Western efforts to create a rival supply chain and break Beijing’s dominance will come up against challenges of cost and scale
The head of one of China’s largest rare earth miners boasted recently of the country’s dominance of the critical minerals industry, telling investors that western efforts to weaken Beijing’s grasp were destined to fail.
“Our tech advances will consolidate China’s rare earth price-setting power,” declared Zhang Xigang, chief of Rising Nonferrous Metals Share Co, a subsidiary of one of China’s two state-owned rare earths giants. “International markets will remain dependent on China’s rare earth supply chain for the foreseeable future.”
The US, Europe and Japan are racing to develop a non-China supply chain for the minerals and magnets that are critical to technologies from smartphones to electric vehicles and fighter jets. Currently, western industry is nearly completely reliant on China for rare earths.
But analysts and industry insiders broadly agree with Zhang’s assessment: breaking China’s grip will be challenging. Beijing has cemented its position as the lowest-cost producer at every stage of the rare earths value chain, thanks to decades of state planning and strategic acquisitions.
China’s grip on rare earths has helped shape global trade negotiations. It has wielded export controls to force concessions from Washington, while European Commission president Ursula von der Leyen has accused Beijing of a “pattern of dominance, dependency and blackmail” to bankrupt industry competitors.
The flow of rare earths has resumed since US and European officials complained of shortages, but trade data and surveys show Beijing is tightly managing exports to prevent stockpiling abroad.
Despite its stranglehold over rare earths — with 70 per cent of the mining, 90 per cent of separation and processing and 93 per cent of magnet manufacturing — Beijing also has generally kept prices low enough to discourage new competitors. That holds lessons for a range of strategic supply chains, and underscores how difficult it will be for the west to compete.
“They don’t turn around and curb production to raise prices — instead they use this market dominance to retain leverage and then weaponise these resources,” said Gracelin Baskaran, a critical minerals expert at the Center for Strategic and International Studies.
“It’s not just rare earths — it’s a story that’s being replicated across commodities.”
China’s dominance of the industry was envisaged decades ago, when then-Chinese leader Deng Xiaoping lauded China’s mineral wealth, saying that “the Middle East has oil, China has rare earths”.
Mining boomed in the 1990s, thanks in part to lax environmental regulation that allowed freewheeling expansion. Thousands of wildcat miners in northern Inner Mongolia extracted light rare earths, while in the south, small operators used chemical leaching and open-air ponds to isolate heavier elements from clay-rich deposits.
As rivals shuttered, China set its sights on climbing the value chain by progressing to the production of rare earth magnets.
Two state-backed companies, China Nonferrous Metals Industry Corp and Beijing San Huan New Materials — then run by Deng’s sons-in-law — joined US investors in 1995 to buy GM’s magnet division, Magnequench, and its plant in Indiana.
Magnequench then acquired the rare earths division of French magnet maker Ugimag, which also had an Indiana plant. By 2004, the US production lines of both facilities had been shut down, American workers were laid off and the machinery was shipped to factories in the Chinese cities of Tianjin and Ningbo.
Beijing also used tax policies and export quotas to make it harder for foreign magnet makers to compete with Chinese producers.
“There was a period where if you were supplying an automotive customer, they’d go to China, get a quote, and then you had to meet that price, and it was just impossible,” said John Ormerod, a magnet industry expert.
By 2010, the two remaining US magnet manufacturers had closed, unable to compete with Chinese producers.
Shaken by China’s unofficial rare earths embargo on Japan in that same year, Japanese industry began to build stockpiles. It has also been making extensive efforts to recycle rare earths from used products such as magnets found in Toyota Prius hybrids.
Meanwhile, Chinese authorities slowly brought the industry under state control, shutting or consolidating thousands of mines into two large state-owned enterprises, China Northern Rare Earth (Group) High-Tech Co and China Rare Earth Group, the parent company of Zhang’s Rising Nonferrous Metals Share Co.
As rival miners in the US and Australia came online, Beijing raised production quotas, holding down prices despite growing demand from the booming EV industry and curtailing profits for both western and Chinese mining groups.
“They’ve suppressed prices,” said Baskaran. “The biggest reason we don’t have alternate sources of rare earths out there is because it’s not commercially lucrative.”
But China’s state-backed rare earths groups have continued to invest despite low returns. They now benefit from immense scale and a technological lead in stages such as rare earth processing, which Beijing has banned from being shared abroad.
“It’s going to be impossible to meet Chinese price levels,” said Ormerod. “Buyers of the magnets will have to accept there’s going to be a premium over the so-called Chinese market price.”
In June, the G7 countries announced their intention to explore a standards-setting mechanism, which analysts have suggested could one day be used to limit China’s ultra-cheap rare earth magnets.
Washington went a step further in July, guaranteeing a price floor for Las Vegas-headquartered MP Materials by pledging to buy neodymium-praseodymium at about double the market price. It also committed to buying all the magnets from a future US facility.
But Gareth Hatch, a founder of the Technology Materials Research firm, doubts demand for higher-priced, non-China magnets, apart from in the defence sector.
“The mantra of most western companies has always been ‘lowest cost at any cost’,” he said. “Why would you buy from a higher-cost producer if lower-cost alternatives are available?”
Source: www.ft.com
Aleksei Andrievskii is the founder of the ANDRIEVSKII SEA WEALTH family office in Cyprus, member of the advisory board at Bendura Bank AG, Liechtenstein