Rare earth metals (REMs) occupy a pivotal role in a diverse array of items that are integral to the continuous shift toward sustainable energy. From solar photovoltaic (PV) plants, wind farms, and electric vehicles to electric networks, battery storage, and hydrogen, REMs are indispensable to producing these systems and instruments. Demand for these materials is thus expected to increase six-fold as countries around the world pursue the “green revolution.”
China is the dominant supplier of REMs to the global market, accounting for around 85–95 percent of the total supply since the late 1990s.
China’s control over the supply chains of REMs has sparked concern that Beijing may seek to withhold these critical raw materials due to political tensions. In 2010, amidst the ongoing territorial disputes between China and Japan over the sovereignty of the Senkaku/Diaoyu Islands, China issued a warning regarding the potential withholding of REM exports to Japan.
Thus far, these worries have proven overblown. Market dynamics have exerted a greater influence than China’s assertive diplomatic strategies. Specifically, REM export volumes to Japan exhibited a substantial degree of stability over the course of the previous decade. However, it is crucial to highlight the significance of narratives in the context of international relations, specifically pertaining to technology and security. Whether true or not, a prevailing narrative has emerged suggesting that China possesses a willingness to leverage its control over REMs to punish nations over disagreements in the political arena.
Japan is the primary recipient of Chinese REMs, with the United States, the Netherlands, South Korea, and Italy following. In these nations, a perception may arise that China could leverage its dominance in the REMs industry to gain advantages in other security-related matters. This narrative was reinforced when China made an announcement earlier this year regarding the implementation of an updated list of export restrictions. This list aims to restrict or potentially prohibit the shipment of certain rare earth elements to the United States.
Given the limited understanding of the internal mechanisms of the Chinese government, it’s assumed that this ban is meant to be retaliation for the United States’ own restrictions on exporting certain technological resources, such as semiconductors, to China. The ongoing “tech trade war” between China and the United States is unlikely to diminish, and is more likely to escalate, especially in light of the forthcoming U.S. elections, where China is being depicted as the modern-day Soviet Union.
Consequently, this will exacerbate the notion that the United States and its allies must establish alternate supply chains for REMs to safeguard against potential geopolitical conflicts. In turn, it is anticipated that these nations will undertake additional efforts to diversify their supply chain and reduce their dependence on REMs provided by China.
Despite the prevailing emphasis on geopolitics and potential export limitations for reasons of national security, there may be a somewhat more straightforward explanation at play. China’s emergence as a prominent manufacturer of environmentally-friendly products, including electric vehicles, solar panels, and advanced electrical networks, has resulted in a surge in domestic demand for REMs. Consequently, this increased demand has constrained China’s ability to export REMs to other countries. In other words, rather than punishing other countries, China is displaying a clear intention to safeguard its economic interests.
On January 15, China’s Ministry of Industry and Information Technology (MIIT) issued the Draft Rare Earth Management Provisions. China’s Ministry of Industry and Information Technology (MIIT) introduced new rules for the export of rare earth minerals, which sought to tighten restrictions on exports and increased penalties if any of these restrictions were violated. China will persist in its endeavors to safeguard its automotive, chip, and other pertinent sectors, as well as ensure a reliable and essential supply of REMs in the forthcoming years.
Beyond the question of motives, governments must be prepared to adapt if China does restrict exports of REMs. We can learn from the example of Japan, which went through a similar experience in 2010.
The Japanese government and industry looked into alternative sources for the REMs in response to potential reductions in exports from China to Japan due to geopolitical concerns surrounding the Senkaku/Diaoyu Islands. During subsequent years, Japan successfully implemented modifications to its supply chain strategy, shifting away from its dependence on China and instead increasing its reliance on sources based in Australia. Despite being more costly from an economic standpoint, this supply chain structure was not susceptible to geopolitical dynamics and potential prohibitions.
This alternative may hold appeal for other significant consumers of REMs. However, it raises concerns over a potential bottleneck, namely whether Australia possesses the capacity to sufficiently meet the demand for REMs from these major consumers. Considering the potential for actions by China that could restrict the availability of REMs as well as the limited existing alternative sources, other countries that are actively investing in the “green revolution” are now exploring alternate avenues for obtaining REMs.
The European Union and the United States have initiated an investigation into potential alternative geographic sites for REMs. The United Nations Economic Commission for Europe (UNECE) reported in September 2022 that the regions of southern and eastern Europe exhibit considerable renewable energy potential that can be explored. Similarly, the United States has been intensifying its efforts to safeguard its reserves of REMs within its domestic boundaries, in competition with China, while concurrently developing a reliable supply chain for critical minerals.
Consequently, there are systematic efforts to establish new supply chains for REMs to offer feasible alternatives to the prevailing supply chain that is predominantly controlled by China. Nevertheless, a critical concern arises regarding the extent to which these emerging sources can adequately meet the anticipated surge in demand. Although there is a theoretical possibility of increasing the overall supply of REMs through these initiatives, it appears to be significantly more challenging in practice.
Despite the concerted efforts made in the EU and the United States, a notable issue persists in relation to the supply chain, particularly concerning the extraction and processing procedures, which are characterized by their highly hazardous nature and adverse environmental impact. The suitability of establishing alternative supply chain sources in the EU and the United States has yet to be determined. These regions are characterized by strong citizen participation in local politics and the prevalence of Not In My Backyard (NIMBY) sentiments.
In the short term, there is no easy answer for China’s dominance of rare earth supply chains, despite the geopolitical discomfort it causes.