To Answer China on Rare Earths, the U.S. Should Look to Japan

In September 2010, a collision between a Chinese fishing vessel and the Japan Coast Guard sparked some of the first conversations about de-risking. After Japan arrested the Chinese vessel’s captain, China responded by unofficially halting all exports of rare earths to Japan, threatening to cripple its automotive and electronics industries.

In September 2010, a collision between a Chinese fishing vessel and the Japan Coast Guard sparked some of the first conversations about de-risking. After Japan arrested the Chinese vessel’s captain, China responded by unofficially halting all exports of rare earths to Japan, threatening to cripple its automotive and electronics industries.

Policymakers across the world suddenly panicked, realizing that China produced 97 percent of rare-earth oxides and had near monopoly control of the rest of the supply chain, too. Alarmed pundits and policymakers called for action to develop rare-earth production outside China and prevent the recurrence of such blackmail.

Over a decade later, worries about Chinese dominance of critical minerals and green technology have only grown. Rare earths are more important than ever, with magnets vital for electric vehicles and wind turbines being made using neodymium, praseodymium, dysprosium, and terbium. Yet only one company has succeeded in making even a slight dent in China’s effective dominance—Lynas Rare Earths, an Australian firm.

As Lynas CEO Amanda Lacaze tells it, the way different countries responded to China’s dominance was “instructive.” Japan went looking for partners to build a supply chain outside China, the United States launched legal action via the World Trade Organization, and the European Union set up a group to study rare-earth supply chains. “So, guess who actually has secure supply chains today?” Lacaze said. Japan’s supply chain for these rare earths effectively is Lynas.

With a mine in Australia and refining plant in Malaysia, Lynas produces 12 percent of global rare-earth oxides (China produces 87 percent). Lynas provides about 90 percent of Japan’s supply of neodymium and praseodymium.

The United States is looking to work with the firm, too, with the Pentagon announcing on Aug. 1 a $258 million grant to support Lynas establishing a refining plant in Texas. Yet, the story of how Japan’s supply chain was established also illustrates how tricky de-risking rare earths might be for the United States.

Mining has diversified geographically, but “as you move further and further down the value chain, it gets increasingly China-centered,” said Ross Embleton, a senior analyst specializing in rare earths at research and consultancy company Wood Mackenzie. As a result, nearly every new mine feeds China—and is often at least partly Chinese owned.

The enormous Chinese state-owned companies that dominate the market, such as China Northern Rare Earth and China Rare Earth Group, operate efficient, closely integrated supply chains. “The likes of China Northern, one of the largest players in the rare earths space, has the ability to go from mineral concentrate to MRI scanner if it has to,” Embleton said. Clever tax breaks and subsidies from the Chinese government undergird this.

To compete with Chinese firms, Lynas and Japan worked closely together to create a nearly parallel system to the well-integrated Chinese supply chain. In 2010, Lynas was struggling to stay afloat. While its Mount Weld mine in Australia had perhaps the best deposits in the world, work on its Malaysian plant had stalled as funding dried up. Then, just one week after China’s embargo ended, the Japanese conglomerate Sojitz announced loans and investments for Lynas and promised to buy a substantial proportion of its future production. The state-owned Japan Oil, Gas and Metals National Corporation stepped up with funding, too.

“They had to hold our hands quite tightly for the first five years,” Lacaze said. “Particularly as the Chinese pushed the price down to try put us out of business.” Between 2013 and 2016, prices for neodymium nearly halved, dropping from an average price per kilogram of $70 to $40. Today prices sit around $77 per kilogram. At one point, the lenders even suspended interest and principal payments.

“That support [offered by the Japanese government] extended to our Japanese customers,” Lacaze said. “The Japanese government would never be so crass as to instruct Japanese companies from whom they should buy. However, it is sort of understood, you know, that the support that was given to Lynas.”

The results speak for themselves. In 2020, Japan, which pioneered rare-earth magnets, still defended a small market share of 7 percent, to China’s 92 percent. The United States, also once a pioneer, produced a negligible quantity. Whether it can recover its position is uncertain.

While various U.S. bodies have put out reports advocating ambitious moves to rebuild capacity, action has been lacking. A recent report by the Department of Commerce suggested that by 2026 the United States could have a completely domestic supply chain meeting 51 percent of total U.S. demand for the rare-earth magnets most commonly used in electric vehicles and turbines. When I put this number to Daan de Jonge, a rare-earth specialist at Benchmark Minerals, his response was to burst out laughing.

There are some green shoots. The Mountain Pass Rare Earth Mine in California has been reopened by MP Materials, which promises to build a mine-to-magnet supply chain. So far, MP has avoided the fate of the mine’s previous owner, Molycorp, which made similar promises in 2010 before going spectacularly bankrupt in 2015.

Yet MP Materials is also testimony to the complexity of disentangling from China. Chinese firm Shenghe Resources’ expertise has been vital to MP, according to Ryan Castilloux, CEO of the critical minerals research firm Adamas Intelligence. (MP Materials disputes this characterization of Shenghe’s involvement.)

Plans to produce alloys and magnets will probably be yet more challenging. China is not only dominant but also has a technological edge, which its government seems determined to keep, announcing policies that sharply limit the export of rare-earth technology.

Even if successfully built, plants can face political challenges based around environmental concerns. Lynas is now in the middle of a protracted struggle with Malaysia, which since a change of government in 2018 has sought to curtail Lynas’s operating license over concerns about radioactive waste produced by the refining. While there is no evidence of the plant contaminating the local area, questions about long-term storage remain. Under current plans, Lynas will have to stop cracking and leaching, the key initial processing stage that removes radioactive material, in Malaysia by Jan. 1 next year. The company has secured extensions in the past and is rushing to complete a new cracking and leaching plant in Kalgoorlie, Western Australia, by September. Still, if it’s finally forced to close part of its Malaysian operations, it will be heavy blow.

The United States’ thick local planning laws, environmental regulations, and environmental activist culture could end up posing similar problems. An unusual permutation of this surfaced in 2022, when Facebook and Twitter accounts linked to the Chinese state posed as Texans to make posts attacking Lynas’ proposed plant in the state.

Not unexpectedly for the head of a firm trying to do business with Washington, Lacaze is bullish about U.S prospects. While she admits U.S. policy has been lacking in the past, she points to the Inflation Reduction Act and a proposed bill to generously subsidize magnet production as promising developments. U.S. hawkishness towards China means she expects these policies will stick. Still, she admits that without the generous government support being offered the United States wouldn’t be at the top of her list of places to set up a new plant.

Others remain cautious, pointing out that a handful of successful projects would barely dent China’s dominance. Reading from Benchmark’s latest research, de Jonge listed current and projected figures for China’s rare-earth production: For neodymium and praseodymium, China is currently responsible for 89 percent of processing; by 2028, it is expected to process 75 percent. As for dysprosium, China currently processes 99 percent; by 2028, that number is expected to reduce a mere 5 percentage points—to 94 percent.

Correction, Aug. 17, 2023: An earlier version of this article was incorrect in stating that MP Materials’ U.S. refinery was not yet open. Reference to the opening of this facility has been removed.

Correction, Aug. 28, 2023: Reference to MP Materials’ U.S. refinery has been removed because its function was described imprecisely. Comment from MP has also been added.

Joseph Rachman is a freelance journalist covering Indonesia and other stories from around Southeast Asia. Twitter: @rachman_joseph

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