China’s export controls and Middle East war heighten uncertainty over rare earth procurement
U.S. invests in production facilities at home and abroad, backed by price and sales guarantees
Expanded alternative supplies expected to weaken China’s rare earth market dominance

The United States is expanding investment in domestic production facilities and mines and processing facilities in allied countries to reduce its reliance on a rare earth supply chain concentrated in China. With China’s export controls and the war in the Middle East increasing uncertainty over raw material procurement, the U.S. government has stepped in to support producers’ capacity expansion by guaranteeing prices and sales. Overseas, it is also broadening alternative supply chains by financing mine development and securing output over the long term. As new facilities in the United States and allied countries begin operating and deliveries under long-term purchase agreements gather pace, some expect China’s decades-long market dominance to weaken.

China Supplies Up to 96% of Key Minerals Used in Semiconductors

According to a supply chain analysis report released on the 12th by the U.S. Semiconductor Industry Association (SIA), China accounts for about 95% of the global supply of gallium, a raw material for compound semiconductors, and about 85% of tungsten, which is used to manufacture precursors for deposition processes. Gallium is a key raw material for compound semiconductors used in power and communications applications, while tungsten is used to make precursors for deposition processes that apply thin films to semiconductor circuits. Because both minerals are used directly in chip manufacturing, they were identified as particularly sensitive to supply conditions in China. All dates are local time.

Rare earths used in semiconductor manufacturing equipment are also heavily dependent on China. China’s share of the supply of neodymium-praseodymium (NdPr), used to make high-performance permanent magnets for precision motors, robots and pumps, reached 96%. China was also found to supply 95% of terbium, which is needed for magnets in precision drive systems. Permanent magnets made from these rare earths are key components in equipment such as wafer-handling robots and sputtering systems that form thin films. The SIA classified rare earths as one of the raw material groups most vulnerable to supply disruptions in the semiconductor supply chain.

Rare Earth Procurement Faces China’s Export Controls and the Middle East War

China’s strict export licensing system is adding to the burden on overseas companies procuring rare earths. Last April, China placed seven rare earth elements, including samarium, dysprosium and terbium, and related magnets under export controls. It now screens end users and intended uses, citing the need to prevent diversion to military applications. Companies seeking licenses must submit sensitive information, including customer details and manufacturing processes.

In the early stages of the controls, some companies were asked to provide design information showing how magnets were incorporated into components such as motors. Others had their applications rejected for leaving certain fields blank and had to restart the process. At the time, some companies rushed approved shipments by expensive air freight to avoid production shutdowns. In the semiconductor industry, U.S. companies also sought help from their government early this year after export licenses for scandium used in 5G communications components were delayed. Many of these companies had been buying raw materials from suppliers in third countries and reportedly encountered procurement difficulties as China checked end users during export reviews.

The war in Iran has added supply uncertainty from the Middle East, further tightening U.S. rare earth procurement conditions. Sulfur, a raw material for the sulfuric acid needed to refine rare earths, is among the commodities whose supplies have been impeded by disruptions to shipping through the Strait of Hormuz. The Middle East accounts for a quarter of global sulfur production, and about half of the world’s seaborne sulfur shipments pass through the strait. There are concerns that disruptions to raw material procurement could also burden companies seeking to refine and supply rare earths outside China, raising production costs and making it harder to secure output. U.S. demand for rare earths has also increased because it must replenish stocks of missiles and precision-guided weapons expended in the war. Some analysts argue that, because building alternative supply chains centered on the United States and its allies takes time, accelerating weapons production could deepen reliance on Chinese rare earths.

U.S. Government Backs Rare Earth Production Expansion With Investment and Sales Guarantees

The United States is therefore using equity investments, price guarantees and long-term purchase commitments to increase domestic rare earth production. Last July, the U.S. Department of Defense signed an agreement to invest USD 400 million (approximately USD 412 million) in MP Materials, which operates the Mountain Pass mine, and also provided a USD 150 million (approximately USD 155 million) loan to expand heavy rare earth separation facilities. It guaranteed a minimum price of USD 110 (approximately USD 113) per kilogram for neodymium-praseodymium products for 10 years, reducing the risk of falling prices. It also agreed to guarantee sales of the entire output of a new magnet factory for 10 years. By easing both initial investment costs and sales risks, these support measures are accelerating the expansion of domestic production capabilities, from mining and refining to magnet manufacturing.

South Korean and Japanese companies are the main buyers of the U.S.-produced rare earths. Because the U.S. industry that processes rare earths into magnets is still in its infancy, producers are securing customers in Asia. MP Materials’ quarterly results confirmed last July also showed that most of its NdPr oxide and metal revenue came from a contract with Sumitomo’s U.S. subsidiary, which supplies materials to Japanese customers. Nick Myers, CEO of rare earth recycling technology company Phoenix Tailings, also said its main customers were in South Korea and Japan. He noted that orders from other companies could exhaust supplies unless U.S. defense contractors moved quickly to make purchases.

Even U.S.-Produced Rare Earths Depend on South Korea and Japan for Processing

South Korean companies have also entered businesses that refine rare earths and produce permanent magnets in the United States. Last May, POSCO International agreed to jointly invest a total of USD 200 million (approximately USD 206 million) with U.S.-based ReElement Technologies to establish a rare earth separation and refining joint venture. Targeting mass production in 2028, the venture plans to establish annual production capacity of 3,000 tonnes before expanding it to 6,000 tonnes, while also building permanent magnet manufacturing facilities in stages. In January this year, Korea Zinc also partnered with U.S.-based Alta Resource Technologies to recover high-purity rare earth oxides from spent permanent magnets. The two companies plan to build recycling and refining facilities at an existing U.S. operating site and begin commercial operations in 2027. They are pursuing plans to supply the resulting materials to advanced-industry companies in South Korea and the United States.

U.S.-produced rare earths are heading to South Korea and Japan because the United States does not yet have a sufficiently developed supply chain to process the raw materials it mines and refines into metals and magnets. To use rare earths in industrial magnets, separated and refined oxides must be converted into metals and undergo subsequent processes such as alloy production and magnet forming. South Korea and Japan already have operating facilities for these processes. In South Korea, KSM Metals in Cheongju, North Chungcheong Province, produces neodymium-praseodymium alloys. The United States, meanwhile, is working to build downstream processing facilities as well as expand mining and refining facilities. MP Materials spent years fine-tuning process conditions for its separation and refining equipment, and as of last July, it was preparing products made at its Texas magnet factory for approval by its first customer, General Motors (GM). Because new facilities must achieve stable processes and complete customer qualification before actual deliveries can begin, building a domestic U.S. supply chain will take more time.

Table 1. Examples of Rare Earth Supply Chain Expansion in the United States, Japan and Europe

U.S. and Partners Secure Supplies Through Long-Term Contracts, Testing China’s Rare Earth Monopoly

With time still needed to complete its domestic supply chain, the United States is using production capacity in allied and friendly countries to fill procurement gaps while also investing in new mines and processing facilities in those countries. Support for Brazilian rare earth producer Serra Verde is a prime example. Backed by USD 565 million (approximately USD 582 million) in financing from the U.S. International Development Finance Corporation (DFC), Serra Verde plans to increase annual production to 6,400 tonnes on a rare earth oxide equivalent basis by the end of 2027. A special-purpose vehicle funded by U.S. government agencies and private capital has also agreed to purchase all first-phase output for 15 years, securing both expansion funding and a long-term buyer.

Japan is also supporting the expansion of U.S. rare earth supply chains by making long-term purchases from overseas producers. Japan Australia Rare Earths (JARE), the Japanese contracting entity, renewed its supply agreement with Australia’s Lynas in March this year, committing to purchase 5,000 tonnes of neodymium-praseodymium annually. The agreement also provides for Lynas to give Japanese industry priority access to 75% of its heavy rare earth oxide output, with JARE purchasing half of total output. This arrangement supports production expansion by securing long-term buyers for rare earths mined in Australia and refined in Malaysia. Europe is also adding facilities to process refined rare earths into permanent magnets. Canada’s Neo Performance Materials opened a permanent magnet factory in Estonia last September, establishing a production base linked to an existing local rare earth separation facility.

Analysts say that as the United States and its allies expand alternative production bases, their capacity to respond to China’s export controls could also grow. Researchers at India’s Takshashila Institution noted that overseas producers, which had struggled to achieve profitability while competing with low-priced Chinese supplies, were gaining investment opportunities as a result of the export controls. They explained that higher rare earth prices outside China could improve the profitability of new mines and refining facilities, lending momentum to supply chain expansion by the United States and its allies. In particular, once companies in these countries invest in production facilities and secure alternative suppliers, they will have less incentive to immediately return to previous trading relationships even if China eases its controls. As these countries’ investments translate into actual production and deliveries, they could diversify demand previously dependent on Chinese supplies and reduce the impact of supply restrictions.