Rare Earths: Is There Room for a Western Alternative to China?



Guido Alberto Casanova | The Italian Institute for International Political Studies

For over a decade, rare earths have emerged as a crucial commodity in the race for the geo-economic dominance of this century, and that is not by chance. As a matter of fact, rare earths are fundamental for the development of the new technologies that will enable the green revolution envisaged by the international community’s climate change efforts.

Rare earths are the key elements that make up those metals and alloys necessary for the decarbonisation process of developed economies. Once processed and refined, these 17 elements are indispensable not only for the production of industrial catalysts, but also for the permanent magnets used in the production of wind turbines and electric vehicles. Thus, rare earths play a strategic role in the development of those industrial sectors that will power the green transition of the next three or four decades.

Precisely for this reason, Chinese companies’ quasi-monopoly over the production and processing of rare earths is a fundamental, strategic dilemma for Western countries’ industrial policies. Before the Covid-19 pandemic, China accounted for no less than 62.8% of all rare earths mined globally. However, mining is only the first step of the elaborate value chain that cuts across the rare earth industry. In the downstream processing and related industrial production sectors (such as permanent magnets), Chinese companies’ shares increases up to 85-90%.

Whilst global concentration in Chinese hands has long been an accepted reality in the rare earths industry, Beijing’s inclination to weaponize this dependency has raised the alarm in all Western countries. In 2010, in the aftermath of an incident involving the Japanese coast guard and a Chinese fishing vessel in the contested waters of the Senkaku-Diaoyu islands, Beijing restricted the export of rare earths towards Japan for several months. Then, at the height of the US-China techno-commercial tensions when the Trump administration announced the Huawei ban in 2019, President Xi Jinping visited a rare earths processing plant alongside Liu He, the Chinese chief negotiator in the trade dispute with the US. In addition to the thinly veiled threat of retaliation, Xi also declared that China needed to embark on a new “Long March” in its economic confrontation against the US.

Facing the risk of overdependence on China, several Western countries have considered diversifying their supplies over the last decade, though most of them have only started making strides in the last few years. Japan was the first one in dealing with such a situation: in 2010, when Beijing partially blocked its exports, Tokyo relied on China for 90% of its imports. Also, the Chinese government’s drastic reduction of rare earths export quotas generated a strong pressure on Japanese processing and refining companies (which, at that time, dominated the sector) to relocate to China due to the induced gap between national and international commodity prices.

Over the years, Japan remained a key consumer of rare earths, yet it also managed to reduce its dependence on Chinese supplies. On the one hand, geological explorations led to the discovery of new, untapped reserves of rare earths, and the government is currently considering a reform allowing more financial support towards exploration activities. On the other hand, Japanese companies have also found alternative solutions: Honda, for instance, announced it had invented a motor that didn’t contain heavy rare earths a couple of years ago. The centrepiece in this quest, though, was the diversification of supplies. The leader in this process was JOGMEC (Japan Oil Gas and Metals National Corporation), a state-owned enterprise, which invested heavily in several resource-rich countries like Namibia and Australia in order to support an alternative network of rare earths suppliers. As of now, the share of Chinese imports has indeed declined to 58%, and Tokyo aims to push that figure below 50%.

One of the first companies JOGMEC decided to bet on was the Australian Lynas Corp. Thanks to an initial $250 mln investment carried out in partnership with Sojitz Corp in 2011 —  and with further injections of capital in the following years — Lynas currently provides a third of  Japanese demand for rare earths. It is also the only non-Chinese company with the expertise and the infrastructure necessary to operate in the downstream sector of rare earths processing. Over the last two years, Lynas has sought to expand its network of processing infrastructure: this effort has been supported by the US in its effort to build a new supply chain independent from Chinese companies. As such, the Department of Defence (DOD) allocated $30m for the construction of a processing plant in Texas last February.

This initiative underlines Washington’s growing attention towards this matter, which has become apparent in the last few years. The reopening of California’s Mountain Pass mine in 2018 – once the world’s biggest before its decline and closure in 2000 – marked the return of the US on the rare earths mining market, despite Beijing’s quasi-monopoly on processing. By the same token, the Trump administration declared rare earths as essential for national defence in 2019 and thus channelled DOD resources towards the reconstruction of a national rare earths processing capacity. From Colorado to California, new feasibility studies and pilot projects have been carried out to rebuild industrial infrastructure. Governmental support for this endeavour, albeit in new forms, has continued despite the transition: Joe Biden’s infrastructure plan envisions conspicuous funds for research and innovation as well as the development of a market for renewable energy and electric vehicles, two sectors wherein rare earths industrial processing capacity will be key.

The most evident gear-change operated by the Biden administration took place at the international level with the engagement of Indo-Pacific partners for the construction of a supply chain less reliant on China. The Quad, for instance, has provided a venue for its members – US, Japan, Australia, and India – to articulate their intention to develop a mining and refining capacity of their own. To that end, JOGMEC is considering the possibility of providing financial support to the early-stage projects currently underway in Texas and California.

Some obstacles are yet to be overcome, however. First, the rare earths industry requires specific technical knowledge and capacity to manage burdensome externalities: as a matter of fact, mining and processing entail serious risks for the local population both in terms of health and environmental degradation. Lynas’ processing plant in Malaysia, for instance, has been accused of failing to properly inform local authorities about the risks concerning the disposal of radioactive waste material derived from the production process.

Another factor is the fierce competition of big Chinese state-owned enterprises, whose production quotas were raised by almost 30% in the first semester of 2021, while Chinese exports of rare earths over the first six months of this year have surpassed pre-pandemic levels (16.5% above the first half of 2019). In addition, the issue of Chinese companies’ quasi-monopolistic market presence also applies to the integrity of Washington’s own alternative supply chain, since the international consortium that allowed the reopening of the Mountain Pass mine includes Shenghe Resources Holding, a big Chinese player in the sector.

However, the most important issue revolves around the financial sustainability of an alternative to the Chinese supply chain. Lynas, the most experienced rare earths company outside China, reported profits for only two years between 2014 and 2020, and had to be bailed out by JOGMEC in 2016. According to experts, finding a market-based solution for the creation of an alternative supply chain will prove difficult: a generous, consistent, and durable financial commitment by public authorities is indeed critical for the success of the initiative, as highlighted by the Japanese experience. However, US and Australian authorities are upgrading their commitment and have been issuing grants and funds to support the domestic development and commercialisation of processing plants, whose main beneficiary has been Lynas, with the aim of setting up complementary facilities in Kalgoorlie, Australia, and Texas.

There’s another, more important silver lining though. The green technologies market is expected to grow in parallel with the decarbonisation of the global economy: demand for rare earths should thus increase, not only in the West, but in China, too. Beijing — albeit dominant in the production market — has been the first rare earths importer since 2018, and some estimates suggest it may become a net importer at some point throughout this decade. Globally, demand is set to increase and drive up sales of existing rare earths companies. As a possible sign of this trend, Lynas reported its record quarterly revenue last month. Therefore, the global expansion in the demand for rare earths is an opportunity Indo-Pacific democracies cannot afford to pass up if they really intend to create their own supply chain independent from China.

Guido Alberto Casanova is a research assistant and editorial assistant at ISPI.

To read the full commentary from The Italian Institute for International Political Studies, please click here.