Does China Pose a Threat to Global Rare Earth Supply Chains?

Does China Pose a Threat to Global Rare Earth Supply Chains?
Does China Pose a Threat to Global Rare Earth Supply Chains?
Does China Pose a Threat to Global Rare Earth Supply Chains? Top

    As China’s economy has developed over the last several decades, its leaders have sought to transform the country into a key player in strategically important industries. Toward this end, Beijing has established China as the dominant global supplier of rare earths, a collection of 17 minerals that are indispensable to the manufacturing of smartphones, electric vehicles, military weapon systems, and countless other advanced technologies.

    Beijing has demonstrated a willingness to leverage its weight in the global rare earth industry in pursuit of its political objectives, raising alarm bells in several major countries. However, China’s influence within the industry is likely to be eroded in the coming years as changing market dynamics empower new actors to compete.

    The Global Marketplace for Rare Earths

    The global rare earths trade is relatively small compared to other commodities. In 2019, the value of worldwide rare earth imports stood at just $1.15 billion – a fraction of the more than $1 trillion in global crude oil imports. The total value of goods produced using rare earths, however, is immense. Each Apple iPhone, for example, relies on multiple rare earth elements. Neodymium is used to make tiny, yet powerful, magnets that allow iPhone speakers to function. Europium is used in trace amounts to produce red colors on screens, and cerium is used to polish the phones during the manufacturing process. During the 2019 fiscal year, Apple sold $142.4 billion worth of iPhones.

    Despite their name, most rare earth elements are relatively abundant. The process of mining rare earths and transforming them into usable materials is, however, expensive and damaging to the environment. For years, Beijing exploited its relatively low-cost labor force and lax environmental laws to gain a competitive edge in the global market and become the leading supplier of rare earths. From 2008 to 2018, China exported nearly 408,000 metric tons of rare earths, which amounted to 42.3 percent of all rare earth exports over the period. The United States was the second-largest exporter, supplying roughly 9.3 percent of the global total. Malaysia (9.1 percent), Austria (9.0 percent), and Japan (7.1 percent) rounded out the top five.

    Breaking Down China’s Rare Earth Exports

    According to China’s General Administration of Customs, China exported 45,552 metric tons of rare earths worth $398.8 million in 2019. The vast majority of these exports went to the world’s major economic and technological powerhouses. About 36 percent (by volume) went to Japan, making it the top destination of Chinese rare earths. The US was a close second, taking in 33.4 percent of Chinese exports. Alongside the Netherlands (9.6 percent), South Korea (5.4 percent), and Italy (3.5 percent), these five countries imported a combined 87.8 percent of China’s rare earth exports.

    Breakdown of Global Rare Earth Exports (2008-2018)
    Country Export Volume
    (metric tons)
    Share (%)
    China 407,886.6 42.3
    USA 89,467.1 9.3
    Malaysia 87,696.1 9.1
    Austria 87,055.1 9.0
    Japan 68,412.9 7.1
    Rest of World 223,172.7 23.2
    Source: UN Comtrade Database

    At 42.6 percent of total exports by volume, lanthanum was China’s top rare earth export by a wide margin. Lanthanum is used in significant quantities in hybrid vehicle batteries. Each Toyota Prius, for instance, contains some 10-15 kilograms (kg) of the substance. Terbium, which is significantly more expensive, was China’s top export by value, accounting for roughly 14.5 percent ($57.9 million) of the country’s total exports in 2019. Terbium is primarily used in solid-state electronic devices but is also used in sonar systems and television screens.

    China’s Push to Dominate the Rare Earth Industry

    China’s dominance in the rare earth industry is the result of decades of targeted industrial policies aimed at leapfrogging other nations. In recent years, Beijing has also looked to reform China’s rare earth industry to enhance efficiency, better protect the environment, and crack down on illegal mining.

    The Chinese government took major steps to support its nascent rare earth industry by issuing export tax rebates in the mid-1980s. The rebates lowered costs for Chinese mining companies, which allowed them to gain a foothold in the global market. From 1985 to 1995, China’s rare earth mining production exploded from just 8,500 metric tons to roughly 48,000 metric tons, and its share of global mining output widened from 21.4 percent to 60.1 percent.1

    As China’s mining capacity expanded, rare earth producers in other countries began to shift their production to China to take advantage of the country’s low labor costs and weak environmental regulations. However, in 1990, the Chinese government declared rare earths to be protected and strategic minerals, which prohibited foreign firms from mining rare earths within China and restricted foreign participation in rare earth processing projects, except in joint ventures with Chinese firms. This enabled Chinese companies to gain foreign know-how through these partnerships while steadily cutting out foreign competition from the supply chain.

    These measures were successful at developing China’s rare earth industry, but export quotas proved to be Beijing’s most consequential policy. Starting in the late 1990s, Beijing began imposing tiered quotas designed to discourage the export of cheaper upstream products like raw ores and encourage the export of oxides, metals, and alloys – the forms of rare earth minerals ready to be used in downstream products.

    Beijing steadily tightened its export quotas and then abruptly slashed them by 37 percent in 2010, allowing just 30,259 metric tons to be exported. The move caused the average price of global rare earth imports to skyrocket from $9,461 per metric ton in 2009 to nearly $66,957 in 2011. Many manufacturers in the US, Japan, and Europe were left struggling to afford supplies of rare earths, while China held a glut of supplies at home.

    Cheap domestic supplies of rare earths gave Chinese manufacturers the opportunity to scale up the production of key products like permanent magnets, which are integral to the functioning of wind turbines, hybrid vehicles, and other advanced technologies. Beijing’s policies allowed China to capture nearly all of the global market. As of 2019, China still produced roughly 85 percent of the world’s rare earth oxides and approximately 90 percent of rare earth metals, alloys, and permanent magnets.

    While successful, Beijing’s policies put China in the crosshairs of major rare earth importers. In 2012, the US, EU, and Japan filed a series of trade disputes against China in the World Trade Organization (WTO), claiming that Chinese government policies were unfairly benefiting its industry at the expense of other countries. The WTO ruled against China in 2014, and by 2015 China finally ended its export quota system.

    World Trade Organization

    Through 2019, the US, EU, and other countries filed 44 disputes against China in the World Trade Organization. What were the causes of these disputes? Find out in our feature on China’s influence in the WTO.

    As China’s rare earth industry has matured, recent government policies have focused on boosting efficiency, limiting environmental damage, and reducing illegal mining. Below is a list of important plans and strategies relating to rare earths.

    Expand to learn more

    • In 2016, China’s Ministry of Industry and Information Technology released the Rare Earth Industry Development Plan (2016-2020), which set goals for capping rare earth mining production at 140 metric tons per year by 2020, boosting spending on research and development, and cracking down on illegal mining and smuggling of rare earths.
    • China’s “Made in China 2025” strategy, announced in 2015, seeks to transform China into a leader in 10 strategically important high-tech industries. While the strategy does not list rare earths among its 10 key technologies, it calls for promoting the “intelligentization” of the rare earth industry. Chinese government documents and industry experts have also made clear that rare earths will be needed to support all 10 technologies.
    • China’s State Council released a white paper, “Situation and Policies of China’s Rare Earth Industry,” in 2010, which outlined goals for improving industry regulation, reducing resource use, and enhancing environmental protection.
    • The National Medium- and Long-Term Program (MLP) for Science and Technology Development (2006-2020) lists rare earths among key materials that are needed to support basic industries.

    Deep Reliance on China

    China has demonstrated a willingness to leverage its influence in the global rare earth industry in pursuit of its political objectives. While several major countries have sought to limit their exposure to supply chain disruptions emanating from China, they nonetheless remain deeply reliant on Chinese rare earth exports.

    Beijing’s most notable use of rare earths as a political tool came in 2010 amid a heated dispute with Tokyo. After Japan arrested the captain of a Chinese fishing boat that rammed a Japanese Coast Guard vessel in the waters near the contested Senkaku/Diaoyu Islands, China restricted rare earth exports to Japan for two months.

    The impact on Japan’s supply chains was limited, but it highlighted the country’s reliance on China for more than 80 percent of its rare earth imports. Tokyo quickly took steps to limit future supply chain disruptions.  In 2011, Japan’s Sojitz Corporation and government-owned Japan Oil, Gas and Metals National Corporation (JOGMEC) invested $250 million in Australian miner, Lynas Corporation. The financial boost helped Lynas to become the only supplier outside of China capable of processing rare earths, and the company now supplies Japan with nearly one-third of its rare earth imports.

    Nearly a decade later, China again sought to leverage its strength in the global rare earth market – this time against the US. Amid searing US-China trade tensions, Chinese President Xi Jinping visited a rare earth facility in Jiangxi province in May 2019, which many interpreted as a warning to the US. An article published in People’s Daily seemed to confirm these suspicions when it hinted that China could cut off exports to the US as a “counter weapon” in the trade war. Days later, Beijing raised tariffs on US rare earths (and other products) from 10 to 25 percent. The Trump administration reportedly drew up plans for its own tariffs on Chinese rare earths, but never implemented them due to concerns that this would leave US companies exposed with no affordable alternative suppliers.

    Policymakers in the US are particularly concerned about the threat of supply chain disruptions to the US defense industry, which uses rare earths in a wide range of technologies, from sonar and communication equipment to missiles and jet engines. According to the Congressional Research Service, each US F-35 multirole fighter requires about 427 kg of rare earths, and each Virginia-class nuclear submarine requires nearly 4.2 metric tons.

    US Defense Applications of Rare Earths
    Element Guidance and Control Targeting and Weapons
    Dysprosium
    Europium
    Lanthanum
    Lutetium
    Neodymium
    Praseodymium
    Samarium
    Terbium
    Yttrium
    Note: There are also numerous rare earths used for electronic warfare technologies.
    Source: Congressional Research Service

    In recent years, the US has sought to reestablish itself as a major world supplier of rare earths. After being shuttered for years, the US’ only rare earth mine, located in Mountain Pass, California, came under new ownership in 2017 and resumed production. However, the mined material that it produces is still sent to China for processing. The US government has also made notable policy changes, including the May 2018 addition of rare earths to a list of minerals deemed critical to US economic and national security. In July 2019, President Trump also declared rare earth metals and alloys “essential to the national defense,” which freed up resources for the Department of Defense (DoD) to take action to secure a domestic rare earth production capability.

    Other economies have sought to reduce rare earth imports from China. The EU funded an initiative that has developed a process for recycling permanent magnet waste into new alloys and materials, which aims to both reduce dependence on China and help Europe meet its climate change goals. South Korea has sought to diversify its supplies of rare earths by reducing imports from China and increasing imports from Japan, as well as by finding innovative ways to reduce consumption of rare earths.

    Among these major economies, only Japan has achieved some success at reducing reliance on China. From 2008 to 2018, the share of Japanese rare earth imports from China fell from 91.3 percent to 58 percent. As of 2018, the US still imported 80.5 percent of its rare earths from China. The EU and South Korea have successfully diversified their imports of certain compounds, like cerium, but they remain almost completely reliant on China for imports of rare earth metals and alloys.2 For example, the EU imported 7,105.9 metric tons of cerium compounds in 2018, of which less than one-quarter came from China. However, nearly all (98.5 percent) of its imports of rare earth metals and alloys came from China.

    Reliance on Chinese Rare Earth Metals and Alloys (2018)
    Economy Imports from China (metric tons) Total Imports
    EU 869.2 882.2
    USA 417.6 438.6
    South Korea 86.1 94.6
    Japan 4,233.4 8,729.2
    Note: Excludes oxides and other compounds
    Source: UN Comtrade Database

    Growing Global Competition

    While China maintains a commanding presence within the global rare earth industry, Beijing’s capacity to unilaterally disrupt supply chains is likely to be eroded in the coming years. A number of initiatives are underway that may prove successful at establishing new rare earth suppliers outside of China. Shifting market dynamics are likely to aid these efforts.

    There are already signs that other players have started to chip away at China’s dominance in certain areas. Mining of raw rare earth materials outside of China has ramped up significantly in recent years as the US’ Mountain Pass mine, and other mines around the world, have increased their output. China’s share of global mining production has slipped as a result, from a high of 97.7 percent in 2010 to 62.9 percent in 2019 – the lowest point since 1995. China’s share of global rare earth reserves has likewise fallen from 50 percent to 36.7 percent over the same period.3

    China’s status as the preeminent supplier of oxides, metals, and permanent magnets has not been similarly diminished – but it may be in the coming years. In the US, the company MP Materials is working to bring online facilities at Mountain Pass that would allow it to process its mined minerals, instead of sending them to China for processing. The company aims to accomplish this in 2021 and to establish the ability to refine and separate rare earth metals in the coming years.

    International efforts are also underway. In April 2020, the US DoD green-lit initial funding for a joint venture between Australia’s Lynas Corporation and US-based Blue Line Corporation to construct a processing facility in Texas. If successful, it would allow Lynas to ship rare earth materials from its processing facility in Malaysia to the US for final processing – rather than to China. The Japanese government (through JOGMEC) is looking to invest in US and Australian initiatives, likely including the new facility in Texas. These steps are part of Tokyo’s announced goal of further reducing Japan’s reliance on Chinese rare earth imports to less than 50 percent by 2025.

    Due to growing demand for rare earths, these ventures will likely be more successful than previous attempts to establish rare earth suppliers outside of China. Much of this new demand is being driven by rapid growth of the renewable energy and electric vehicle industries, which utilize large quantities of rare earth permanent magnets. From 2007 to 2017, China’s production of renewable and nuclear energy more than tripled, accounting for roughly 51 percent of the global increase in production over this period. China’s electric vehicle market is growing even faster. Between 2014 and 2019, the number of electric vehicles in China swelled from approximately 90,000 to nearly 3.4 million.

    As China’s domestic consumption of rare earths grows, the country will be increasingly reliant on imports to feed its appetite for the materials. China already became the world’s largest importer of rare earths in 2018, and it is expected to become a net importer by the middle of the decade. Under these conditions, Beijing’s influence over the global rare earth industry would be significantly reduced, and new players might finally find themselves able to compete. ChinaPower

    1. Measured in metric tons of rare earth oxide (REO) equivalent.
    2. Includes metallic forms of individual elements, as well as inter-alloyed and inter-mixed rare earth elements.
    3. Includes only those minerals that are adequately concentrated and economically viable for extraction.