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How China came to dominate the supply chain of rare earths and critical minerals

Camille Lau

As the world fast forwards to a clean energy transition, the race is on to secure the supply chains of critical minerals for essential technologies. Against the backdrop of highly geographically-concentrated resources, vulnerability to disruption, and China’s dominance in relevant supply chains, how did China quietly secure a “near-monopoly” in the Rare Earth Industry? How can countries reduce dependence on China for critical minerals?

According to the International Energy Agency (IEA), China is home to  about 35% of the World’s nickel, 58% of lithium, 65% of  cobalt, and 87% of rare earth elements (REE) i.e. cerium, lanthanum, praseodymium etc.  .[1] (See Figure 1) Despite a lack of consensus on the exact extent to which China dominates the supply chains, it is estimated that China controls up to 90% of the refining and processing of critical minerals in the supply chain,[2] more than 55% of the world’s rare earth mining, and 85% of the refining process of rare earth elements.[3] (See Figure 1) To get a sense of the world’s dependence on China, critical figures show that the United States imported 98% of its processed REE from China in 2018,[4] and China provided 98% of the EU’s supply of REE in 2021. While the world scrambles to secure supply chains for critical minerals and rare earths, China has long had a head start in the “race” through orchestrated and coherent strategic policies.

Source: IEA

Since the discovery of rare earth deposits in Inner Mongolia in 1927, China has invested heavily into research and development of rare-earth technologies. In 1990, the Chinese government declared rare earths as a protected and strategic mineral. Projects on rare-earth mining and smelting required approval from the State Development and Planning Commission (SDPC), where foreign investors could only participate in joint ventures with Chinese firms. Meanwhile, the Ministry of Land and Resources developed plans  for rare earths as a type of strategic commodity. However, production levels always exceed the quota set by the government due to policy fragmentation and miscommunication. The output level continued to rise significantly until 2008, when China accounted for over 90% of the world’s output of rare earths. To prohibit illegal mining, the government implemented a unified pricing mechanism, and issued production quotas to limited mining companies.[5] At the same time, the Ministry of Commerce was responsible for issuing and distributing export licenses, and the setting of export quotas. Owing to increased domestic consumption, rebate on exported rare earths was eliminated, and the government introduced export duties instead to protect the domestic supply of strategic minerals.[6]

In 2010, during a diplomatic standoff in the Senkaku boat collision incident, China drastically reduced critical mineral exports and triggered an unanticipated rise in REE prices.[7] China was then accused of banning critical minerals and REE exports to Japan and halted exports to the US and the EU. The impacts were threefold. 

First, The abrupt reduction in allowed quotas of REEs from China and the subsequent steep price hikes shook the world awake  “as China grew to become a Goliath in the rare-earth industry.”[8] This strategic dependence on China had become a game-changer, and was used to leverage its power over the US, Japan, and the EU instead. Second, it was a wake-up call on the current status quo of critical minerals and REE supply chains. At least five elements were identified as vital for clean-energy applications, including dysprosium, neodymium, terbium, europium, and yttrium.[9] Third, this resulted in a series of trade disputes at the WTO.

However, in 2011, due to consistent decline in prices and the decreased use of relevant materials, the concerns regarding rare earth metals and critical minerals seemingly dissipated.  While the price hike of the rare earth crisis exposed many countries’ vulnerabilities to import dependency, it also prompted countries to reflect on the sustainability and security of their current energy policies. For example, the EU responded through releasing the first criticality analysis report of raw materials in 2010.

China’s capture of the magnet industry also laid the foundation of its firm grip on supply chains. In 1995, two Chinese companies joined forces with a US investment firm to acquire Magnequench – the industry leader in bonded neo magnetic powers, magnets, and their applications.[10] The US government approved the acquisition based on the condition that both parties agree to keep the company in the US for at least five years. Once the deal expired, the entire business was relocated to China, along with the technology. [11] Since then, a bulk of the magnet industry moved to China. It is worth noting that rare earth magnets i.e. neodymium and samarium cobalt are not only the strongest magnets commercially available, but are used in a wide range of applications, including defense technology.

While critics accuse China’s implementation of protectionist measures have led to unfair trade, and China’s lower export quota was deemed unfair by the WTO, China’s dominance of the industry is more than just to expand its influence and increase other countries’ reliance on it. Existing literature also argues that China’s goals are strategic to domestic needs: to guarantee the supply to its domestic REE needs and prices at below export level, and to maintain international manufacturing facilities in China.[12]

Arguably, China’s control of the supply chain and protectionist measures contributed to the dynamic condition of today’s critical minerals and REE market. However, it is nonetheless true that more than two decades of strategic dependence on China accommodated its orchestration of a consolidated and meticulous strategy planning.

The pandemic has severely disrupted the supply chain of mineral resources. It has been a wake-up call for many, and a nightmare come true to some. Reactive responses came in many different ways, but unilaterally pointed towards the domestication of supply chains. For example, the US prioritizes the revival of its rare earth processing and production, as it once led the industry back in the 1960s. Tax credits were given to rare earth magnet companies, and would increase to $30 per kilogram if all of the component material is produced within the US.[13] The European Battery Alliance has set the goal of sourcing 80% of Europe’s lithium demand from European sources by 2025.[14] In 2022, Australia has established the Critical Minerals Strategy to develop a thriving and durable Australian critical minerals sector.[15] In the meantime, China has further consolidated its rare earth industry by establishing China Rare Earth Group Co. Ltd, a state-owned enterprise (SOE) that is a conglomerate of top industry producers to increase its pricing power and production efficiency. [16]

However, whether domestication of supply chains would succeed varies from country to country, depending on the risk factors. For example, environmental regulations are generally more stringent in the US, EU than in China. Competition in the industry is fierce as well, as western companies will have to compete against subsidized Chinese suppliers. In the near future, it is expected that the trend of securing domestic supply of critical minerals will lead to a tendency of increasing state-backed competition.

Disclaimer: The opinions expressed in this article are those of the author and do not necessarily reflect the views of CEAS.

[1]. The Role of Critical Minerals in Clean Energy Transitions (p. 13). (n.d.). IEA. https://iea.blob.core.windows.net/assets/ffd2a83b-8c30-4e9d-980a-52b6d9a86fdc/TheRoleofCriticalMineralsinCleanEnergyTransitions.pdf

[2]. The UK and China: Critical Minerals, China Research Group. (2021). [Policy Brief]. China Research Group. https://chinaresearchgroup.org/research/the-uk-and-china-critical-minerals

[3]. Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth. (2021). [100-Day Reviews under Executive Order 14017]. The White House. https://www.whitehouse.gov/wp-content/uploads/2021/06/100-day-supply-chain-review-report.pdf

[4]. Nakano, J. (2021). The Geopolitics of Critical Minerals Supply Chains. CSIS. https://csis-website-prod.s3.amazonaws.com/s3fs-public/publication/210311_Nakano_Critical_Minerals.pdf?DR03x5jIrwLnNjmPDD3SZjEkGEZFEcgt

[5]. Tse, P. K. (2011). China’s Rare-Earth Industry. USGS. https://pubs.usgs.gov/of/2011/1042/of2011-1042.pdf

[6]. Ibid.

[7]. Humphries, M. (2013). Rare Earth Elements: The Global Supply Chain [CRS Reoprt for Congress]. Congressional Research Service. https://sgp.fas.org/crs/natsec/R41347.pdf

[8]. Hurst, C. (2010). The Rare Earth Dilemma: China’s Market Dominance.

[9]. Critical Materials Strategy. (2011). U.S. Department of Energy. https://www.energy.gov/sites/prod/files/DOE_CMS2011_FINAL_Full.pdf

[10]. Magnequench is the industry leader in bonded neo magnetic powers, magnets, and their applications. https://mqitechnology.com/support-contact/about-us/

[11]. Goldman, J. (2014). The U.S. Rare Earth Industry: Its Growth and Decline. Journal of Policy History, 26, 139–166. https://doi.org/10.1017/S0898030614000013

[12]. Kalantzakos, S. (2018). China and the Geopolitics of Rare Earths.

[13]. https://www.reuters.com/business/us-house-bill-would-give-tax-credit-rare-earth-magnets-2021-08-10/

[14]. https://ec.europa.eu/commission/presscorner/detail/en/QANDA_22_1257

[15]. https://www.industry.gov.au/data-and-publications/2022-critical-minerals-strategy#:~:text=Australia’s%202022%20Critical%20Minerals%20Strategy,Minerals%20Strategy%2C%20published%20in%202019.

[16]. https://www.china-briefing.com/news/china-merges-three-rare-earths-state-owned-entities-to-increase-pricing-power-and-efficiency/

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