China Export Ban Could Sting ETFs

by on September 4, 2009 | ETFs Mentioned:

The Chinese government is considering the implementation of a ban on the export of rare earth metals, a move that could have a significant impact on industries around the globe that rely on the materials for the production of everything from hybrid cars to air defense missiles. A draft report prepared by China’s Ministry of Industry and Information Technology proposes a ban on foreign shipments of terbium, dysprosium, yttrium, thulium, and lutetium. China is considering restricting the amounts of other rate metals exported annually to a level far below global demand. The full impact of China’s decision is difficult to gauge, but several ETFs could see some big movements, both up and down, in coming weeks.

The proposed policy would present serious problems for the rest of the world. Since more than 95% of the world’s rare earth minerals are mined within China, an export ban wouldn’t only raise prices globally, but may make some material impossible to acquire at any price.

According to an article in the Telegraph, China flooded the market for rare earth metals in the 1990s, putting many international competitors out of business. Companies around the globe are developing rare metal mining operations, but the rarity and difficulty in extracting this family of metals means a long ramp-up period. A rare earth element mine in California isn’t set to reopen until 2012. Indian and South African deposits continue to produce rare earth deposits, but their production volumes pale in comparison to China. Other locations in North America and Vietnam have also been considered.

The prices for many of these rare metals are staggering. Terbium, an ingredient in low-energy lightbulbs, sells for $800,000 per tonne. The introduction of new technologies in recent years has increased the importance of rare metals to the global economy, as well as the world’s reliance on China. Dysprosium is critical to the construction of hybrid car motors. Many modern gadgets also use small amounts of rare earth metals.

ETF Plays For A China Metals Ban

China’s ultimate actions re difficult to predict. But this situation has the potential to have a major impact on equity markets around the globe. Here’s a look at three ETFs that could be on the move as this saga evolves:

  • First Trust ISE Global Wind Energy ETF (FAN): This ETF allocates two-thirds of its holdings to companies providing goods and services exclusively to the wind energy industry. Neodymium, one of the metals that could soon be subject to export quotas, is a critical component of wind turbines, meaning that China’s next move could have a major impact on companies engaged in the production of this alternative energy source.


  • Technology Select Sector SPDR Fund (XLK): Many of today’s hottest tech gadgets, including iPods, Blackberries, and plasma TVs,  include sprinklings of rare earth metals. If supplies of these metals are cut off or drastically reduced, technology ETFs could suffer (see the ETFdb Technology page for a complete list of Technology ETFs).


  • Claymore/AlphaShares China Small Cap Index ETF (HAO): Although conspiracy theories will no doubt be plentiful, the fact of the matter is that China’s contemplated actions aren’t meant to hold the rest of the world hostage. Rather, these rare earth metals are needed to fuel continued growth in China’s economy. The fact that China is considering such restrictions is an indication that the country’s economic prospects are bright, particularly within the manufacturing sector. While there are a number of China ETFs available (see the China Equities page for a complete list), HAO is unique in that it offers diversified exposure to the small cap segment of the Chinese equity markets (as opposed to FXI, which is limited to 25 mega-cap holdings).


Disclosure: No positions at time of writing.