Kelantan Eyes Rare Earth Mining to Diversify State Revenues

Highlights

• Kelantan is evaluating rare earth element mining as a strategic revenue source, positioning itself as the second-largest non-radioactive REE resource holder in Malaysia.
• The state aims to diversify its economy through new sectors like carbon credits and hydrogen energy, pending federal regulatory alignment and environmental considerations.
• Malaysia plays a critical role in the global rare earth supply chain, with Lynas Rare Earths’ processing plant serving as a key non-Chinese REE processing facility.

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The Malaysian state of Kelantan (rural state in the northeast of Peninsular Malaysia) is actively evaluating rare earth element (REE) mining as a strategic revenue source, according to Deputy Menteri Besar Datuk Dr. Mohamed Fadzli Hassan (opens in a new tab). Speaking during the State Legislative Assembly in Kota Bharu, Dr. Fadzli highlighted Kelantan’s significant reserves of non-radioactive rare earth elements (NR-REE), positioning it as the second-largest NR-REE resource holder in the country.

The move is part of a broader initiative to diversify Kelantan’s economy by developing new sectors including carbon credit generation and hydrogen energy—measures designed to reduce dependence on traditional revenue streams.

Kelantan, Malaysia

However, momentum hinges on regulatory alignment with federal authorities. The Ministry of Natural Resources and Environmental Sustainability (NRES) (opens in a new tab) is finalizing the National Climate Change Bill and the National Carbon Market Policy, both of which are expected to be tabled by year’s end. These frameworks will govern emissions trading, sustainability benchmarks, and environmental standards that impact REE development.

Kelantan’s cautious posture signals awareness of the environmental scrutiny facing REE mining across Southeast Asia—particularly after illegal or poorly regulated projects in neighboring states raised concerns over deforestation, water contamination, and radioactive waste. In contrast, Kelantan’s focus on NR-REEs aligns with market trends favoring low-thorium, environmentally safer deposits.

Malaysia’s Strategic Role in the Global Rare Earth Element (REE) Supply Chain

Malaysia plays a critical role in the rare earth supply chain, acting as one of the few countries outside China with significant rare earth processing capacity. The centerpiece of this role is Lynas Rare Earths’ processing plant in Gebeng, Kuantan (opens in a new tab)—the only major rare earth separation facility operating at scale outside China.

Key Role of Lynas Malaysia

Lynas, an Australian company, ships REE concentrate from its Mount Weld mine in Western Australia to Malaysia, where the materials are refined into individual rare earth oxides. The Gebeng plant handles light rare earths (like neodymium and praseodymium) used in permanent magnets essential for electric vehicles, wind turbines, smartphones, and military systems. This downstream capability is vital for breaking China’s near-monopoly on REE processing.

Despite U.S.-backed efforts to localize processing (including a second facility in Texas co-funded by the Pentagon), Malaysia remains Lynas’s cornerstone processing site, especially while the U.S. facility ramps up. This has positioned Malaysia as a strategic linchpin in non-Chinese rare earth supply chains.

Ties to China and Geopolitical Complexity

While Malaysia is part of a broader Western effort to diversify away from China, its economic ties to Beijing remain strong. China is Malaysia’s largest trading partner, and Chinese rare earth companies have expressed interest in joint ventures and processing partnerships across Southeast Asia, including Malaysia.

This creates geopolitical tension: on one hand, Malaysia enables Western-aligned REE diversification through Lynas; on the other, it risks becoming a secondary processing hub for Chinese firms seeking to circumvent export controls or embed themselves deeper in Southeast Asian infrastructure.

Environmental and Policy Challenges

Malaysia’s role has not been without controversy. Local opposition to the radioactive waste and environmental risks associated with the Lynas plant prompted temporary license restrictions and policy reviews. These issues highlight the tightrope Malaysia walks between industrial ambition, environmental responsibility, and geopolitical balancing.

Rare Earth Exchanges (REEx) Reflections

Malaysia’s rare earth processing capabilities make it a strategic chokepoint in global REE supply chains, especially for allies seeking to bypass China. However, its balancing act between environmental constraints and trade relations with both China and the West makes its future role highly sensitive to policy shifts, both domestic and international.

Key Questions for REEx Investors on new potential sources

• Will federal policy enable streamlined permitting for NR-REE projects in 2026?
• How will Kelantan fund infrastructure for industrial-scale extraction and processing?
• Are foreign investment or joint venture partners (e.g., China, Australia, Japan) already being courted?
• Will carbon and hydrogen initiatives cannibalize or complement REE resource development?

For investors tracking the next frontier in Asian REE supply, Kelantan offers a potential new node—but one that depends heavily on federal political will and investor confidence in sustainable practices.

REExTake: Kelantan’s emergence as a rare earth hub hinges not just on geology, but on policy execution and ESG transparency. Watch for federal legislative signals and initial exploration contracts in early 2026.

Source: The Sun Daily (Bernama) (opens in a new tab) | Author: Local Desk