Apple (AAPL) has been riding high on its brisk iPhone sales and its booming AirPod business; it’s a high value and high margin business, notes Carl Delfeld, international investing expert and editor of Cabot Global Stocks Explorer.
Here's the problem — the majority of iPhones and all AirPods are not only assembled in China, they depend on certain critical materials, notably rare earths, that are only available via Chinese supply chains.
More from Carl Delfeld: Investing South of the Border
Both these products require rare earth permanent magnets. In fact, the iPhone requires more than a dozen rare earths and rare metals. Here are two key things you need to know about rare earth elements.
First, the real value of these metals is their unique electrical and magnetic properties that allow for miniaturization and much lighter, stronger, resilient, and efficient components.
While America has slept, China has become the Saudi Arabia of critical strategic metals. China is now responsible for 85% of the world’s rare earths production.
And second, China still accounts for a majority of the production of a variety of rare metals that go into Apple products such as the iPhone.
The supply chains around the world that play a role in producing all the components that come together in China for assembly are complicated and fascinating.
For example, though the battery is largely made by Samsung, the camera by Sony, the glass screen by Corning and the flash memory by Toshiba, only a few people actually know where all the materials that go into these components are sourced. It is a highly tuned and sensitive supply chain that has been scrambled by the Wuhan virus.
As of today, more than half a billion people are in partial or total lockdown in China. All domestic commercial flights are suspended. Business in China will not return to normal for at least a couple of months.
This disruption in production of assembly lines and rare earths may hit Apple’s profit margins down the road but the situation should boost rare earth prices and rare earth stocks.
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Here are some ways you might profit from this unfortunate situation.
An easy way is through the strategic metals exchange-traded fund, VanEck Vectors Rare Earth/Strategic Metals ETF (REMX). This is a basket of companies involved in strategic metals and rare earths with a fair amount of exposure to Chinese companies.
Another way is through an Australian company that has about a 14% global market share of rare earths; it’s called Lynas Corporation Limited (LYSCF). Lynas has a processing facility in Malaysia and recently signed a preliminary agreement to do the same in Texas.
For more aggressive investors, there are also some smaller speculative companies that I own that have a higher risk/reward profile.
We all hope the coronavirus in China and around the world is contained as soon as possible. But as investors, we need to be aware of the potential ripple effects and hedge the risks — particularly if you’re one of the many people who own Apple stock. Investing in rare earth stocks is a good way to do it.
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