China's Rare Earth Quotas May Have Broader Impact Than You Think

Rare earth metals tend to catch investors' attention every time China takes actions to change its export policies. This time is no different, as China was revamping its export quota system. According to

, the system “…keeps overall quotas for 2012 in line with the previous two years but segments them between companies based on their environmental compliance as well as further distinguishing between 'light' and 'heavy' rare earths.” The reason why China's export policy is so important is that the country is essentially the only producer of rare earth elements. These metals are used in various products ranging from rechargeable batteries powering electric vehicles to armored military vehicles. Hence, a steady supply of these metals is vital to many young technology growth companies, as well as large blue chip defense manufacturers. Tesla

and General Dynamics

are just two examples of companies that fall under this category. The Financial Times article also states that the mining of rare earth metals can be highly polluting. This is one of the reasons why China has been so eager to adjust the export quotas, but one could wonder whether the political importance of rare earths is also a factor behind China's actions. Nevertheless, the rare earth metals have been highly volatile in 2011 and the Market Vectors Rare Earth/Strategic Metals ETF

has been trading between $13.83 and $28.91. The latest decision to maintain the current quotas sent the ETF lower yesterday and it is currently trading below the $15 level. The article also points out that because of the lower demand and high prices of rare earths, China's export quotas have generally been unfilled. If this trend continues, the manufactures that depend on the rare earths will be unaffected. However, the future changes in Chinese export quotas are something to look out for as they might either increase or decrease the availability of the rare earth metals that are crucial for several manufacturers. Hence, traders can collect profits by following the Chinese export quotas. Any changes could directly impact companies like Molycorp

and Rare Element Resources

, but also indirectly affect manufactures who use these metals. You can follow me on Twitter