Rare Earth Upstream Has Peaked? Ministry of Commerce Sanctions 10 U.S. Companies; Real Market Expectations May Lie Downstream

Original Author: David

On June 22, the Ministry of Commerce issued Announcement No. 23 of 2026, adding 10 US entities, including AEVEX Aerospace, Red Cat Holdings, and MP Materials, to the export control list, prohibiting the export of dual-use items to them. On the same day, another 46 US companies were added to the government procurement restriction list.

(Author's note: Dual-use items refer to goods, technologies, and services that have both civilian and military uses or contribute to enhancing military potential.)

This marks another round of China's normalized rare earth countermeasures since October 2025. The 10 targeted US companies are primarily concentrated in the three sectors of defense, drones, and rare earths.

The two most prominent names on the list are MP Materials and USA Rare Earth, both flagships of the US rare earth industry. China's action against them led to an initial market reaction favoring A-share rare earth stocks: if competitors are choked off, domestic players become scarcer and more valuable.

The question is, given that rare earth stocks have been rallying since last October and upstream leaders are already trading near their year-to-date highs, is it too late to react now?

If it is too late, where might capital flow next?

This latest control list from the Ministry of Commerce affects more than just the rare earth sector. The already-priced-in rare earth sector may not be devoid of further catalysts, and some overlooked niche sectors might still be flying under the radar.

We attempt to identify the potential implications and map them onto valuation coordinates for your reference.

Key Conclusions

① A-share rare earth upstream stocks have already priced in gains; this control measure is not a new catalyst.

Northern Rare Earth is currently trading at RMB 52.9, with only about 20% upside to its one-year high of RMB 63.6. Rising Nonferrous Metals (RMB 115) and Shenghe Resources (RMB 33.6) are also near their one-year highs. These upstream resource stocks have been on an uptrend since last October, with the "rare earth countermeasure beneficiary" logic largely factored in. For the upstream rare earth sector, this control measure is more of a reconfirmation of the trend than a new starting point for an uptrend.

② Relatively underpriced are the mid-to-downstream rare earth magnet and drone supply chains.

Within the same rare earth chain, mid-to-downstream valuations are significantly lower than upstream:

In the magnet sector, Earth-Panda Advanced Magnetic Material (RMB 30.7) and Zhenghai Magnetic Material (RMB 13.7) are still near the lower bound of their one-year trading range, significantly lagging behind the gains of upstream resource stocks. The drone sector, corresponding to Red Cat and Teal Drones on the control list, is even quieter, with AVIC (China) UAS trading near its one-year low and attracting limited market attention. Pricing progress varies across different parts of the value chain for the same event.

③ The targeted US stocks may not constitute a unilateral negative; market reaction awaits confirmation after market open.

MP Materials and USA Rare Earth are core assets in the US domestic rare earth supply chain, with MP Materials backed by a stake from the US Department of Defense.

For these companies, China's export controls and US policy support are two concurrent forces, and their impact direction may not be uniform. None of the three stocks were trading at lows before the announcement. Given the announcement was made on Monday before the US market opened, their true pricing reaction awaits the market's verdict.

Investors holding relevant positions should closely monitor post-open trading trends.

Why Are Export Controls Bullish for Domestic Rare Earths?

Many might initially find this counterintuitive: banning exports means Chinese companies do less business, so how can it be positive?

The key lies in the direction of the controls. This ban prohibits China from selling rare earth-related items to those 10 US companies, cutting off the supply sources for these US firms, not affecting the raw material procurement of Chinese manufacturers.

China possesses the world's most complete rare earth chain—from mining and smelting/separating to magnet manufacturing—achieving self-sufficiency without relying on US feedstocks. This means the announcement does not impact the upstream supply for Chinese producers; they can continue production and export as usual.

The ones truly constrained are on the US side.

Companies like MP Materials and USA Rare Earth, aiming to build supply chains independent of China, still depend on China for separation technology, equipment, and some intermediate materials. Pressuring competitors effectively enhances the scarcity and pricing power of Chinese players in the global rare earth landscape, which is the real reason the market interprets this as bullish for A-share rare earth stocks.

Upstream Rare Earths Have Priced in Gains, Capital Has Yet to Flow Downstream

Let's clarify the chain. Rare earths are mined, then undergo smelting and separation to become raw materials like praseodymium neodymium oxide. This is the upstream segment, occupied by companies like Northern Rare Earth, Rising Nonferrous Metals, and Shenghe Resources.

These raw materials are further processed into NdFeB permanent magnet materials, which are installed into various motors. This constitutes the mid-to-downstream segment, where players like JL Mag, Zhenghai Magnetic Material, and Earth-Panda operate.

Upstream sells raw materials, downstream sells magnets.

In this market cycle, capital has predominantly flowed upstream. Northern Rare Earth (RMB 52.9), Rising Nonferrous Metals (RMB 115), and Shenghe Resources (RMB 33.6) are all trading near their one-year highs. The logic is straightforward: every time rare earths' strategic importance is highlighted, the primary beneficiaries are upstream players who own mines and have smelting capacity—their scarcity is tangible.

In my view, this control event is directionally positive for upstream, but prices have already largely absorbed this expectation. Entering now feels like chasing highs with unfavorable risk-reward.

Moving downstream to the magnet sector, the pricing progress is notably slower.

Among the three leading magnet companies, JL Mag, with RMB 7.7 billion in revenue and doubled net profit, saw its stock price rise over 90% in 2025, leaving it at a high level. However, Zhenghai Magnetic Material and Earth-Panda remain near the lower end of their one-year price range, having not kept pace with upstream gains.

There's an easily overlooked context here:

Since the second half of 2025, China has actually relaxed exports of magnets to the US. For instance, JL Mag's total US sales reached RMB 500 million for the year, a 40% increase; both Zhenghai and Earth-Panda also obtained US export licenses. This addition of 10 companies to the control list is a targeted move within the framework of "clearing ordinary commercial clients while specifically cutting off particular defense entities," not a comprehensive embargo.

Therefore, the actual impact on magnet companies' financials is limited.

The 10 targeted US companies were not among their major clients anyway. The real revenue for JL Mag and Zhenghai Magnetic Material comes from new energy vehicles and robot motors, having little to do with exports to the US military.

For magnet stocks, this control measure is more of a sentiment boost for the sector, unlikely to translate into concrete orders. However, what I find worth watching downstream is which businesses closely align with the defense theme of this list.

In this regard, Earth-Panda aligns better than the other two.

Earth-Panda is a smaller player, with RMB 1.6 billion in revenue and RMB 57.4 million in net profit for 2025. However, it is a major domestic supplier of military-grade magnets, holding over 40% market share in this niche according to public data. Its products are used in equipment like aero engines and missiles, directly corresponding to the defense and drone US companies on the control list. This forms its most direct narrative connection to the event.

But a matching narrative doesn't guarantee stability: financially, its gross margin is only 18%, its debt-to-asset ratio approaches 60%, and both its profitability and financial safety margin are thinner than peers. Coupled with its smaller market cap, its stock price can spike quickly but also fall sharply.

It suits those who can handle volatility and prioritize the "purest theme play," but not those seeking a stable core holding.

Zhenghai Magnetic Material is a different type. When its 2025 net profit more than tripled, the magnitude of its turnaround was sharper than Earth-Panda's. However, the driver was humanoid robots and new energy vehicle motors, largely unrelated to this defense list. Its low valuation stems more from the robot story not being fully priced in by the market.

So, reading the rare earth chain, the upstream and downstream are in two different situations.

Upstream holds the resources and has the most tangible scarcity, but price has already absorbed the positives, making it a high-level chase now; downstream magnets are still at low levels. Earth-Panda is more aligned with the defense list, but at the cost of a smaller market cap and weaker finances; Zhenghai is cheap but has weaker correlation.

Drones: The list points to this sector, but no direct positive catalyst

Red Cat Holdings and its subsidiary Teal Drones on the control list manufacture military reconnaissance and strike drones in the US. They represent the type of military drone supplier the US wants to foster and use to replace Chinese counterparts.

The market will naturally draw parallels to the A-share military drone sector, but the logic here might differ from rare earths. It won't generate orders for a specific Chinese drone company. Instead, it highlights the "US-China rivalry in military drones," prompting the market to reassess the strategic value and export competitiveness of domestic military drones.

Following this lead to find corresponding targets in A-shares, the best business match is AVIC (China) UAS.

AVIC UAS is a leading Chinese manufacturer of large military drones. Its core product, the Wing Loong series of reconnaissance/strike UAVs, accounts for over 90% of its main revenue, primarily exported through military trade. It is the mainstay of China's military UAV exports.

In terms of business alignment, it is indeed in the same arena as the targeted US drone companies, making it the highest correlation candidate in this line.

Its current price of RMB 44 is near the lower end of its one-year range. However, this level results from a decline from its peak, not an uninitiated uptrend.

According to the 2025 financial report, the company's performance surged following significant military trade orders. Revenue for the first three quarters grew over threefold year-on-year, pushing the stock price to RMB 48 at one point. The current decline is more akin to a cooling-off after the rally materialized.

It's important to note that military trade revenue heavily depends on single large orders. In 2024, revenue dropped 70% YoY, leading to losses, before rebounding strongly in 2025. This feast-or-famine characteristic means its valuation based on price level alone is unreliable. The real variable is the signing and delivery pace of subsequent military trade orders. In terms of valuation, the company's P/E ratio has long been in the tens, so it's not exactly undervalued.

Export Controls: Not Entirely Bearish for Corresponding US Stocks

This is the primary concern for holders of these US stocks, and the answer might be counterintuitive: not necessarily.

MP Materials and USA Rare Earth, the most significant entities on the export control list, are core vehicles for the US's effort to reduce reliance on Chinese rare earths. MP is the only large-scale vertically integrated rare earth company in the US. Having received an equity investment from the US Department of Defense in 2025, it is itself a target of national strategic support. This identity creates a dual situation:

China cuts off its access to Chinese dual-use items, but precisely because of supply chain security concerns, the US government might conversely provide it with more orders and subsidies.

Pre-announcement prices support this assessment. None of MP Materials, USA Rare Earth, or Red Cat Holdings were trading at lows before the control news broke. The market had not pre-emptively sold them off as "likely to be sanctioned," and investors hadn't merely priced them as victims.

Of course, the ultimate outcome awaits the market's verdict. As the announcement was made on Monday before the US market opened, definitive pricing—whether the sanctions are read as material negatives or offset by support expectations—will be revealed through post-open trading activity.