How China's Grip on Rare Earths Shapes Our Future: The Unseen Power Behind Global Tech

Dominance does not last for long. Specifically, the ones that can enable you to demolish others. It does not matter when you have protected that lead zealously.

Rather, it becomes a lightning rod for huge structural changes around you that work to ensure its demise.

When you wield and unleash your dominance at others to make them bow down then you have shown your cards. Once the cards are out, your game is known.

Then it is all a matter of who wins the game of attrition.

West dominated certain power structures. China has been creating its own.

The coming years will see a battle between the two.

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The Boat Collision that Shook the World

The Senkaku Islands, also known as the Diaoyu Islands in China, are a major bone of contention between the two countries. A flashpoint. They are in the East China Sea.

No one lives there.

So why are they important?

Because of their proximity to crucial shipping lanes, rich fishing grounds, and potential energy resources.

In 2010, an incident occurred there that shook the world.

A Chinese trawler collided with Japanese coast guard vessels near the islands. Japan went ahead and arrested the trawler's captain. This sparked a diplomatic crisis with China, where the Chinese imposed a temporary ban on rare earth metal exports to Japan.

That started a domino effect around the world.

The prices in the Rare Earth Elements (REE) spot market soared and remained high even when the supply to Japan was restored.

The reason why the Chinese could single-handedly impact the global supply chains for REE is that they have acquired almost monopolistic control over their exports.

China has officially denied suspending exports to Japan, blaming instead stricter controls and overzealous Chinese suppliers. However, export quotas this year were 24,280 tons, down from 31,310 tons in 2009. And some reports have said there are more cuts to come, with officials suggesting that the need to check environmental degradation and a possible price collapse mean an additional 30 percent cut is necessary next year. So why all the fuss? The problem is that China has gradually acquired more than a 90 percent share of the exports of these metals, which have proved to be a critical ingredient for green energy and high-tech products ranging from wind turbines and hybrid vehicles to mobile phones and guided missiles. Their importance stems in large part from the fact that in many industries, there’s currently no viable substitute. (Source: Did China Overplay Rare Earth Hand? / The Diplomat)

Before we move on, let us understand something about the Rare Earth Elements.

What are the Rare Earth Elements (REEs) and why are they important?

Rare earth elements (REEs) are a group of 17 chemically similar elements that include the 15 lanthanides on the periodic table, plus scandium and yttrium.

These elements are:

1. Lanthanides: Lanthanum, Cerium, Praseodymium, Neodymium, Promethium, Samarium, Europium, Gadolinium, Terbium, Dysprosium, Holmium, Erbium, Thulium, Ytterbium, and Lutetium.
2. Scandium and Yttrium: Although not part of the lanthanide series, they are often included in discussions of rare earth elements because they tend to occur in the same ore deposits and exhibit similar chemical properties.

Many of these REEs occur as oxides and need to be separated.

The group of REEs includes the lanthanides, from lanthanum to lutetium, plus yttrium and scandium. The major minerals containing REEs are bastnaesite, monazite, and xenotime, which contain 60% to 75% rare earth oxide (REO) equivalent by weight. The REEs are relatively abundant in the earth's crust. For example, cerium, one of the light rare earth elements, is more abundant than copper. REEs occur as a series of elements within the minerals, making separation difficult and costly. Generally, the REO is isolated in the separation process. The REO can be used directly or further processed into other rare element earth chemicals and products. In 2018, 88% of the world's REEs were processed and separated in China. The only other major operational separation plant is in Malaysia, where Lynas Corporation processes ore mined at the Mount Weld deposit in Western Australia. About 62% of the rare earth mineral concentrates were sourced in China in 2018, down from 79% in 2015. This drop in China's REE concentrate production was caused by the ramping up of production at the Mount Weld mine and at the Mountain Pass, California mine, as well as imports of ore from Myanmar. Imports of REE concentrates are therefore becoming increasingly important for Chinese processing companies. (Source: Rare earth elements – The vitamins of modern industry / S&P Global)

These REEs are the new ingredients for the future of the most important industries.

Why are the REEs so critical?

Let us put it in one sentence.

Read this Congressional Research report here.

Rare earth elements are integral to the functionality and advancement of numerous high-tech and green technologies.

Their unique chemical and physical properties make them irreplaceable in many critical applications, underscoring their strategic importance in modern industry and global supply chains. As the demand for these technologies grows, so too does the significance of securing a stable supply of rare earth elements.

Here are some of the industries that are heavily dependent on the REEs.

1. High-Tech Devices
   REEs are essential components in many high-tech devices, including smartphones, digital cameras, computer hard disks, and flat-screen televisions. For example, neodymium is used in powerful magnets found in computer hard drives and headphones, while lanthanum is used in camera lenses to improve image quality.
2. Clean Energy Technologies
   REEs play a critical role in clean energy technologies. They are used in the production of wind turbines, electric vehicles (EVs), and solar panels. Neodymium, praseodymium, dysprosium, and terbium are used in the strong permanent magnets required for wind turbines and EV motors. The demand for these elements is expected to grow significantly as the world transitions to renewable energy sources.
3. Defense Applications
   REEs are vital for various defense technologies. They are used in guidance systems, radar, sonar, and electronic displays. For instance, samarium-cobalt magnets are used in precision-guided weapons and other military applications due to their stability at high temperatures.
4. Catalysts
   REEs such as cerium and lanthanum are used as catalysts in various industrial processes. Cerium is used in automotive catalytic converters to reduce emissions, while lanthanum-based catalysts are used in petroleum refining.
5. Magnets
   Magnets made from REEs, particularly neodymium-iron-boron magnets, are the strongest known magnets and are used in a variety of applications where space and weight are limiting factors. These include computer hard disks, electric vehicle motors, and various automotive subsystems like power steering and electric windows.
6. Glass and Ceramics
   The glass industry is a significant consumer of REEs, using them for glass polishing and as additives to provide color and special optical properties. Lanthanum, for example, is used in optical glass and camera lenses.
7. Lighting and Displays
   REEs are used in phosphors for fluorescent and LED lighting, as well as in the screens of televisions, smartphones, and computer monitors. Yttrium, europium, and terbium are key elements in producing the red, green, and blue colors in these displays.
8. Medical Technologies
   REEs are used in various medical technologies, including MRI machines and laser scalpels. Gadolinium, for instance, is used as a contrast agent in MRI scans due to its magnetic properties.
9. Environmental and Energy Efficiency
   REEs contribute to environmental and energy efficiency by enabling the development of more efficient and compact technologies. For example, they are used in the production of energy-efficient lighting and in the miniaturization of electronic components

For ingredients as crucial as the REEs are, the strange thing is that this whole market - from production to processing is overwhelmingly dominated by just one country.

China.

And that one country uses that monopolistic status to the hilt. As was amply demonstrated during the Senkaku Island crisis.

China's overwhelming Dominance of the REE market

There is an interesting story that one should read before we discuss the hard facts and figures.

In 1995, two Chinese companies, San Huan New Material, and China National Non-Ferrous Metals Import and Export Corporation, worked with a U.S. investment firm, Sextant Group on an acquisition.

They wanted to acquire Magnequench. A company that was the industry leader in bonded neodymium magnetic powders, magnets, and their applications. 

The U.S. government approved the acquisition with one major condition.

That the company would remain in the U.S. for at least five years.

Great right? Well no.

Once this period expired, the entire business, along with its technology, was relocated to China. 

This was the beginning of the move by China to dominate this world of the REEs. This one move significantly shifted the magnet industry to China, which now dominates the production of rare earth magnets, including neodymium and samarium cobalt magnets. These magnets are not only the strongest commercially available but are also critical for a wide range of applications, including defense technology

The chairman of San Huan was Zhang Hong. He was the son-in-law of Deng Xiaoping. He took over as chairman of Magnequench!

How much is China's dominance of the Rare Earth's market after all?

Production of REE by China is 60% and Processing (based on imports) is 90%

That is an overwhelming monopoly!

At present China produces 60 percent of the world’s rare earths but processes nearly 90 percent, which means that it is importing rare earths from other countries and processing them. This has given China a near monopoly. Benchmark Minerals Intelligence has flagged that the United States is particularly exposed to processing restrictions for heavy rare earths, given China separates 99.9 percent of them. (Source: What China’s Ban on Rare Earths Processing Technology Exports Means / Center for Strategic & International Studies)

Why does CSIS call out the separation process to be so crucial for US National Security?

Currently, China separates 99.9% of global heavy rare earths, according to consultancy BMI or Benchmark Mineral Intelligence. Most of the Western processing capacity being installed is for "light" rare earths, including neodymium and praseodymium or NdPr. "Most likely, the impact of this ban will be in greater difficulty in getting heavy rare earth separation capacity online outside of China," said Daan De Jonge at BMI. "You can have all the NdPr separated in Europe or the U.S. as you want, but if you're still relying on dysprosium from China, you're still very exposed to geopolitical shocks." (Source: China Bans Export of Rare Earth Processing Tech Over National Security / Voice of America)

Why is this control over processing technology so critical?

You see, the processing of heavy rare earth elements (HREEs) is a very complex and intricate set of chemical processes that present significant technical challenges.

Unlike light rare earth elements (LREEs), HREEs are more difficult to separate and purify due to their similar chemical properties and the presence of various impurities in the ores. This makes the extraction and refinement processes highly specialized and technically demanding.

Over the years, China has built phenomenal expertise in the REE. China's expertise in chemical separation and purification is the largest in the world.

The country has developed sophisticated solvent extraction processes that allow for the efficient separation of individual rare earth elements from mixed ores. This process involves multiple stages of chemical treatment, including leaching, solvent extraction, ion exchange, and precipitation, to isolate and purify specific rare earth elements. China's mastery of these techniques has been bolstered by significant investments in research and development, leading to the establishment of state-of-the-art laboratories and research centers dedicated to rare earth processing

The existing standard to refine these strategic minerals, known as solvent extraction, is an expensive and dirty process that China has spent the past 30 years mastering. MP Materials (MP.N), opens new tab, Lynas Rare Earths (LYC.AX), opens new tab and other Western rare earths companies have struggled at times to deploy it due to technical complexities and pollution concerns. (Source: "Insight: Western start-ups seek to break China's grip on rare earths refining" / Reuters)

China has had the first-mover advantage in this industry and they have made significant investments over the years in the extraction processes. Something that the Western countries failed to do.

The United States’ delay in developing processing capacity will hinder its ability to build both national, energy and economic security. There are two main reasons for this. First, China has technical know-how in this area that other countries lack. For example, it has an absolute advantage in the solvent extraction processing for rare earths because Western companies have struggled to roll out these advanced technical operations alongside pollution concerns. Second, although several separation, processing, and manufacturing facilities are under construction, it can take years to complete construction and fully operationalize them. (Source: What China’s Ban on Rare Earths Processing Technology Exports Means / Center for Strategic & International Studies)

So basically, here are three reasons why China's dominance of processing should worry the world.

• The complex chemical processes required to separate and purify heavy rare earths pose significant technical hurdles.
• China has decades of experience and intellectual property that other nations lack in this specialized industry.
• It could take years and massive investments for other countries to establish independent heavy rare earth processing capabilities

We have discussed the advantages that China has over the world when it comes to processing. Let us understand the other areas where China scores over the world to secure REE monopoly.

The Mining Benefit

China possesses the largest reserves of rare earth elements globally, accounting for approximately 36% of the world's known reserves. The country has developed extensive mining operations, particularly in regions like Inner Mongolia, Sichuan, and Jiangxi. These areas are rich in both light and heavy rare earth elements, which are crucial for various high-tech applications. The mining process involves extracting rare earth ores from the earth, which are then subjected to beneficiation techniques to concentrate the rare earth minerals. This stage includes crushing, grinding, and flotation or gravity separation to remove waste materials and increase the concentration of rare earth elements.

Read this document for more details.

Intellectual Property Dominance

China's dominance in the REE industry is also a result of its extensive intellectual property portfolio. The country has accumulated a vast number of patents related to rare earth processing technologies, surpassing the combined total of patents held by the United States and other countries. This intellectual property covers a wide range of innovations, from advanced solvent extraction methods to environmentally friendly processing techniques. China's ability to innovate and improve upon existing technologies has given it a significant competitive edge in the global market.

It was not as if China was the first one in the REE science industry. It was the US. But the sheer persistence of China overruled the initial advantage that the US had.

The United States was the first nation to file an international patent for REs in the 1950s. China’s first RE patent did not come until 1983, but it made up for lost time by establishing five well-funded National Rare Earth Laboratories operating under a series of National Industrial Policy initiatives. (By contrast, the United States has one National Lab. The Ames National Laboratory works on REs on an on-again/off-again basis.) In turn, China surpassed the United States in the number of field patents by 1997, and by 2021, it is estimated that China will have accumulated more RE patents than the United States and the rest of the world combined. China has also been able to tailor its industrial policy to shift focus to the upper end of the RE value chain; China produces or controls over 70 percent of the world’s mined REs, and it refines more than 80 percent of all REs into mixed oxides and separates more than 90 percent of all REs into individual elements. China and Chinese-controlled enterprises produce more than 99 percent of all so-called new REs metals (produced from virgin ore). (Source: "How the United States Handed China Its Rare-Earth Monopoly" / Foreign Policy)

So over the years, six major players have arisen in the world of REE. Let us take a quick look.

The Top 5 REE Reserves

China, Vietnam, Russia, Brazil, and India are the big five in the REE reserves.

Here are the countries with the top 5 REE reserves. Here is a table with some context to these reserves.

Now let us understand the Chinese monopoly and its larger implications.

China's Monopoly and Geopolitical Implications

The world is looking at the specter of a conflict between China and Taiwan. So, in case of a conflict between China and Taiwan, China can come up with various moves to retaliate in the rare earth elements (REE) industry and supply chains.

Something that China has already demonstrated that it is capable of doing.

We saw the Senkaku Islands episode that shook the REE markets globally.

Well, there is another instance when in the ongoing tit-for-tat tech war between the US and China, the scenario escalated when China brought in its REE muscle.

Let's recap. It started with the October 7 export control order from the US.

With the Oct. 7 export controls, the United States government announced its intent to cripple China’s ability to produce, or even purchase, the highest-end chips. The logic of the measure was straightforward: Advanced chips, and the supercomputers and A.I. systems they power, enable the production of new weapons and surveillance apparatuses. (Source: ‘An Act of War’: Inside America’s Silicon Blockade Against China / New York Times)

That was followed in August with a ban on "covered national security technologies and products". Which areas were these?

The "semiconductors and microelectronics, quantum information technologies, and artificial intelligence sectors that are critical for the military, intelligence, surveillance, or cyber-enabled capabilities of a country of concern." (Source: Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern / White House)

Then on October 17, the US went a step further. They imposed restrictions on China acquiring these chips via any foreign subsidiaries. (Source: BIS Export Controls/Oct 17, 2023).

Read our earlier newsletter for more details on the semiconductor wars between US and China.

The saga went on, however.

On August 1, 2023, China began restricting exports of gallium and germanium, citing national security concerns. The restrictions require exporters to obtain a license to ship some compounds, identify importers and end users, and specify how the metals will be used. China is the world's leading producer of gallium, accounting for more than 95% of the global supply, and produces about 60% of the world's germanium. These materials are used in many industries, including electronics and fiber optics, and are also critical components of the Department of Defense's supply chain. 

And the controls that the Biden establishment thought it had imposed on China to break its semiconductor industry were clearly ineffective because, in August 2023, China showed that it could master complex semiconductor chip technology.

In December 2023, China followed it all up with a ban on export of technology to make rare earth magnets. This was on top of a ban already in place on technology to extract and separate critical materials

China has shown that when "shit hits the fan," it is not averse to hitting back on the Rare Earth Elements' side with bans and controls of its own. A territory that it zealously guards.

1. Export Bans and Restrictions
2. Manipulating the supply of rare earth elements to create market instability by driving up prices and causing supply chain disruptions
3. Form strategic alliances and invest in REE resources abroad, ensuring a steady supply for countries (countries in Africa, Southeast Asia, and South America) that are its allies while limiting access for adversaries

Now, throw in the Taiwan conflict.

That is when the ramifications of the Chinese dominance really starts hitting.

Is the world ready for that eventuality? That is what the global leaders need to ask themselves.

As should the executive leadership in India.

Where does India stand in the REE market?

India possesses the fifth-largest reservoir of esoteric earth elements globally, surpassing Australia's reserves by almost twofold.

In February 2023, the Geological Survey of India (GSI) discovered 5.9 million tonnes of lithium reserves in the Salal-Haimana area of Jammu and Kashmir's Reasi district. This discovery could make India the world's seventh-largest source of lithium, and some say it could boost the country's economy and help it become a leader in green industrial power. Lithium is a critical raw material used to make electric vehicle batteries.

Read - Implications of lithium reserves in Jammu and Kashmir / ORF

Despite this abundance, India predominantly relies on importing processed rare earth materials from its geopolitical adversary, China. By refining its current policies, India has the potential to establish itself as a prominent rare earth provider on the global stage.

So, India has policy hurdles, including expertise, the need for large capital outlays, and shoring up high technology for extraction, processing, and logistic

The imports from China expose India to significant supply disruptions.

India has only one REE producer - the State-owned IREL (India) Ltd. Its refineries are currently running at mere 40% capacity! Why?

Because there isn't enough ore to refine. Which is because of mining restrictions.

Some ways that India can go ahead are:

• Capitalizing on its entry into the Minerals Security Partnership (MSP)
• Developing a course curriculum for training experts and qualified engineers
• Acknowledging the sector as a strategic sector
• Making the sector lucrative and competitive for entrepreneurs
• Opening its rare earth sector up to competition and innovation
• Attracting the large amounts of capital needed to set up facilities
• Effective networking between the government, educational institutions, national and international collaborations, and private sector organizations

But most of all, a competitive set of collaborations to plug the expertise gap is a must!

According to a 2016 estimate, the Indian REE industry could potentially “net a capital employment of about Rs 121,000 crore, including Rs 50,000 crore worth of foreign exchange”. The US, Japan, and Australia are announcing collaborations in this sector worth hundreds of millions of dollars; meanwhile, India’s relationship with China offers little guarantee that there will be no coercive economic actions in coming decades. India has already missed one global wave of industrial manufacturing. Its rare earth reserves and the post-pandemic economic situation offer it an opportunity to ride the next wave towards high-tech manufacturing. It must be sure not to miss this chance. (Source: Here's how India can end Chinese dominance in rare earths / Business Insider)

And that is where the Indian government is pushing ahead.

At the Business 20 summit in New Delhi in August 2023, Prime Minister Narendra Modi addressed the unusual dominance of China in the world of Rare Earth Metals.

Prime minister Narendra Modi on Sunday said that the world may witness a "new model of colonialism" if countries with critical and rare minerals do not regard custodianship as a "global responsibility". (Source: PM Modi warns of new colonialism model over control of rare earth minerals / Hindustan Times)

In fact, the Modi government designated Rare Earth Minerals as one of the three critical sectors that need to be protected against any supply chain disruptions.

The government fully understands the ramifications of this one industry that will change the world in the future.

Given the importance of these materials and their monopolistic control by a few, one thing is certain.

The coming geopolitical wars will hinge on these minerals. Deng Xiaoping realized this in 1987. (Source: Can Europe go green without China’s rare earths? / Financial Times)

“The Middle East has oil, China has rare earths,” declared then-Chinese leader Deng Xiaoping in 1987 while touring Baotou, Inner Mongolia, the site of one of China’s largest rare earth deposits.

What Deng got in 1987, the world is getting to know in the last decade or so.