China’s grip on rare earth elements is slipping. Investors should take note.

And China holds a significant lead in manufacturing and processing capacity, with the U.S. coming in a “distant second,” generating about one-sixth of what China can produce, said Mark Williams, a risk management expert and finance professor at Boston University.

The U.S. Geological Survey reported that China’s production quota for rare-earth oxide equivalent was estimated at 240,000 metric tons in 2023, while the U.S., the second-largest producer, saw output of just 43,000 metric tons.

However, China’s “monopolistic grip” over rare earths is “starting to weaken as research, mining innovation, and new discoveries have occurred elsewhere,” said Williams. China accounts for around 70% of global rare earths production — down from around 90% a decade ago, he said.

COVID-19 and supply chain disruptions “highlighted the risk of overdependency on China imports,” said Williams. Strategic and geopolitical factors are fueling the “drive of rival countries” along with the quest to find substitutes to countering the damaging environmental impact of mining, and increased importance of recycling, he said.

‘Supercritical materials’

Rare earths, or REEs, refer to a group of 17 different elements, including yttrium, scandium and the lanthanides — 15 chemical elements in the periodic table, according to the U.S. Geological Survey.

Contrary to popular belief, other much talked-about commodities essential to technology, such as cobalt and lithium, are not REEs.

The 17 elements officially considered REEs are used in glass polishing and ceramics, automotive catalytic converters, magnetic applications, lighting, televisions and pharmaceuticals, and you can find them in smartphones, computers, cars, wind turbines, and even missile guidance systems.

Downstream uses for REEs have “proliferated, from millions of EVs to billions of LED lightbulbs,” said Byron King, a geologist who writes about energy and resources for Paradigm Press. He referred to the elements as “supercritical materials.”

Internal combustion cars need them in features such as power windows and seats that require small electric motors, he said. They have a range of uses in “all manner[s] of electronics,” and in renewable energy, given REEs use in solar and wind applications.

Military applications for REEs include drones, where they are used in propeller motors, said King. Our “modern military simply does not work without RE in electronics, optics, guidance, propulsion. Absent RE, we’re back to tossing rocks and sharp sticks.”

China’s dominance

China, meanwhile, has made efforts to secure its lead in the market.

The country remains the “whale in the pond of REs” and is “by far, still the largest producer of REs at scale, from mine to mill to refinery to downstream processor,” said King. China still has “vast resources within its borders and…scours the world for RE projects, if not simply supplies of opportunity.”

China has a 30-year head start on the rest of the world, he said. Its RE industry “dwarfs what’s in the West,” in terms of people with technical knowledge and capital equipment focused on extraction, refining, and downstream adaptations.

Late last year, China announced a ban of rare earth extraction and separation technologies.

The technology ban is “a challenge because the world doesn’t necessarily have the full technical know-how to rapidly meet our current needs. It’s relied on China for it,” said Gracelin Baskaran, research director at the Center for Strategic and International Studies, a Washington think tank.

China has also laid bare its global dominance when it comes to certain commodities. Last year it restricted the world’s access to gallium and germanium, which are not technically REEs, but known as rare metals used in the manufacturing of computer chips.

Read: China restricts access to 2 metals crucial to making semiconductors. What you need to know.

Production potential

There are signs, however, that China’s monopoly on the REEs market is weakening.

It’s “previous competitive advantage is lessening and under attack,” said Williams, with “new discoveries, research, supply chain diversification, economics around environmental cost and recycling taking hold.”

And there’s great potential for new REE sources.

As new processing capacity is built, the world will need to quickly “identify new sources of rare earths for production,” said CSIS’s Baskaran. “Processing is only useful if we have feedstock to process.”

Brazil has almost a fifth of the world’s reserves but produced less than 0.5% last year, “indicating significant room to increase production, she said. Madagascar, Mozambique and Tanzania also have significant reserves and together have about the same amount of rare earths as China, so these countries have a “significant role to play in critical minerals security.”

The U.S., meanwhile, has “numerous locales that could delivery primary RE materials,” but it’s a “high-cost jurisdiction with lots of regulations,” said King. “Canada’s in the same boat, although more friendly to certain kinds of mine development.”

Canada is not currently a commercial producer, but Defense Metals Corp.
DFMTF,
+2.49%

DEFN,
-2.13%,
a mineral exploration firm that focuses on the acquisition of REE mineral deposits, is the most advanced REE company in Canada, said Luisa Moreno, the company’s president. It aims to reach production in about five years, she said.

Demand for REEs has doubled in the last five years, with the “adoption of greener, low carbon technologies” contributing to that rise, said Moreno.

To meet the world’s needs, “we must continue to increase rare earths production outside China and, most importantly, build geographically diversified supply chains,” she said.

Opportunity

For now, China will continue to be the dominant player in the REEs space, said Moreno.

“If China falls short, we may see shortages of some of the critical rare earths, but that would lead to a significant increase in prices and improve the economics of projects outside Asia,” she said.

That may widen prospects for investment opportunities, which include exploration companies, producers, and exchange-traded funds.

Exploration firms include Arafura Rare Earths Ltd.
ARU,

and Brazilian Rare Earths Ltd.
BRE,
-3.79%,
while Canada-based Neo Performance Materials Inc.
NEO,
+0.42%
is a provider of advanced industrial materials, including magnets.

China Northern Rare Earth (Group) High-Tech Co. Ltd.
600111,
+1.17%
and Lynas Rare Earths Ltd.
LYC,
+4.62%
are among the world’s producers. MP Materials Corp.
MP,
-1.64%,
owns the only operating rare earth mine and processing facility in the United States.

There are also a few REE ETFs.

Those include the VanEck Rare Earth/Strategic Metals ETF
REMX,
launched in 2010, which tracks companies that mine and process rare earth minerals and strategic metals, and the Optica Rare Earths and Critical Materials ETF
CRIT,
launched in March 2022, offering exposure to companies involved in the mining, production, recycling, processing, or refining of rare earths and critical materials.

Risk management expert Williams, however, warned that “investing in rare earths are not for the faint of heart as there a number of macroeconomic, environmental and geopolitical factors at play.” 

Given that China holds a “monopolistic grip over the industry and tightly controls its exports,” there is political risk should the relationship between the U.S. and China continue to falter.

Some risks can be reduced through the purchase of ETFs, but ETFs can potentially “fail to track with the movement of underlying value of rare earths,” said Williams.

Still, in terms of growth for REEs, think of the power demand coming artificial intelligence, said Paradigm Press’s King. “I cannot imagine this king of energy use will not require REs in all manner of components to the systems — electronics, optics, cooling, quantum computing.”