Trump beating China on rare earths is easier than you think

Given the ability of the words “rare earths” to bring the leadership of the world’s largest economy to its knees, it’s tempting to think that establishing a supply chain to produce the minerals outside of China is a challenge on the scale of putting a man on the moon.

In fact, that’s a vast overestimate.

Only a tiny amount of government spending is needed to bulletproof most of the world’s supplies of the elements, essential for high-strength magnets used in military aircraft and munitions as well as electric cars and wind turbines. It’s probably in the order of a single White House ballroom ($US200 million) or, among Silicon Valley’s hyperscalers, six hours of spending on AI data centres ($US350 million). By some measures, governments might even turn a profit on the transaction.

What’s been missing until very recently is sustained attention and follow-through from officials in Europe and the US. Beijing’s latest export controls appear to have changed that for good. In thinking that rare earths were a geopolitical weapon equal to developed democracies’ hold over the semiconductor supply chain, China has vastly overplayed its hand.

That’s because minerals processing is not rocket science. Nor is it the 3-nanometer chip design enabled by extreme-ultraviolet-lithography machines – a true moonshot innovation that’s involved decades, and tens of billions of dollars, of research and development (each machine costs $US400 million).

Almost every mined element in common use is extracted by the same basic set of processes (grinding, roasting, leaching, separating) at sites where engineering expertise is typically more focused on minimising costs and safety hazards, rather than fundamental challenges of physics or chemistry.

China’s dominance of rare-earth production probably gives it a technological edge, a minimal advantage in this industry and one that’s easily erased.

Consider Lynas Rare Earths. Some 15 years ago, the miner was among the first beneficiaries of the current era of resource nationalism, when China cut off supplies of rare earths to Japan in a standoff over disputed islands northeast of Taiwan.

Tokyo’s response was swift. In partnership with Japanese trading house Sojitz, its mineral-security agency JOGMEC provided Lynas with $US250 million of discounted funding in 2011 to help advance its plans to mine rare earths in Australia, process them in Malaysia and distribute them via Sojitz. In 2023, another $200 million was added to start production of so-called heavy rare earths such as dysprosium and terbium, the main focus of China’s threatened export controls.

For Japan, that far-sighted injection of capital has turned rare earths into a mostly solved problem. Thanks to its secure supply of raw materials, the country now has about three-quarters of the world’s rare-earth magnet production capacity outside China. Assume that each dollar of government funding can mobilise $4 of private money, and the whole program has probably cost $90 million or so from the public purse – about 0.01 per cent of annual budget spending for Tokyo.

Japan isn’t alone. In California’s Mojave Desert, the Mountain Pass mine was for decades the world’s biggest producer of the elements. It was also in the market for cheap finance in the early 2010s. Unlike Lynas, it was turned down for a government loan in the US and financed itself with junk bonds instead, just before a surge in Chinese supplies crashed prices and sent it careening into bankruptcy.

Revived under current owner MP Materials Corp., it stayed on stronger footing by holding net cash to protect itself from downturns in the market. Thanks to rising concerns in Washington, this year it extracted $550 million in loans and equity from the US government, along with purchase and price guarantees, to advance its heavy rare earths plans.

In Australia, Iluka Resources – mainly known for producing the titanium oxide pigment used in white paint and toothpaste – noticed there was money to be made from its waste dumps. By reprocessing its discarded tailings, it could turn itself into yet another rare-earths producer, and even have capacity to purify other companies’ ore.

With $1.65 billion in government loans, it’s aiming for first production in 2027. By acting as banker, Canberra should get back hundreds of millions more than it put in. Barring default, the loans priced at 3 per cent above benchmark short-term rates should net the government a handsome profit.

It’s common to argue that handling of the low-level radioactive thorium and uranium waste that commonly occurs alongside rare earths is a prohibitively difficult problem in environmentally minded democracies. Not so: MP Materials and Iluka plan to handle their tailings on site, in dumps protected from groundwater intrusion and dust release. Similar waste is a common byproduct of the phosphate fertiliser industry.

These facilities, and others scrounging around for a few hundred million in concessional loans, are together more than capable of meeting the world’s needs for rare earths, even if Beijing were to employ the nuclear option of an all-out embargo. The current US war on wind energy and electric vehicles — the biggest consumers of rare-earth magnets — makes it far more costly to support this supply chain, but even now it’s not impossible.

China may have the biggest reserves, but gained its current dominant producer status only by presenting itself as the cheapest and most stable source of long-term supplies. The geopolitical sabre-rattling of recent months appears to have permanently immolated that reputation, as dozens of rival miners and processors step up to take its place.

As long as developed democracies don’t forget the lesson of this moment, Beijing will come to regret thinking that it could ever hold the world to ransom over a pile of dirt.

Bloomberg L.P.