China’s Rare Earth Elements Monopoly: Geopolitical Consequences

Nations are awakened to the fact that over-reliance is rarely a good policy. Russia’s invasion of Ukraine has rammed the EU hard because of supply-related issues pertaining to crude oil, natural gas, and coal. This struck as a bolt at a time when an increased cost of hydrocarbons and under-investment in renewable has exacerbated this issue.

The issue of energy reliance is now forcing countries to seek alternatives. In tune with their climate commitment goals, leaders have now turned attention to clean energy with a thrust on renewable energy production. Countries across the world are now scrambling to secure not just energy but switching to clean energy. Clean energy is dependent on reliance on a range of minerals used in solar panels, turbines, permanent magnets and EV motors. Rare Earth Elements are a major key to producing clean energy.

Rare Earth Elements are called so not because of their rarity but because of their varied critical profile, difficulty in extraction, price volatility and the stability of their supply. They are available globally but are highly concentrated in a few countries. About 35% of global rare earth reserves are in China (44 million metric tonnes) followed by Vietnam, Brazil and Russia, India (6.9 million MT), Australia, the US and Greenland.

China’s production of REE reached a peak of 98% in 2008-2009. Developed countries import REEs from China. The extraction of REE is rather tedious requiring huge manpower and low wages would make it a profitable enterprise. Ironically, REEs which are vital for global and national interests and indispensable for green technologies, to mitigate climate change have a production process that generates a lot of toxic waste which poses damage to the environment and human health.

Currently, 85% of the REE comes from China. It has become a strategic issue since the pace of deployment of clean energy is dependent on the availability REEs. This has become the latest frontier of geoeconomic rivalries. China is a high-value manufacturer with expertise in both upstream, midstream and downstream processes- exploration, mining, processing, manufacturing, advanced manufacturing and recycling.

It is no secret that China uses its assets and clout as political weapons and REEs were no exception. The dominance of China in REE came to the fore after Beijing imposed an embargo on the export of REE to Japan following the detention of the Captain of the Chinese ship in 2010 when Japan was importing nearly 82% of its requirements from China. Weaponisation of REEs jolted countries.

Following China’s restraints on the export of tungsten and molybdenum, the US, Japan, and the EU referred the issue to the Dispute Settlement Consultations of WTO which ruled in the favour of the US in 2014.

China’s rise as REE superpower

China’s tryst with REEs commenced with the Sino-Soviet Industrialisation Program in 1956 when the Soviet Union attempted to begin small-scale production of rare earth concentrates for its aircrafts¹.  But by 1959, Sino-Soviet relations frayed leading to the Soviet Union denying a prototype nuclear reactor by the Soviet Union and China conducted nuclear tests in 1964 all by itself². It is known that Monazite and bastnasite are sources of REEs. China’s Bayon Obo mine had a large amount of Monazite and bastanite³.

Owing to the instability in Zaire (now the Democratic Republic of Congo), a major source of Cobalt used in military jet engines, the US began to look for alternatives in 1978. Subsequently, as part of the 1979 US Presidential Directive, China and the US established programs for the transfer of technology and the US initiates and funds several programs for joint research⁴.

By the 1980s owing to regulatory constraints the US REE suffered major setbacks. Realising a potential for growth in this field, China created the Chinese Society of Rare Earths in 1980. Around the same time, the Chinese government, tasked its scientific community to develop technologies for processing REEs. Chinese chemist, Dr. Xu Guangxian, the Father of Chinese REE studies who obtained a doctorate in Rare Earths from Columbia University successfully separated praseodymium and neodymium two inseparable minerals and developed a “cascade theory of counter-current extraction” to obtain 99.9% pure rare earth elements⁵.

By 1985 China established China Rare Earth Information Centre (CRIC). It has increased funding to the REE technology during the seventh five-year plan (1986-90) and started 300 research institutes and centers. Beijing promoted projects related to REEs smelting, mining and its applications under Programs 863 and 973⁶.

China has more patents on REE than the rest of the world combined.  The low-cost minerals and supply of materials attracted several companies to relocate to China. This mutually benefitted the firms and the Chinese in terms of manufacturing capacities through a transfer of technology. Simultaneously, China began to collaborate with companies in Japan and Canada to gain expertise in the processing of REEs. Planning and investing in REE ahead of the times, China soon attained market superiority and as a pre-eminent exporter sought economic gains.

Deng Xiaoping on his visit to Inner Mongolia in 1992, proudly claimed, “The Middle East has oil and China has rare earths”⁷ and announced that REEs are central to China’s industrial policy. China built state of art key laboratories at Peking University and Changchun University and imposed an annual export quota from 1996-2014. In 2006 it imposed production quotas to curtail illegal mining. These actions increased the prices of REEs. China also accounts for 72% of Cobalt global refining capacity, and 60% of Lithium manufacturing capacity⁸.

At the height of the US-China trade war in 2019, President Xi visited REE facility in Jiang Xi province as a message of using it as leverage. In 2020 he called for enhancing the global supply chain dependence on China and the concomitant merger of all the three state-run REE facilities under the China Rare Earth Group.

As of 2020, the US imports 80% and the EU imports 98% of its REE from China. They majorly fear China of an embargo on REE than a military conflict⁹. China is also spending big to upgrade its facilities in the Bayan Obo mining district and started 41 new rare earth magnets projects with $1.9 billion. The plan is to increase the value of the industry from $350 billion in 2021 to $1 trillion yuan by 2025¹⁰. The goal is to retain a tight grip on prices and maintain the supply of REEs in a controlled manner.

China has invested in mines in Myanmar, Madagascar, Afghanistan, Green Land and Zimbabwe. China recently identified permanent magnets to be among the 10 industries targeted for government support under in 2025 Make in China initiative. CCP Central Committee in October 2020 announced that by 2035 China must be a technological leader¹¹.

China sought foreign investments and imported advanced technologies and machinery in developing advanced products to maintain its supremacy and imposed restrictions on foreign investment in the ownership of mines. Unveiling ‘reverse colonisation’- China now processes most of these minerals while Australia mines them. By adding value to the raw materials supplied by the west, it is exporting them back to them and retaining the control hold over their supply.

Reflecting its unease with countries trying to catch up and making substantial efforts to decouple from its supply chains, in October 2020, China brought out export-control law to restrict the export of controlled items. In 2021 January it introduced draft legislation to protect its resources, terming them as “prized resources of irreplaceable significance”¹².

Covid-19 exposed the fragility of the global supply chains for not only pharmaceuticals and essential supplies but also critical minerals. The glitches in the supply chain were felt by innovators and manufacturers across the world. Nations are really worried about China exploiting this import dependence geopolitically. Developed countries are increasingly worried about the effect of supply disruption on their industrial competitiveness.

While clean energy is one of the key considerations of nations to re-evaluate their policies on REE, other major interests are defense requirements, economic security and industrial competitiveness. Even the Rare Earth Elements which were initially narrowly confined to the 15 lanthanides plus Yttrium and Scandium are now referred to as critical minerals by the US and critical and raw metals by the EU.

Each of these countries is focusing on a mix and match of several options to have secure supply chains- investment, recycling, research for substituting rare earth with other metals, recovery of earth oxides and recycling magnets.

Interestingly, the deposits of REE are concentrated in fragile countries making their sustained availability a matter of contention.

US Strategy

Till the 1980s, 99% of the World’s REEs were sourced from the US. But US lost its markets due to changes in US regulations, voluntary transfer of technology and expertise to China and the near complete absence of an industrial policy. With a seamless flow of funds and support from the government, China developed a robust infrastructure and established its dominance in REEs. 1993 US National Defense Authorization Act authorised the sale and disposal of all rare earth stockpiles in strategic reserves and closed the bureau of mines in 1996.

In 1998, US National Technology Laboratory transferred all technology to China and halted the production of REEs from the standalone rare earth mine, Molycarp Rare Earth Separation Facility due to environmental issues. While the US began to shut shop and close down all the mines and production facilities, China started establishing new laboratories for REE to cater to the world’s demands. In 2004, the Bush administration promoted offshoring to China and soon US industries reliant on REE started relocating to China.

In March 2010, President Obama- convened an interagency working group to promote supply diversification. Shortly after the embargo-in December 2010, the US issued the first Critical Materials Strategy document. Finally, after 37 years of Congressional orders on REE regulations, the Trump administration issued a Presidential order in requiring the Department of Interior to publish the list of 35 Critical Minerals. In February 2018, the US government revealed plans to boost the production of 35 critical minerals with the Department of Interior stating that “Any shortage of these resources constitutes a strategic vulnerability for the security and prosperity of the United States”.

President Trump has signed into law National Defense Authorisation Act (NDAA) which prevents the US from buying permanent magnets, tungsten, molybdenum, tantalum products from China¹³. Between 2011 and 2018 the US Congress introduced a dozen bills on REE but none of these legislations were passed.

In June 2019, the US department of commerce presented, “6 calls to Action, 24 goals and 61 recommendations”. Trump deemed any threat to economic security as an issue of national security and national defense. His administration has steered an initiative purely along those lines.

The US has joined nine countries for Energy Resource Governance Initiative (ERGI) to discover and develop reserves necessary for EVs and to cut reliance on China for critical minerals¹⁴. The countries included- Australia, Botswana, Peru, Argentina, Brazil, DRC (Democratic Republic of Congo), Namibia, the Philippines and Zambia wherein the US will share mining expertise to develop Lithium, Cobalt, and Nickel.

Peru, Argentina and Bolivia constituted the Lithium triangle while DRC has the world’s largest reserves of Cobalt. Australia and the Philippines are among the countries with the largest Nickel reserves¹⁵.

In April 2020, a white paper on critical elements placed a primary focus on the status of industries in upstream and midstream of supply chains.  Trump declared a national emergency to deal with the country’s dependency on Chinese elements and recommended the use of tariffs, quotas, remedies and directed agencies to improve supply chains¹⁶. While Trump deemed the US inadequacy in REE as a national security threat, Biden’s concerns were cornered around their indispensability towards realising the mid-century net neutrality commitment.

In January, bipartisan legislation, Restoring Essential Energy and Security Holdings on shore for Rare Earths Act of 2022 was introduced in Senate forcing defense contractors to stop buying REE from China by 2026 and use the Pentagon to create a permanent stockpile of strategic minerals. This legislation is expected to revive the production of REE in the US.

Biden has outlined ambitious climate and technology plans- a $2 trillion infrastructure plan which includes $35 billion for climate research and innovation, $46 billion for renewable energy manufacturing and $174 billion to boost the electric vehicle market. Meanwhile, the Ukraine crisis has shone a light on resource security issues. The US Department of Defense has given $35 million contract to MP Materials to process REE from Mountain Pass Mine¹⁷.

To decouple the REE supply chains from China, on June 14^th, the US along with its partner countries announced the establishment of a Mineral Security Partnership (MSP) the world’s largest mining event at Prospectors and Developers Association of Canada (PDAC), Toronto. MSP partners include- Australia, Finland, France, Germany, the EU, Canada, Japan, South Korea, UK and Sweden.

MSP aspires to catalyse investments from government and private players for strategic opportunities and adhere to the highest environmental, social and governance standards. The goal is to ensure that critical minerals are produced, processed and recycled in a manner that supports the abilities of countries to realise the full economic development benefit of their geological endowments¹⁸.

Termed as metallic NATO by analysts, MSP basically relies on collaboration with countries with similar ideological and political perspectives. The US is now mulling “friend-shoring” to strengthen the economic and supply chain resilience.  Germany accounts for 8% of gallium production, Finland for 10% of germanium and Spain accounts for 31% of strontium production. France leads in Hafnium production used in space applications.

During the last four decades, China has substantially consolidated its dominance in REEs. It is now capitalizing on its ties with African and Latin American countries containing the largest sources of critical minerals through BRI (Belt and Road Initiative). Chinese State-Owned Enterprises (SOE) are engaging with these countries in both upstream and downstream processes of mining these minerals.

Critical Mineral Framework of the EU, Japan, Australia, Canada and the UK

China’s REE monopoly has spurred western countries to diversify and break free from Beijing’s stranglehold on critical supply chains. To this end, the EU generated a list of 34 critical minerals in 2011. In 2012, the EU Commission established the European Innovation Partnership on Raw Materials to carry out the Raw Materials Initiative. Given the environmental concerns associated with the extraction of REEs, the EU has focussed on refining and manufacturing. In September 2020, it issued a Critical Raw Materials Resilience: Charting a Path Towards Greater Security and Sustainability document.

Through diversification of critical mineral supply chains by way of economic partnership agreements mostly with Australia, joint ventures, mining explorations and processing plants throughout Asia, America and Australia Japan’s REE exports from China fell from 91.3% in 2010 to 58% in 2018. But all its investments didn’t really yield any fruit and it’s unlikely that China’s dominance can be toppled overnight.

UK is planning its first REE processing plant in the East Riding of Yorkshire. It launched UK’s Critical Mineral Strategy (UKCMS) in July 2022 to increase domestic capabilities, collaborate with international players, and establish transparent, responsive and responsible international markets.

Australia first released the Critical Mineral Strategy in 2019 and recently added pure Alumina and silica to the list. To develop Australia into a critical mineral powerhouse, the government has committed $200 million to the Critical Mineral Accelerator Initiative and announced a $2 billion Critical Mineral Facility (CMF). Australia is now actively building relations with Japan, India, the UK, the US, Korea and the EU. Canada released a discussion paper on the Critical Minerals Strategy and backed it with $4 billion in budget and developed its own list of 31 critical minerals¹⁹.

As of 2021, China made up 54% of global REE, North America 18%, Asia 14%, and Europe 2%. China’s dominance in neodymium (used in permanent magnets) is almost 85% with 90% of the share in global production including the downstream processes like products, technologies and magnets. China’s REE dominance is causing an alarm.

Decarbonisation, digitalisation and telecommunications are now indispensable for sustainable development. Critical minerals are crucial for such a technology-driven transition. Consequently, the demand for them is predicted to rise by at least four times. As such, monopolisation and weaponization of these crucial resources with surging demand might trigger tension and ignite rivalries.

While countries are making attempts to decouple critical supply chains from China, worsening geopolitical conditions has complicated the situation. Critical minerals have become a strategic issue vital for economic reliance, development, energy transition, defense, national security and industrial competitiveness for developed countries. Developing countries like India have more than one imperative. In addition to managing climate change, they have to reduce poverty, stimulate economic growth and improve health.

Technological innovations are crucial to address the challenges 21st-century. To facilitate such innovation, countries must now make concerted efforts in a multilateral fashion to manage resources and ensure supply chain resilience and security.  To attain this, countries must display a tremendous political will. Having surrendered market space and facilitated China’s supremacy in REE, whether nations could manage and diversify supply chains is a million-dollar question.

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