Building a China Plus One Supply Strategy for Rare Earth Elements

Rare earth elements have become critical to the development of clean energy and defense technologies.
China controls most of the global supply of rare earth elements, including the production and processing of the ore.
To de-risk supply, the West is ramping up support to boost production of these minerals in other parts of the world.

July 14, 2023 | Risk Management

Rare earth elements are an integral part of green energy technologies. They are used in the manufacturing of wind turbines, fuel cells and hydrogen cells, rechargeable batteries, and magnets used in electric and hybrid vehicles. These elements are also used in defense technologies such as precision-guided munitions, targeting lasers, communications systems, airframes, aerospace engines, radar systems, optical equipment, sonar, and electronic countermeasures.

However, the supply of these rare earth elements is mostly concentrated in China, creating a supply chain risk during times of disruption such as geopolitical tension.

In 2022, China accounted for 70% of the world's mine production of rare earths. Not only does China have the biggest reserves of rare earth elements, but it also holds nearly 85% of the world's capacity to process rare earth ores into usable materials for manufacturers.

According to the United States Geological Survey data, China is estimated to have 44 million metric tons of rare earth oxide (REO) equivalent in reserves, or 34% of the world's total.

In comparison, Vietnam, Russia, and Brazil are estimated to have just over 20 million metric tons (MMT) each, while India has 6.9 MMT, Australia 4.2 MMT, and the U.S. 2.3 MMT of REO.

Advantage China

Although rare earth elements are abundant, there are some constraints that prevent other countries from increasing production.

First, these elements are usually found mixed with one another or with radioactive elements such as uranium and thorium. Due to their unique chemical characteristics, rare earth elements can be challenging to purify as well as to separate from other materials.

Second, rare earth element mining, separation, and purification are labor-intensive processes. If not handled carefully, they may also have negative health impacts and cause degradation in the natural environment. The current production methods require a lot of ore to extract small amounts of rare earth metals. It also generates harmful waste from the processing methods, including radioactive water, toxic fluorine, and acids.

Despite these production constraints, China has managed to build its dominance in rare earth elements in recent years as Western producers left the industry. In 2022, China merged three companies to form China Rare Earth Group Co., an industrial conglomerate that holds almost 70% of the country's annual heavy rare earth production quota.

As renewable sources of energy replace fossil fuels over the coming decades, this large-scale transition will increase the demand for rare earth elements given their application in clean energy.

The dominance of China in the production of these elements means that Western countries will be too dependent on China for supplies. There is also the risk of prices of these elements shooting up if supplies from China are disrupted.

China recently restricted the export of gallium and germanium, used in the manufacturing of semiconductors, to the U.S. and Europe.

In 2010, when China cut off all rare earth element exports to Japan, prices skyrocketed, exposing the risk of relying on a single supplier for such critical raw materials.

De-risking Rare Earth Elements Supply Chain

To ensure stability in the supplies of these elements, the West is ramping up support to boost domestic production of these minerals.

Forming an alliance with other rare earth element producing countries such as Australia, Myanmar, and Canada can balance the supply chain. Africa too has a lot of untapped potential given low levels of exploration. It can become a prominent supplier of these elements.

Diversification of technology to reduce the usage of rare earth elements is also a possibility. Tesla Motors recently announced that its next-generation motors will use rare earth-free magnets. Although technical details are sparse, these breakthroughs can change the demand dynamics for rare earth elements and rein in price rise in the global market.

Author: Subodh Kapadnis