The West is recycling rare earths to escape China’s grip — but it’s not enough

China's dominance in rare earth mineral production, controlling 69% of mine production and nearly half of global reserves in 2024, is prompting Western nations to seek alternative sources and reduce reliance through recycling and technology development, exemplified by the U.S. Department of Defense's $4.2 million investment in Rare Earth Salts. However, China's export controls on specific rare earths and other critical minerals like tungsten, used in EV batteries and defense applications, are raising concerns about supply chain vulnerabilities, particularly as recycling efforts face limitations and demand in sectors like defense remains high. While some companies are receiving export licenses, the broader trend suggests a potential market distortion and highlights the need for diversified supply chains, though challenges remain in establishing alternative mining and processing capabilities.

Analysis

China's strategic tightening of its grip on the global supply of rare earth elements (REEs) and other critical minerals presents significant challenges to Western economies, particularly in the automotive and defense sectors. In 2024, China controlled 69% of rare earth mine production and nearly half of global reserves, according to the U.S. Geological Survey, and the International Energy Agency states China controls over 90% of the global refined supply for key magnet rare earths (neodymium, praseodymium, dysprosium, terbium) essential for EV motors. This dominance is underscored by recent export controls on specific REEs like terbium (9g used per typical single-motor EV) and cerium (50g used per EV), and critical minerals such as tungsten, of which China produced approximately 80% of the global supply in 2024 and is used at about 2 kilograms per EV battery. These restrictions, including a broader State Council policy from October on dual-use mineral exports, necessitate government approval for overseas sales and are occurring amidst a U.S.-China trade war, which Cox Automotive notes will further distort the market. Western nations are responding by investing in alternative sourcing, R&D to reduce reliance (e.g., Toyota's efforts), and recycling initiatives, such as the U.S. Department of Defense's $4.2 million investment in Rare Earth Salts. However, developing alternative mines and processing plants is a multi-year endeavor, and recycling, while promising for future ex-China material from end-of-life EVs, remains challenging and energy-intensive. Furthermore, slowing EV uptake in the U.S. (7.5% of new vehicle sales in Q1, per Cox Automotive) may, as suggested by Hallgarten & Company, diminish the immediate imperative for replacing Chinese-sourced materials in EVs, though defense applications, like the F-35 fighter jet containing over 900 pounds of REEs, maintain high demand. While some Chinese firms reportedly received export licenses post a U.S.-China trade truce, the overarching situation signals heightened supply chain vulnerability and considerable uncertainty for industries dependent on these materials.

Key Decisions for Investors

• Investors should critically assess portfolio exposure to companies heavily reliant on Chinese-sourced rare earths and critical minerals, particularly within the EV, battery manufacturing, and defense sectors, given the increased supply chain risks highlighted by export controls and geopolitical tensions.
• Consider opportunities in companies actively pursuing diversification of mineral supply chains, developing alternative technologies to reduce rare earth dependence, such as Toyota (TM), or engaging in domestic mining, processing, and recycling of critical minerals in Western jurisdictions, while being mindful of the long development timelines and inherent operational challenges.
• Monitor developments in Chinese export policies, Western governmental initiatives to secure critical mineral supplies, and the pace of EV adoption, as these factors will significantly influence the long-term viability and profitability of affected industries and related investments.