The delicate balance of global supply chains is under unprecedented strain, particularly in the critical realm of rare earth elements.
China, a dominant force in this sector, has wielded its influence with increasing assertiveness, triggering a scramble among Western nations, most notably the US, to secure their own strategic mineral independence.
The ongoing saga highlights the intricate interplay of trade, technology, and national security.
In a move that sent ripples through international markets, China implemented a stringent licensing procedure for the export of certain rare earths and related products on April 4.
This immediately led to a significant collapse in exports. While Beijing initially framed this as a standard procedure, citing the dual-use nature of permanent magnets (which heavily rely on rare earths) for both civilian and military applications, the strategic implications soon became evident.
Volkmar Baur, FX analyst at Commerzbank AG said in a report:
It became clear, particularly as a result of negotiations with the US, that the licensing procedure was more likely a strategic move in the trade dispute with the US.
Though Chinese exports did rebound in June, companies continue to grapple with persistent bottlenecks and delayed deliveries, underscoring the lingering impact of China’s tightened grip.
China’s unrivaled dominance and its implications
China’s near-monopoly in the rare earths market grants it unparalleled leverage.
The nation produces approximately 90% of all refined rare earths and controls the entire global capacity for certain specific elements.
This commanding position empowers the Chinese government to disrupt supply chains at will through deliberate export restrictions, potentially leading to widespread production stoppages in the manufacturing industry.
The consequences of such disruptions are far-reaching. Permanent magnets, manufactured almost exclusively in China, are indispensable components in a vast array of electronic devices – from everyday mobile phones and vacuum cleaners to cutting-edge electric vehicles.
While the quantities of rare earths required are often small, their critical role makes them exceedingly difficult, if not impossible, to substitute. “Although only small quantities of rare earths are often required, they are indispensable,” Baur emphasised, highlighting the disproportionate impact of their scarcity.
US counter-strategy: investing in domestic resilience
Recognising the acute vulnerability stemming from this dependence on China, the US government has embarked on an ambitious strategy to bolster its domestic rare earth capabilities.
In a significant move in July, the Department of Defense acquired a stake in a key US company, securing an option to acquire up to 15% of its shares, potentially making it the largest shareholder.
This company stands as the sole entity in the US possessing both a rare earth mine, the Mountain Pass Mine in California, and a production facility for permanent magnets.
The US government’s commitment extends beyond equity investment. It has also guaranteed to purchase all neodymium-praseodymium (NdPr) oxide produced by the company over the next decade at a price of $110 per kilogram.
This guaranteed price significantly surpasses current market rates, sitting around 50% above the achievable price on the Shanghai Metal Exchange and more than 80% above this year’s average price for NdPr oxide.
Baur pointed out:
Only on 8% of trading days in the last 15 years has the market price of NdPr oxide exceeded the government’s guarantee.
He further illustrated the premium being paid to secure domestic supply.
Based on 2020 production volumes from the Mountain Pass Mine, this guaranteed price translates into an estimated annual subsidy of around $1.4 billion.
Despite debatable costs, the US’s aggressive strategy to build a “mine to magnet” supply chain aims for self-sufficiency in permanent magnet production by 2027. This will serve its defense and manufacturing needs, a critical move given China’s reported intent to restrict critical mineral supply to Western defense companies.
Europe’s lagging response and persistent vulnerability
In stark contrast to the proactive stance taken by the US, Europe continues to grapple with its dependence on China for rare earths.
Despite articulated plans to diversify supply chains, the implementation of these strategies remains woefully behind.
This inertia leaves European industry exposed to the significant risk of supply restrictions at any given moment, a vulnerability that is projected to persist even in the medium to long term. At a minimum, this continued dependence is likely to drive up prices.
The case of germanium serves as a stark reminder of this precarious situation.
China introduced mandatory export licenses for this critical mineral in the summer of 2023.
Subsequently, Chinese exports have plummeted by approximately 70% compared to pre-license levels.
As a direct consequence, the price level for germanium exports to Germany is currently about 30% higher than the price of germanium within China.
Baur commented:
The example of germanium illustrates this.
He also highlighted the tangible economic impact of China’s leverage. Without decisive action, Europe’s industrial base remains at the mercy of geopolitical shifts in the rare earth market.
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