The latest market segment to take center stage in the U.S.-China war is the rare earths space. The previously moribund VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) followed up Monday's heavy volume gain of 6 percent with an almost 5 percent pop on Tuesday.

What To Know

The backstory here is easy to understand. On Monday, Chinese President Xi visited a rare earths facility Ganzhou, Jiangxi province. Ganzhou is one of China's most rare earths-rich regions and, overall, the country dominates the export market for these minerals. Xi's Ganzhou visit was coordinated and intended to send a message.

“These trips are not coincidental, they are carefully planned,” said Rareview Macro founder Neil Azous in a note out Tuesday. “Said differently, there is always a signal – that is, China has some degree of leverage.”

Why It's Important

China has considerable leverage when it comes to rare earths export, of which the country controls about 90 percent. The U.S. is a voracious consumer of rare earths. There is consumer demand via electric vehicles, smartphones, and tablets, all of which need rare earths. And there is the national security element because these minerals are used in the production of missile guidance systems, night vision goggles, and other military products.

There is just one active rare earths mine in the U.S. and, believe it or not, it's in California. Australia's Lynas Corp. said Monday it's partnering with another company to open a rare earths facility in Texas.

“Lynas Corp., said it had signed a memorandum of understanding with Texas-based Blue Line Corp. to set up a rare earth separation facility in the United States,” said Azous. “Note, Lynas is the only major rare earth mineral producer outside of China.”

What's Next

If it decides, China can materially alter the rare earths market over the short term and it has done so in the past.

“We highlight this because the last time China limited rare earth exports was 2011, and the price of the rare earth miners index (MVREMXTR Index) was 9-fold what it is today,” said Azous.

Interestingly, 2011 was the first full year of trading REMX (it debuted in October 2010) and although clamped down rare earths exports in 2011, REMX still lost more than 38 percent that year. From 2013 through 2018, REMX notched just two positive annual performances in 2016 and 2017.

The REMX ETF traded around $14.99 at the time of publication.