Rare Earth Exchanges

How Defense Companies Procure Rare Earth Materials and Magnets

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Highlights

  • China dominates 90% of global rare earth magnet production.
  • China controls 70% of rare earth mining and 85% of processing capabilities.
  • U.S. defense companies must decouple from Chinese rare earth supplies by January 2027.
  • U.S. defense companies face significant technological and economic barriers in decoupling.
  • Achieving independent rare earth magnet production requires massive investment.
  • Infrastructure development and international collaboration are needed for independent production.

Defense companies like Raytheon, Lockheed Martin, and Northrop Grumman depend on tiered suppliers to secure rare earth materials and magnets. These specialized contractors handle the sourcing, refining, and fabrication of rare earth elements (REEs) into the essential alloys and magnets used in advanced military technologies, such as missile guidance systems and radar.

To ensure stable supply, defense contractors seek long-term supply agreements (LTSAs) with processors or manufacturers, stipulating fixed pricing and consistent delivery. In some cases, materials are procured directly from rare earth magnet producers, especially for critical components like neodymium-iron-boron (NdFeB) or samarium-cobalt (SmCo) magnets.

The U.S. Department of Defense (DoD) also supports supply chain security through government-funded contracts and subsidized joint ventures with domestic or allied suppliers.

Accessing and Procuring Rare Earth Magnets

Rare earth magnets, especially NdFeB types, are predominantly sourced from Chinese manufacturers, as China controls 90% of the global supply. Even when materials are mined in the U.S. or Australia (e.g., by MP Materials or Lynas Rare Earths), processing and magnet production often occurs in China due to a lack of refining and manufacturing infrastructure elsewhere. Defense companies also explore strategic stockpiling agreements to buffer against supply disruptions.

To meet stringent military-grade requirements, magnets must exhibit high resistance to demagnetization, exceptional thermal stability, and mechanical durability. These rigorous specifications narrow the pool of qualified suppliers, making decoupling from established supply chains even more challenging.

Why Decoupling from China Is So Difficult

China holds approximately 70% of global rare earth mining and 85% of processing capacity. Its vertically integrated operations streamline extraction, refining, and magnet production. Replicating this scale and efficiency is an enormous challenge for Western nations.

Cost Advantages and Economies of Scale

China benefits from massive economies of scale, significant government subsidies, and looser environmental regulations, which enable it to produce REEs and magnets at much lower costs. In comparison, Western producers face higher production costs due to stricter environmental and labor standards.

Technological Expertise and Market Entrenchment

China has invested heavily in R&D for high-performance magnets, including proprietary refining and manufacturing techniques. Having outsourced production decades ago, U.S. and European companies lack the technical know-how and infrastructure to produce advanced magnets on a competitive scale.

Existing Dependencies

Defense companies have built global supply chains that are deeply integrated with Chinese producers.

Alternatives like Japan or Europe are also tied to Chinese rare earth supplies, and rebuilding independent domestic supply chains would require substantial time and investment.

Of course, the DoD rule enforced by January 2027 requires defense contractors to procure non-Chinese magnets (opens in a new tab).

Environmental and Regulatory Barriers

Rare earth processing generates hazardous byproducts, including radioactive waste. Environmental regulations in Western countries make it prohibitively expensive and time-consuming to establish comparable production facilities, creating further dependence on China.

Implications for Defense Contractors and Mitigation Efforts

The reliance on Chinese rare earths and magnets poses significant national security risks, as supply chain disruptions could hinder the production of critical military technologies.

To mitigate these risks, the U.S. government has initiated several strategies, from investment in domestic capabilities (e.g., MP Materials, Urban Mining, and Magnetics USA with a focus on recycling REEs) to international partnerships with allies to strategic agency funding.

Despite these efforts, significant barriers remain, including infrastructure gaps, high costs, and geopolitical challenges. Rare Earth Exchanges has reported profound challenges and the need for government backing that has not been considered previously.

Despite the January 2027 deadline, achieving full independence from Chinese magnets will likely require decades of sustained investment and coordination among governments, private industry, and international allies.

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