Which ASX shares have exposure to this 'absolutely essential' market?

One expert has named one area that investors should look at.

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Key points

  • Fund manager Emanuel Datt is bullish about rare earth miners 
  • He thinks that tensions between China and Taiwan could lead to higher rare earth prices 
  • Lynas is the “gold standard” for rare earth businesses, in his view 

I think Australia is very fortunate because of the abundance of resources (and ASX shares) that can provide access to compelling demand and profit.

Names like BHP Group Ltd (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) get plenty of investor attention because of the huge cash flow generated by their iron ore divisions.

But, there are other ASX shares that are exposed to different commodities.

Rare earth ASX shares could be one of the most interesting areas of the resources space. Examples of rare earths include neodymium (Nd) and praseodymium (Pr).

Examples of uses for rare earth elements, according to Geoscience Australia, include: magnets and super magnets, motors, metal alloys, electronic and computing equipment, batteries, catalytic converters, petroleum refining, medical imaging, colouring agents in glass and ceramics, phosphors, lasers and special glass.

This expert is bullish on rare earths

At the end of August, fund manager Emanuel Datt had allocated 23% of the fund towards rare earth ASX shares.

My colleague Tony Yoo has previously written about some of Datt's rare earth picks, which include Lynas Rare Earths Ltd (ASX: LYC) (which is down 25% since mid-August), Dreadnought Resources Ltd (ASX: DRE) and Lanthanein Resources Ltd (ASX: LNR).

Why is Datt optimistic about rare earth prices and rare earth ASX shares? He suggests that there could be higher tensions between China and Taiwan, which could lead to the "weaponization" of rare earth supply through supply restrictions. Datt explained:

We know that rare earths are absolutely essential for advanced technology applications, ie renewables, electric vehicles […] The second point was the market power. We've already discussed how China produces around 90% of rare earths globally on a downstream basis.

We're not looking or anticipating a full-blown war or anything like that between the two nations. But escalation in tensions, you know, sanctions and tit for tat retaliation. I think that will be enough to really get rare earth prices moving and demand being pushed forward effectively from rare earths uses, wanting to secure supply ahead of any potential restrictions.

What does Datt like about Lynas shares?

My colleague Tony Yoo reported on why Datt thinks that Lynas is the "gold standard" for rare earth ASX shares. Datt said:

It is an integrated producer with downstream processing facilities located in Malaysia and upstream operations in Western Australia.

Its customers are primarily Japanese and other nationalities who wish to diversify their supply from non-mainland Chinese sources.

Lynas Rare Earth share price snapshot

Since the start of 2022, Lynas has dropped by more than 30%.

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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