Industry needs a rare earths supply chain outside China

Industry needs a rare earths supply chain outside China

When China said this month it would impose sanctions on Lockheed Martin in retaliation for a US decision to sell missiles to Taiwan, it did not elaborate on what this would entail.

But the Global Times, China’s state-owned nationalist tabloid, speculated that Beijing would probably “cut off material supply including rare earths, which are crucial to advanced weapons production”.

That would mark the latest phase in the weaponisation of rare earths — a group of 17 metallic elements that are embedded in most high-tech products.

China accounts for 80 per cent of the global mined supply of rare earths and an even higher share of the manufacturing of powerful rare earth magnets, which are key constituents in everything from wind turbines to the F-35 fighter jets built by Lockheed.

Last year, as the trade war between Washington and Beijing intensified, China’s president Xi Jinping made a highly publicised visit to a rare earths magnet maker in Jiangxi province, highlighting the nation’s dominance over a supply chain.

Analysts say a move to restrict rare earths supplies to Lockheed, the largest arms manufacturer in the US, could intensify an US push towards a technological decoupling with China and supercharge efforts to create a non-Chinese supply chain in a global industry worth up to $5bn a year.

Tentative steps are under way in the US, Australia and the EU to bolster security of supply of rare earths. The European Commission is working on a raw materials strategy that aims to wean domestic industries off their dependence on Beijing. And, in November, Canberra signed an agreement with Washington, which mandated both nations’ geological agencies to work together to assess the potential for new supply.

Australia, a key ally of the US, is well placed to assist these efforts as it holds a sixth of the world’s rare earths deposits and is home to Lynas Corp, the only big non-Chinese rare earths producer.

Canberra has identified 15 rare earth and critical minerals projects struggling to attract commercial funding and is offering state-backed loans to help develop them. So far, however, private investors remain reluctant to bankroll the dozen or so junior miners and entrepreneurs seeking to create a non-Chinese supply chain.

This is hardly surprising given the hurdles facing new entrants. Despite their name, rare earths are relatively abundant. However, the process of separating them into commercially viable products poses steep technical and environmental challenges. China’s market dominance enables it to control prices and put pressure on challengers that threaten its Made in China 2025 strategy to create a vertically integrated supply chain encompassing mining, magnets and high-tech manufacturing. 

The collapse in 2015 of Molycorp, a debt-laden US company that operated the Mountain Pass rare earths mine in California, highlighted such risks to investors. And in 2016 Lynas was only saved from collapse when shareholders, including state-owned Japan Oil, Gas and Metals National Corporation, agreed to a debt restructuring.

Generating profits from rare earths has proved elusive for non-Chinese companies and enduring low prices make the funding of new projects difficult to justify.

This forms the backdrop to the Pentagon’s decision this week to provide funds to Lynas and US-based MP Materials to develop processing facilities, which would break China’s monopoly over commercial separation of heavy rare earths — key ingredients in powerful magnets. Ord Minnett, a Sydney-based broker, estimates that Lynas could receive just under half the estimated $50m cost of building the plant from the US government.

Experts say public funds may kickstart investment in rare earths but insist greater industry collaboration is needed to establish a viable non-Chinese supply chain. Western magnet makers and high-tech manufacturers need to use their purchasing power to underwrite investment in rare earths processing capabilities or they could find themselves outflanked by Chinese competitors.

“China could severely limit the rest of the world production of electric vehicles, hybrid vehicles, wind turbines, MRIs by reserving the use of Chinese domestically produced rare earths for the Chinese domestic manufacturing industries,” according to a report by Dudley Kingsnorth, a professor at Curtin University, who is an expert in rare earths.

“Effectively, this would force the rest of the world to purchase rare earths embedded in the [original equipment manufacturers] made in China; destroying millions of jobs.”

Western industry should take note. In the long term, the migration of millions more manufacturing jobs to China would pose more of a threat than Beijing imposing sanctions on a single arms manufacturer.