The complex road to ending the dependence on Chinese rare earths

Last month, legislators introduced a bipartisan bill in the U.S. Senate that could prohibit defense contractors from procuring rare earth metals from China by late 2026 and force the Pentagon to create a strategic reserve of those elements by 2025.

Arkansas Sen. Tom Cotton, one of the bill’s sponsors, said the goal is to end “America’s dependence on the CCP (Chinese Communist Party) for extraction and processing of these elements,” which he described as “critical to winning the strategic competition against China and protecting our national security.”

Essential for modern life

A group of 17 elements, rare earths play a key role in modern life as they are key to high-tech civilian and military applications. The list of products using these elements is almost endless, including smartphones, computer hard drives, MRI machines and electric vehicle motors. These minerals can also be found in critical components such as catalysts, permanent magnets and metal alloys.

In the military sector they are also used in a wide range of areas such as precision-guided weapons and satellite and stealth technologies, as well as in unmanned vehicles and advanced communications systems. They are of strategic importance for the functionality of modern and increasingly interconnected armed forces, which is why a growing number of countries consider securing access to these elements to be essential for future economic and military stability.

Despite the name, rare earths are not rare. They are more abundant on the Earth’s crust than many other elements, but they are generally found in low concentrations and usually mixed together, which makes separating them not only technically difficult but also costly if the environmental harm is taken into account.

The extent of U.S. dependence

One of the key issues for the United States and its allies is that China is still the global leader in rare earths mining, refining and component manufacturing, controlling about 37% of world reserves and 58% of mine production in 2020, according to the U.S. Geological Survey.

It wasn’t always this way. Until 1985, the United States was the world’s largest producer of rare earths. That changed drastically when Beijing began mining and extraction operations, with 80% of the rare earth compounds and metals used in the U.S between 2016 and 2019 coming from China.

Until recently, the U.S. had only one rare earth mine. Located in Mountain Pass, California, the mine, owned by MP Materials, produced 15% of the world’s rare earths in 2020, according to the U.S. Geological Survey, making it the second largest global source of production.

In recent years, mine operators have sent thousands of tons of concentrated rare earths to China for processing, as no separation facilities exist in the United States. It is China’s ability to separate the rare earth carbonates or oxides, after initial processing, that gives Beijing an edge in processing these materials.

Additional rare earths mining and processing in the U.S. is planned. For instance, the USA Rare Earth LLC project at the Round Top Mountain deposit in Texas is expected to start production of a range of critical rare earths in 2023, said Rajiv Biswas, Asia-Pacific Chief Economist at IHS Markit. The company has also built a critical minerals processing facility in Colorado, which will produce separated rare earths oxides.

New rare earths conglomerate

Despite these efforts, the United States’ dependence on Chinese rare earth imports is what has been driving some politicians in Washington to push for legislation. The aim is to secure U.S. access to these critical elements as well as reduce China’s decadeslong dominance in the sector, particularly as both countries continue to be embroiled in trade disputes.

Washington’s concerns may have been compounded by news that China has further consolidated its rare earths industry as part of efforts by Beijing to boost cost competitiveness, increase production efficiency, and strengthen its grip over pricing.

In late 2021, three key producers of these strategic minerals — China Minmetals Rare Earth Co., Chinalco Rare Earth & Metals Co., and China Southern Rare Earth Group — merged to form the China Rare Earth Group Co.: an industrial conglomerate based in the city of Ganzhou that will hold almost 70% of China’s annual heavy rare earth production quota, according to Patricia Mohr, economist, commodity market specialist and an associate of Capitalight Research in Toronto, Canada.

Chinese state media praised the merger as demonstrating Beijing’s determination to use the country’s rare earth resources in more strategic industries such as semiconductors and electric cars, as well as to enforce stricter production and export quotas, and help provide price stability.

Jenik Radon, an expert on sustainable natural resource development at Columbia University, said that the recent merger can also be seen as a way by Beijing to cut down on illegal rare earths exports and an opportunity to implement and enforce better environmental standards for the industry, which will invariably result in higher prices.

Radon also noted that the prices the manufacturing industry pays for rare earths are “almost insignificant in the cost of a final product such as smartphones, meaning that increased prices should not be a show-stopper.”

At the same time Jacob Gunter, a senior analyst at German think-tank MERICS, argues that by consolidating oligopolies into quasi-monopolies Beijing is making these conglomerates easier to manage, which also helps empower them globally.

“Rather than having three rare earth companies with their own assets, economies of scale and comparative strengths, Beijing prefers to have a single rare earth titan of such size that it will be nearly impossible for any foreign competitors to emerge and compete with them outside of China,” Gunter said.

A geopolitical tool

Dominance over such critical resources gives Beijing greater geopolitical influence, if not clout, and bargaining power at the negotiating table. China can leverage rare earths as a strategic commodity in trade talks with its rivals, especially since the country does not only produce the majority of these minerals, but currently also dominates almost all downstream sectors of the value chain up to the final product.

A case in point is when China blocked the export of rare earths to Japan in 2010, after the captain of a Chinese fishing boat was arrested near the Japanese-controlled, Chinese-claimed Senkaku Islands in the East China Sea.

The move, which left Japan’s electronics and auto industries suddenly without an essential resource for several weeks, was followed by Beijing’s decision to impose export restrictions on rare earths between 2010 and 2014, leading to steep increases in rare earth prices during those years.

Japan, the U.S. and the European Union reacted by filing a complaint at the World Trade Organization, which in 2014 ruled that China’s actions were inconsistent with WTO regulations. The following year Beijing scrapped the export restrictions.

The 2010-2014 crisis resulted in global value chains shifting to China, as companies that relied heavily on a secure rare earth supply relocated their production plants there.

Not only have important technologies and expertise in the area been transferred to China in recent years, but Chinese companies and research institutions have also taken a leading role in areas such as separation techniques and patents, particularly for permanent magnets, which are used in many high-tech products such as electric vehicle motors.

Moreover, China seems to be following the path of developed economies in sending its rare earth production abroad. But while the country works to clean up its environment, it risks polluting other areas.

“Investment is already strong in parts of Africa and South America, and there has even been talk in Beijing of sending its companies into post-American-withdrawal Afghanistan to source rare earths from there. While this could mean less concern about reliance on rare earths produced in China, Beijing would still effectively control access to these resources, as it will be Chinese state-owned enterprises controlling production abroad,” noted MERICS analyst Gunter.

Countering Chinese dominance

The 2010-2014 crisis also led to increased global exploration for rare earths deposits, with Tokyo actively trying to secure its supply through mining projects outside of China, especially in Australia.

“Japan has invested heavily in rare earth production in other countries while also developing a highly efficient rare earth recycling system that has significantly decreased its reliance on China.

“As a knock-on effect, other rare earth customers have benefitted from Japan’s actions as they now have more diverse sources,” added Gunter, who believes Beijing would think twice before using rare earths as a geopolitical weapon again.

That’s because such a move would not only spur the U.S. and other actors to intensify efforts to diversify their rare earth sources, but could also result in further restrictions being imposed on China to further limit its access to key U.S. technologies such as semiconductors.

The U.S. and allies such as Australia have sought to improve their access to rare earths by setting up extraction and processing facilities for military applications. After all, Washington’s ability to maintain a military edge over China is also dependent on developing a secure supply chain for rare earths.

For instance, the Pentagon announced in November 2020 that it would contribute $9.6 million to MP Materials’ effort to “add value-add processing and separation capabilities” to the Mountain Pass operations.

And a few months later, in February 2021, it unveiled a $30.4 million technology investment deal with Australian company Lynas Rare Earths, one of the largest rare-earth companies outside of China, to set up a facility in Hondo, Texas, for processing light rare earth elements.

Moreover, MP Materials is investing more than $220 million — with support from the Pentagon — to optimize and restart separation facilities for light and heavy rare earths at Mountain Pass, and it recently announced a new plant in Fort Worth, Texas, that will produce about 1,000 tons of magnets per year, enough to power 500,000 electric vehicle motors annually.

There are also indications of an alliance-based approach by the U.S., Japan, Australia and India to counter China’s dominance in the sector as they seek to cooperate in finding alternative sources of rare earths and build more refining capacity.

Australia is expected to play a critical part in this regard, with Canberra announcing in September 2021 a 2 billion Australian dollar ($1.5 billion) loan facility for local mining projects to help secure supplies of critical minerals used in advanced technologies.

Moreover, the government of Western Australia welcomed in February a AU$140 million loan for the Yangibana Rare Earths Project in the Gascoyne, with the company facilitating the project — Hastings Technology Metals — now on track to become Australia’s second rare earths producer, following Lynas.

Once fully operational, the Onslow Rare Earths Plant is expected to have a yearly production capacity of around 15,000 tons of mixed rare earth carbonate, containing 3,400 tons of neodymium and praseodymium.

In addition, the U.S. has established bilateral working groups with Canada and Australia on critical minerals.

A gradual process

These efforts come as China’s global share in rare earths mine production has sharply declined in recent years: from 83% in 2016 down to 58% in 2020, mostly due to countries such as the U.S., Australia, Russia, India and Burundi stepping up production.

This means that China no longer has a monopoly on these elements, although it still maintains a strong lead in rare earth technologies.

Ending dependence on Chinese rare earths will depend not only on how quickly other countries can scale up extracting, processing and refining these resources, but also on whether they can do it in an environmentally protective way and at a cost that will allow them to compete with China.

However, a quick fix is unlikely, particularly given the high level of dependence of some countries, including the U.S., and the limited investments made so far in diversifying the sources.

“At present, there is no ‘going around’ China when talking about commercial scale operations consuming rare earths,” said Daan de Jonge, a consultant at London-based commodity research company CRU.

“China has the most significant share of processing capacity at every step of the rare earths supply chain, so it is likely that the vast majority of rare earth magnets will have gone through China, or at least relied on China at some point,” he added, pointing out that this includes magnets for electric vehicles as much as those used in military and defense applications.

“Even if a non-China mine produces an ore, separates their own NdPr (neodymium and praseodymium), and sells that to a Japanese magnet maker, they will still have to import dysprosium from China for high temperature applications.”

However, as the Sino-U.S. trade and technology rivalry intensifies, we can expect to see more significant steps taken by Washington, noted MERICS analyst Gunter. Furthermore, rare earths are an area identified by the European Union as a strategic reliance risk, so it would not be surprising to see European investment in rare earth markets, such as sub-Saharan Africa, in the near future, he added.