Rare earth magnet. Department of Defense Image
Diversifying from Chinese Monopoly of REEs
Last month, China’s State Council announced stricter controls over the export of processed rare earth elements (REE) starting in October. REEs, a group of 17 elements, are used to manufacture magnets, lithium batteries, and other products crucial to the defense, technology, and energy sectors. Globally, China produces 60 percent of REEs and processes about 90 percent of them. This monopoly is problematic as it leaves U.S. production of defense weaponry and electronics at risk of supply chain disruption in the case of a worsening US-China relationship. The United States needs to diversify its mineral sourcing and processing, domestically or in cooperation with allies, to reduce over-reliance on China.
The United States’ dependence on Chinese imports of critical minerals leaves American production capabilities vulnerable on multiple fronts. The Department of Defense (DOD) estimated that the current U.S. national stockpile already has a shortfall of 88 materials and a potential large-scale conflict with China will further threaten the supply of 53 of them. The U.S. Army needs REEs, a subset of critical minerals, to install battery storage systems to generate renewable electricity on its bases and set up an electric non-tactical light-duty vehicle fleet by 2027 as part of its climate goals. On the commercial side, the International Energy Agency predicts that global demand for lithium batteries will increase by as much as seven-fold by 2030 due to the Western shift towards cleaner electricity generation and usage. Goldman Sachs predicts that by 2030, 50 percent of vehicle sales in the United States will be electronic vehicles (EVs), which require lithium batteries.
Rising geopolitical tensions leave the United States at a disadvantage should China choose to restrict its exports, which it has recently begun to do due to the trade war. In December 2023, China banned exports of mineral extraction and separation technologies. The ban followed strict export permit requirements for minerals key to magnets and computer chip production. Since last year, China has ramped up its production of REEs by 13 percent. As a result, the price of the most profitable metal neodymium-praseodymium, used in EVs and wind turbines, has been driven down by 20 percent, the lowest in three years. Although dropping prices from overproduction may seem lucrative for consumers in the short term, Chinese market dominance adds to the danger of the state wielding its control over REE exports as political leverage.
The United States should improve domestic processing capabilities and find alternative sourcing partners. This requires a substantial partnership between the U.S. government and American companies, as the latter must be convinced to resist low Chinese prices and pay more for domestic production. While Chinese dominance over the REE supply chain stems from decades of strategic state investment, cheap labor, and loose environmental regulations, there are ways for the United States to balance out the gaps. The DOD has recommended diversification and partnering with allies while developing a domestic “mine-to-magnet” supply chain. Investment banks like JPMorgan and Goldman Sachs also state the need for a more resilient REE supply chain to avoid disruption shocks.
Currently, the U.S. government has made some progress to address this issue. U.S. Senators have introduced the Global Strategy for Securing Critical Minerals Act of 2024, which imposes duties on critical minerals from China, creates a fund to support investments in critical minerals, develops a diplomatic mechanism to support overseas American private-sector projects related to critical minerals, and expands collaboration with allies. The Biden administration has also prioritized investment into domestic processing facilities and improving the national stockpile. To combat pricing differences, Biden’s Inflation Reductions Act plans to shift the production capacity of batteries from Europe to North America as global demand for them grows by an expected 21 percent annually through 2028. The goal is to make the price of U.S. lithium-ion battery energy storage systems competitive with Chinese systems by 2026. Foreign investment in American manufacturing has also grown since last year. South Korean company LG Energy Solutions is building a $5.5 billion battery complex in Arizona and the Norwegian firm FREYR Battery is also investing in a $2.5 billion Georgia-based battery plant.
While the United States has taken steps to reduce reliance on China for REEs and the products made from them, there is still a long road to securing a steady and diversified supply chain. All these steps are crucial for ensuring U.S. national security as these materials are essential to future defense capabilities, technology production, and clean energy transitions.
