the pace of domestic supply growth, with subsequent quota increases expected to be more measured. This also helps phase out outdated smelting capacity and optimize the profit structure of the industrial chain.
Overseas supply is primarily concentrated in the United States, Australia, and Myanmar. Regarding incremental supply, apart from expansion projects by existing miners, new projects in Angola and Australia are advancing and are expected to commence production in 2026 and beyond. A major U.S. project is also progressing through feasibility studies.
In terms of downstream development, a key U.S. producer is building oxide and magnet capacity based on its mine and has signed long-term agreements, indicating an acceleration in overseas efforts to build out their supply chains.
Demand: The Era of "Electrification of Everything" to Drive Sustained Growth for Rare Earth Magnets
Rare earths possess irreplaceable magnetic, optical, and electrical properties that significantly improve product performance, increase product variety, and enhance production efficiency. They are widely used in metallurgy, military, petrochemicals, glass and ceramics, agriculture, and new materials.
Permanent magnet materials represent the most important and promising downstream application for rare earths, accounting for over 60% of functional material usage. New energy vehicles remain the primary source of demand growth, while embodied robots are expected to use significantly more material than industrial robots. The scaling of embodied robots could drive long-term demand.
Supply-Demand Outlook
On the supply side, against the backdrop of comprehensively upgraded domestic regulation, it is assumed that China's rare earth quotas will maintain a steady 5% growth rate. Overseas incremental projects are expected to gradually come online. Stimulated by high prices, supply from scrap recycling is anticipated to achieve relatively high growth rates.
On the demand side, growth from new energy vehicle motors is expected to decelerate, with embodied robots contributing to long-term incremental demand. Overall, the domestic supply and demand for key oxides are projected to maintain a tight balance from 2026 to 2028. The narrowing supply-demand gap reduces marginal elasticity, but with sustained demand growth, price levels are expected to remain high with some volatility.
Key Companies to Watch
Key companies highlighted in the sector include China Northern Rare Earth, China Rare Earth, Zhongxi Youse, JL Mag Rare-Earth, and Zhongke Sanhuan.
Risk Factors
Potential risks include higher-than-expected domestic quota issuance, greater-than-anticipated overseas supply releases, weaker-than-expected demand, and calculation errors.
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