US allies struggle to break Chinese stranglehold on rare earths

A couple of hours outside Houston, in a remote field near a Dow Chemical Co. plant, the U.S. attempt to undermine China’s grip on the global supply of rare earth minerals critical for high technology has yet to begin.

Even if that were the case, China’s dominance of the market (it controls around 70% of production and more than 90% of refining) means that goal will likely remain out of reach.

The Texas plant, which will be built by the Australian company Lynas Rare Earths Ltd., represents a fraction of billions of dollars in subsidies and loans pledged for mineral production and refining in the U.S. and its key allies. For the 149-acre (60-hectare) site, Lynas won more than $300 million in Pentagon contracts. If all goes according to plan, it will operate a plant to process rare earths There in two years.

But while national security is a key factor in the programs in the United States and elsewhere, falling prices since 2022 are undermining the economic viability of those projects, raising questions about whether this and similar efforts can become a supply chain to compete with Chinese companies protected by their government.

“These market conditions have destroyed most of the projects that were expected just a couple of years ago,” said James Litinsky, CEO of MP Materials Corporation., which owns the only rare earth mine in the US and is building a factory to make magnets in Texas.

“Despite the efforts and investments of many governments, Chinese control over the vast majority of the supply chain persists,” Litinsky said on an earnings call last month.

The metals targeted by the United States and its allies are not actually “rare,” but they rarely exist in high enough concentrations to justify mining, which is often dangerous for the environment. Among them are 17 chemically related elements that have useful properties for making electronics more efficient in products ranging from phones to fighter jets.

Laura Taylor-Kale, the undersecretary of Defense for industrial base policy, pledged earlier this year that the United States will have a “sustainable mine-to-magnet supply chain capable of meeting all U.S. defense requirements by 2027.” She said that once the Lynas project in Texas is up and running, the company “will produce approximately 25% of the world’s supply of rare earth element oxides.” In recent years, falling global prices have been driven by rising supply from China and elsewhere, as well as a weakening Chinese economy, which has meant domestic industry cannot absorb the increased output.

China’s Ministry of Natural Resources and Ministry of Industry did not respond to requests for an explanation of their rationale for raising rare earth mining quotas in 2023 and 2024, which analysts say helped drive down prices.

“Most rare earth mines are struggling to break even with low prices, while early-stage projects face delays and funding shortfalls,” according to a Sept. 3 report in Benchmark Source. Those factors are “potentially holding back the West’s effort to reduce reliance on Chinese supply chains,” it added.

Some projects are already reporting setbacks.

Arafura rare earths Ltd. is one of the companies that appears to be struggling to grow as planned. This year it secured an Australian government loan of A$840 million (US$560 million), and in July it raised more capital, saying the project is ready to begin construction.

It signed purchase agreements with two Korean automakers in 2022 for production at its Nolans project north of Alice Springs, Australia, but has not started construction.

“We have the debt, we have the approvals, the acquisitions are pretty much in place,” said CEO Darryl Cuzzubbo. “The missing piece is capital. We’re working to get that before the end of the year, which would allow us to start construction early next year.”

Cuzzubbo said his goal is to raise half of the capital from “core investors, who are doing very well,” adding that “once we have that, we will go to the rest of the market to get the remaining 50%.”

Iluka Resources Ltd. is another company facing multiple hurdles as it invests in rare earth production in Australia. The company received a A$1.25 billion loan in 2022 to develop Australia’s first integrated rare earth refinery, which it aimed to open in 2026. But this year it announced the project could cost as much as A$1.8 billion, well above initial estimates.

Earlier this year, the company’s chief executive accused China of trying to manipulate prices and take over the industry in Australia. “China’s influence over the global rare earths market is pervasive,” chief executive Tom O’Leary said in May. “It is this monopolistic production, combined with price interference, that is leading to market failure.”

Lessons from Japan

A similar experience led Japan to embark on a path to reducing its dependence on China for rare earths more than a decade ago. The results show that these projects are taking longer and are more expensive than initially anticipated.

Tokyo invested $250 million in Lynas in 2011 after Beijing temporarily cut off supplies over a territorial dispute. It took two years before trial production began and even longer to reach target levels, the company said. The company did not turn a profit until 2018.

According to Amanda Lacaze, Lynas’s chief executive, support from Japanese companies and the government was what helped keep it afloat. Japan supported Lynas by “investing money in capital and in developing our assets, but also supporting us during a period of very, very low prices,” she said.

Japan has finally reduced its dependence on Chinese rare earth supplies from 80%-90% to about 60%, former Economic Security Minister Takayuki Kobayashi said in an interview.

Patience was even more critical, though, Lacaze said. This was underscored by a company announcement last month: A problem with wastewater permits means planned earthworks for the Texas plant are unlikely to happen this year, Lynas said in its latest earnings report.

“Patient capital in mining and also in an area where something is being done for the first time is really important,” Lacaze said in August. “If we really want an industry, we have to recognize that we are playing a 30-year catch-up game.”