For over a decade, rare earths have emerged as a crucial commodity in the race for the geo-economic dominance of this century, and that is not by chance, writes Guido Alberto Casanova in an analysis recently published by the Italian Institute for International Political Studies (ISPI). These 17 elements play a strategic role in the development of those industrial sectors that will power the green transition of the next three or four decades. Precisely for this reason, Chinese companies’ quasi-monopoly — amounting to no less than 62.8% of all rare earths mined globally — over the production and processing of rare earths is a fundamental, strategic dilemma for Western countries’ industrial policies. However, mining is only the first step of the elaborate value chain that cuts across the rare earth industry. In the downstream processing and related industrial production sectors (such as permanent magnets), Chinese companies’ shares increases up to 85-90%.
Whilst global concentration in Chinese hands has long been an accepted reality in the rare earths industry, Beijing’s inclination to weaponize this dependency has raised the alarm in all Western countries. Facing the risk of overdependence on China, several Western countries have considered diversifying their supplies over the last decade, though most of them have only started making strides in the last few years. Japan was the first one in dealing with such a situation: in 2010, when Beijing partially blocked its exports, Tokyo relied on China for 90% of its imports. Over the years, Japan remained a key consumer of rare earths, yet it also managed to reduce its dependence on Chinese supplies. On the one hand, geological explorations led to the discovery of new, untapped reserves of rare earths, while on the other, the centerpiece in this quest is the diversification of supplies. The leader in this process was a state-owned enterprise JOGMEC, which invested heavily in several resource-rich countries like Namibia and Australia in order to support an alternative network of rare earths suppliers. As of now, the share of Chinese imports has indeed declined to 58%, and Tokyo aims to push that figure below 50%.
The United States also supports efforts to build new supply chains independent from Chinese companies — Washington’s growing attention towards this matter has become apparent in the last few years. The Donald Trump administration declared rare earths as essential for national defence in 2019 and thus channeled DOD resources towards the reconstruction of a national rare earths processing capacity. Joe Biden’s infrastructure plan envisions conspicuous funds for research and innovation as well as the development of a market for renewable energy and electric vehicles, two sectors wherein rare earths industrial processing capacity will be key. The most evident gear-change operated by the Biden administration took place at the international level with the engagement of Indo-Pacific partners for the construction of a supply chain less reliant on China. The Quad, for instance, has provided a venue for its members – US, Japan, Australia, and India – to articulate their intention to develop a mining and refining capacity of their own.
Some obstacles are yet to be overcome, however. First, the rare earths industry requires specific technical knowledge and capacity to manage burdensome externalities: as a matter of fact, mining and processing entail serious risks for the local population both in terms of health and environmental degradation. Another factor is the fierce competition of big Chinese state-owned enterprises, whose production quotas were raised by almost 30% in the first semester of 2021, while Chinese exports of rare earths over the first six months of this year have surpassed pre-pandemic levels. In addition, the issue of Chinese companies’ quasi-monopolistic market presence also applies to the integrity of Washington’s own alternative supply chain, since the international consortium that allowed the reopening of the Mountain Pass mine includes Shenghe Resources Holding, a big Chinese player in the sector. However, the most important issue revolves around the financial sustainability of an alternative to the Chinese supply chain. According to experts, finding a market-based solution for the creation of an alternative supply chain will prove difficult: a generous, consistent, and durable financial commitment by public authorities is indeed critical for the success of the initiative, as highlighted by the Japanese experience.
