Overview:
This article examines how China’s dominance in rare earth element processing has created a critical global bottleneck, shaping energy, technology, defense supply chains, and efforts by governments to diversify sourcing of essential minerals.
There are seventeen rare earth elements: the fifteen lanthanide elements, as well as scandium and yttrium. REEs are concentrated around one processing hub, the Chinese facilities. Rare earth elements are essential to modern technology, but their supply chain is unusually fragile.
China’s Rare Earth Processing Bottleneck
The dominance of China in the processing of rare earths has resulted in a bottleneck effect that poses a risk to the energy, defense, and technology industries. The rare earth elements are susceptible to risks in supply, considering the dominance of China in the processing of rare earths.
However, before moving ahead, it is important to highlight the difference between rare earth elements and critical minerals in terms of supply risk. Critical minerals are a broad category of materials that include rare earths as well as other metal commodities.
Critical minerals that aren’t REEs may have variables affecting them that may confuse the discussion of economic and supply dynamics (e.g., some critical minerals that are not REEs depend on the price of major minerals they are by-products of). Each REE is listed as a critical mineral, but not every critical mineral is an REE.
Cobalt as a Contrast Case in Critical Mineral Supply Chains
About 73% of the world’s cobalt output is located in the Democratic Republic of Congo (DRC), which raises unique ethical and political challenges. Cobalt is a case that illustrates how CRMs can raise unique supply dynamics compared to REEs. Cobalt is a publicly traded commodity that affects the liquidity and market structure of a mineral.
Furthermore, it is a general consensus that the dominance of rare earth processing in China has a substantial effect on the stability of the global supply chain. Being a publicly traded commodity has implications for the liquidity, price formation, and market structure of a mineral. In addition, it is a consensus that China’s dominance in rare earth processing has a significant effect on the stability of global supply chains.
Critical minerals that aren’t REEs may have variables affecting them that may confuse the discussion of economic and supply dynamics (e.g., some critical minerals that are not REEs depend on the price of major minerals they are by-products of). Each REE is listed as a critical mineral, but not every critical mineral is an REE.
The U.S. Geological Survey (USGS) defines critical minerals as any minerals that are considered essential for economic and national security. US-designated critical minerals are defined under the Energy Act of 2020. To illustrate, cobalt is a critical mineral, but not classified as an REE.
Market Conditions
According to the U.S. Geological Survey and multiple industry analyses, China controls a dominant share—often estimated between 70 and 90 percent—of global rare earth element processing capacity, depending on the specific element and stage of refinement. This overwhelming figure shows that the market is reliant on them. This dependence gives China strong political influence in the distribution of resources and processing rates. The risks associated with supply differ depending on whether one is dealing with light REEs or heavy REEs. Heavy REEs are mined in very few countries. This is a major vulnerability that highlights the need to diversify sources of rare earth elements. In fact, China’s rare earth processing dominance is a key variable affecting market conditions and international policy decisions.
Processing rare earth elements in China has raised environmental concerns, according to multiple academic and policy studies, particularly regarding the enforcement of environmental standards. A heavy concentration of metallurgical skills and proprietary knowledge creates economic and policy lags for other governments, who would have to bypass decades of development to match. It will take time, expertise, and resources to orient new supply chains, build new infrastructure, and implement necessary policies. Investing in alternative supply sources could help maintain economic stability, but it would require strategic compromises.
Alternative Supply Options
Russia
Strengths: Russia possesses significant REE reserves in geological terms.
Weaknesses: However, geopolitical instability, international sanctions, and regulatory uncertainty largely preclude meaningful near-term development or international cooperation.
United States
Strengths: The United States has large domestic deposits of REEs and strong research potential.
Weaknesses: The United States lacks refining facilities and is currently dependent on China for processing. The current exclusivity of what infrastructure does exist causes high costs.
Australia
Strengths: Australia has a robust mining sector, is a stable ally, and is developing downstream processing.
Weaknesses: Australia is still scaling midstream capacity.
Brazil
Strengths: Brazil enjoys long-term potential and significant reserves.
Weaknesses: Brazil has limited midstream infrastructure, needs significant investment to develop, and currently only exports raw materials.
India
Strengths: India is currently upscaling REE extraction and processing. It enjoys significant reserves of REEs
Weaknesses: India’s regulations are complex, it lacks private investment, and much of its domestic ore is of low quality.
Demand Drivers
Rare earth elements are essential for the future of transportation, electronics, and energy sectors, and they are key to a transition away from fossil fuels. One of the lanthanide elements, neodymium, is essential for high-performance permanent magnets in electric vehicle motors and wind turbines. Electronic products and data-center hardware for artificial intelligence require REEs. Rare earth elements also have plenty of defense and medical applications. Some aircraft engines need high-temperature superalloys that incorporate REEs. Medical technologies from imaging to radiotherapy require rare earth elements. There remains an open policy question around identifying sourcing hubs and interim measures. As a final point on demand drivers, it is crucial to recognize how China’s rare earth processing dominance continues to shape long-term supply strategies.
Policy Possibilities
If the goal of Western governments is to diversify their sourcing of rare earth elements away from the supply stream of China, it is important to manage a two-pronged approach to these adjustments: a long-term solution and a short-term stopgap. It has been proposed that Chinese-Malaysian processing ventures could serve as a temporary fix, although such solutions remain contentious. The sourcing of REEs from Malaysia would still require Chinese cooperation, but this strategy lessens China’s dominance in the value chain while other options are being explored.
This interdependence incentivizes China to reduce exploitation of the market, even if it allows it to sidestep some restrictions in the meantime. At the same time, Western firms may attempt methods of creating access to processed REEs by developing a new processing hub. If industry stakeholders analyze the supply and demand of each REE, it can be simpler to reorient trade and refining priorities. Alternative hubs (e.g., Australia, India) and interim measures can complement or substitute joint ventures to reduce dependence on China. Understanding demand drivers can inform strategic supply line formation and policy direction.
Sources:
Bipartisan Policy Center — “What Are Rare Earth Elements?
U.S. Geological Survey — “What Is a Critical Mineral?”
Editor’s Disclaimer: This article is intended for informational and analytical purposes only. It does not constitute investment advice, policy recommendations, or an endorsement of any government, company, or commercial strategy. Views expressed are based on publicly available data and analysis at the time of publication.
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