Highlights
- China controls over 60% of global rare earth oxide production.
- China controls over 80% of processing capacity for rare earth elements.
- China is strategically consolidating state-owned enterprises to influence global markets.
- Western nations, led by the U.S., are actively working to reduce reliance on Chinese rare earth metals.
- Efforts to reduce reliance include mine reopenings, refining investments, and alternative technology development.
- China’s market control enables strategic export restrictions and potential economic leverage.
- Increasing global diversification efforts may challenge China’s dominance in the rare earth market.
Over the past handful of years, China has made moves to intensify control over its rare earth metals industry, which is critical for modern technologies, from batteries, electric vehicles, and wind turbines to inputs in industrial electric systems, aerospace, and defense systems. Rare earth metals, a group of 17 elements prized for their magnetic and conductive properties, have surged in price, nearing peaks last seen in 2011. By 2021, as we have reported, Beijing merged several state-owned enterprises (SOEs) into China Rare Earth Group, Co., Ltd, creating the world’s second-largest rare earth producer. By 2021, that new entity will control 30% of China’s rare earth production and 60-70% of heavy rare earth output, bolstering Beijing’s influence over global markets.
China’s top state-backed rare earth behemoths include China Northern Rare Earth Group High-Tech Co., Ltd., China Rare Earth Group Co., Ltd, and Shenghe Resources Holding Co., Ltd.
All of them are the result of state-sponsored roll-ups of one sort or another. In aggregate, China controls about 60% or more of the global rare earth oxide production today, but this is a significant decline from 97% in 2011. However, when we look at processing capacity, the Chinese maintain about 80%+ control over this very important segment of the value chain. And when it comes to magnets, this control is even higher, with China holding a commanding position at about 90% of the total market. In the production of high-strength rare earth permanent magnets, China holds a commanding position. As we point out below, there is pressure across nations in the West and elsewhere to change this dynamic.
Change is sought because this extensive control enables China to influence global supply chains and pricing within the rare earth industry and beyond. China will likely not enforce a trade war using most rare earths as it might jolt the United States into a far bigger, more robust government response.
However, China will use its position. That started in 2010 with Japan (opens in a new tab) during a dispute. Since then, China has imposed several restrictions on the export of minerals, including Gallium, germanium, and antimony. In December 2024, China banned exports of these minerals to the United States, citing national security concerns. These minerals are used in semiconductors, fiber optics, solar energy, and defense technologies.
In October 2023, China imposed curbs on graphite products that go into electric vehicle batteries. China accounts for over 70% of the supply of both natural mined graphite and its synthetic variety.
Beijing frames consolidation as a move to stabilize production and supply chains, but critics suggest strategic motives, some in the West pointing to economic warfare implications. With tighter state control, China seeks to influence rare earth prices, much like OPEC’s control of oil. The ongoing restructurings were also meant to reduce environmental damage, a major issue in rare earth mining, and to position Chinese firms for international expansion.
Large SOEs can more easily secure funding for overseas ventures, evidenced by Ganfeng Lithium’s acquisition (opens in a new tab) of British lithium producer Bacanora as one example.
However, China’s dominance has triggered Western concerns. Rare earths are vital for military systems and emerging green technologies. Western nations, led by the U.S., have reopened mines and invested in refining and production to reduce reliance on Chinese supply.
The U.S. Department of Defense awarded Lynas Rare Earths a grant to build a light rare earths refinery in Texas. These efforts have chipped away at China’s market share, dropping it from 80% in 2017 to 60% by 2021. More recently, the Department of Defense established the “Mines-to-Magnets” initiative, and several other public-private types of deals have been announced. Then, there is the DoD rule to diversify defense contractors away from Chinese magnets by 2027.
Rare Earth Exchanges was launched by October 2024 to chronicle the changing rare earth element landscape, given the vital importance of these elements to Western prosperity.
Western companies, particularly automakers like BMW and Tesla, are also exploring ways to minimize reliance on rare earths. Some are reducing usage, sourcing from alternative suppliers, or developing products that eliminate rare earths altogether. Yet, investment in alternative technologies has lagged, partly due to past price volatility. Plus, the pathway to replacing rare earths with replacement products is likely a lengthy one.
China’s dominance faces challenges abroad. While rare earth deposits are widespread, deals like the controversial mining agreements in Congo have definitively raised scrutiny and resistance. Some of the practices associated with China (opens in a new tab) are absolutely unacceptable.
Could Beijing’s consolidation of political and economic power over the last few years backfire if heavy-handed tactics provoke greater global diversification of rare earth supply?
Crisis such as the civil war in Myanmar, as chronicled by Rare Earth Exchanges, could disrupt China, and the pressure within what we call the China Rare Earth complex from the national government and the communist party to innovate and keep ahead of Western industry advancement reminds us of a geopolitical chess game with real-world implications. Will countries like Malaysia venture off from China’s controls to launch their own value-added centers? What about India? Brazil?
Is it overly alarmist to consider Beijing’s consolidation as inevitably translating into complete market dominance, given Western ingenuity, a couple of years now of intense efforts across the world to diversify, plus an incoming POTUS Donald Trump, who likely will shake up some sectors,, drooping the Paris Agreement and elenctic vehicle mandates?
How, over the next few years, will Western and global diversification efforts drive and counterbalance China’s influence?
Moreover, while environmental improvements are cited, the assumption that SOEs will enforce stricter regulations may overlook potential compliance gaps. However, we translate many Chinese state documents on the topic, showing that the national government seems committed to environmental improvements. But now, can we trust much of this?
While China has capitalized on its position to dominate processing and value-added production in the rare earth space, we should not downplay the broader market dynamics and technological innovations that could reshape rare earths’ global landscape. But especially if only left to market forces without considerable government support, these will likely not manifest at scale in the short nor likely the intermediate run.
Daniel
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