Author: Kristin Vekasi, University of Maine
The world needs more readily available rare earth metals. These metals are used in energy transition technologies such as electric vehicles and wind turbines, in most contemporary electronic gadgets, and in some defense applications. Over the next few decades, the demand for rare earths is expected to increase two to eight times the current supply.
Rare earths are part of a complex global value chain. Considerable expertise is required to transform the extracted concentrates into refined, separated and industrially useful oxides. Through effective long-term investments in the rare earth supply chain, China has gained around 50-60% of the mining market share and around 90% in the intermediate processing stage.
In recent years, China’s domestic demand has begun to outpace supply due to expanding e-vehicle and renewable energy markets. China has even started importing crucial heavy rare earths from Myanmar, a source of supply that has been disrupted by the COVID-19 pandemic and civil conflict.
When China announced the creation of a new state-owned China Rare Earth Group in January 2022, it caused tremors. The new “megafirm” will control 60 to 70% of Chinese production of rare earths, which corresponds to 30 to 40% of the world supply.
This extraordinary market share is similar to Taiwan Semiconductor Manufacturing Company’s 50% share of global semiconductor manufacturing. Recent history highlights the problems of such market concentration. Supply chain issues exacerbated by the pandemic have shown how reliance on a single company or country can be disruptive and difficult to resolve when the source company or country cannot not deliver. The high concentration of production and asymmetric trade dependencies have facilitated the use of economically coercive trade and investment policies around the world.
Import-dependent countries such as Japan and the United States have securitized rare earths, as well as other minerals that have recently been deemed “critical”. In late 2021, a US Department of Defense official said the critical materials sector is a “microcosm for the geopolitical and geocompetitive forces shaping the 21st century.”
The United States has reinvigorated domestic production of rare earth minerals. But the United States still depends on China for most post-processing and lacks an independent supply chain. For more than a decade, Japan has been spurred by the so-called rare earth mineral export ban — amid an erupting territorial dispute with China — to invest in rare earth diversification. But Japan faces similar challenges to the United States in developing an independent supply chain for rare earth minerals. Building a new supply chain can take up to a decade, and most proposed projects fail.
Concerns about rare earth supplies from China are not unfounded. In the 2000s, China implemented quantitative restrictions on the export of rare earths, and China’s alleged 2010 export ban on Japan heightened fears among importing countries that Chinese rare earths could be a tool of techno-nationalism. The WTO ruled against these restrictions, leading China to implement production quotas that also restricted supply. In the United States, stakeholders associate these concerns with defense applications of rare earths, in line with Washington’s discourse on competition and economic decoupling with China.
China has been supplying the world with rare earths for three decades. Chinese research and development has increased efficiency and yields from rare earth mining and processing. The increased vertical integration of China Rare Earth Group will likely improve the yields of existing mines.
The China Rare Earth Group is the result of the merger of three major mining conglomerates and two research institutes. It will control China’s heavy and medium rare earths, under the supervision of the State Council’s Public Assets Supervision and Administration Commission. Another rare earth mega-corporation that controls China’s light rare earths may emerge in the future.
The main objectives of the new mega-corporation are rooted in the national political economy, including consolidating the market under state control, matching supply to demand, emphasizing the vertical integration and higher value-added domestic production, and greater price stability. Rare earth prices have increased due to growing demand and constraints from Chinese producers, including environmental regulations.
Consolidation will likely cement China’s dominant position in the global market, especially in post-processing. For governments and companies concerned about rare earths as a supply chain choke point, this news will exacerbate that concern. They should seize this opportunity to redouble their efforts to diversify supply chains through market-based approaches and public-private partnerships. Given that one of the non-Chinese rare earth supply chains relies on Russian ores and Estonian processing, policymakers should be aware of the realities and challenges of broad and resilient diversification.
OECD countries should diversify even in the absence of geopolitical competition. Diversification and resilient supply chains are needed to keep pace with the growth of the green economy and to meet the demands of proposed Green New Deal policies. Policymakers should view this merger as a boost to meeting the challenge of a green energy future.
Kristin Vekasi is an associate professor in the Department of Political Science and the School of Politics and International Affairs at the University of Maine.