What happened

Monday put investors in lithium and rare earth metal stocks on the edge. While Standard Lithium (SLI 3.91%) and Lithium Americas (LAC) sank 10.7% and 13.3%, respectively, by 2:30 p.m. EDT, rare earth stock MP Materials (MP 4.97%) was down 8.5% by then.

With concerning news from China and an electric-vehicle (EV) manufacturer slashing its outlook on supply shortages hitting electric-vehicle stocks hard, lithium and rare earth stocks were bound to feel the heat.

So what

Chinese stocks fell off the cliff Monday as property developer China Evergrande Group (EGRN.F) was reported to be on the brink of bankruptcy. This news sent panic waves across the investing community. The situation is reminiscent of the Lehman Brothers financial crisis of 2008: Evergrande is among the leading lenders in China with billions in debt likely to be defaulted. That not only poses a serious threat to all the banks with exposure to the company but could also have ripple effects across China's property and financial markets. If Evergrande were to collapse, this would likely slow down growth in the nation or perhaps even drive it into a recession.

Not surprisingly, shares of electric-vehicle manufacturers like Nio (NIO 4.06%) and Ford that have a significant stake in China sank on Monday, dragging along suppliers to the EV industry. Prominent among them were lithium stocks Lithium Americas and Standard Lithium, both of which are betting big on battery-grade lithium to ride the EV-market growth.

A person charging an electric car.

Image source: Getty Images.

MP Materials, on the other hand, owns the only operating rare earth mine in the United States, which strives to produce rare earth concentrate and elements including lanthanum, neodymium, and praseodymium that are widely used in EV batteries and motors, among other products.

The Evergrande crisis and concerns about a potential slowdown in China come at a time when the auto industry is already struggling to keep factories running in the wake of the global semiconductor chip shortage that's showing no signs of ending soon. Today, Chinese EV manufacturer Li Auto (LI -0.75%) announced it expects to deliver only 24,500 vehicles in the third quarter versus its previous guidance of 25,000 to 26,000 deliveries as the chip shortage is hurting its supplies. Earlier this month, Nio reported a 25% sequential drop in its August vehicle deliveries and reduced its third-quarter delivery estimate to 22,500 to 23,500 vehicles from the 23,000 to 25,000 vehicles it projected earlier.

Now what

From auto makers to mining companies, billions of dollars are being poured into lithium given the exponential growth potential in the EV industry. Lithium Americas is bringing two mines into production, with its Thacker Pass mine in Nevada inching closer to development since a federal judge refused tribal leaders' request for an injunction. Standard Lithium, meanwhile, is advancing its flagship project in El Dorado, Arkansas and strives to make it the "largest and most advanced" lithium brine project in the U.S.

The rare earth industry is comparatively niche, but MP Materials has incredible prospects with China currently providing nearly 85% of the world's rare earth supply.

Granted, a slowdown in China could hit the EV industry hard, but on days like today when stocks tank on fears of a broader market sell-off, I'd urge investors to make investment decisions with a long-term view. 

Editor's note: This article has been corrected to say that MP Materials owns the only rare earth mine in the United States.