Last week, ASPI researcher Albert Zhang shone the spotlight on a sophisticated information campaign by the Chinese Communist Party targeting rare earths and the Australian company Lynas. This research has powerful implications for policy makers looking to create resilient reserves of rare earth elements (REE) and critical minerals.
REEs are a group of 17 metals – 15 elements from the lanthanide series and two chemically similar elements, scandium and yttrium. Each has unique properties vital to a range of commercial and defense technologies, including batteries, high-powered magnets and electronic equipment. An iPhone, for example, contains eight rare-earth minerals, and there are probably a few in your fridge and washing machine. They are also about 420 kilograms of an F-35 fighter jet and are essential for guided missiles.
Despite their name, ETRs are not that rare. They are present in abundance in the earth’s crust. The challenge, however, is finding them in sufficient concentrations to justify commercial mining operations. Securing the initial funding required to build a mine in a location that will tolerate the substantial environmental impacts of rare earth processing is no easy task.
Luckily for China, the commercial viability of its reserves, Chinese companies’ access to state-backed financing, and the country’s lax environmental regulations have helped cement its dominance in the global REE market.
China’s production of rare earths exceeds that of the world’s second largest producer, the United States, by more than 100,000 tonnes per year. The United States still depends on China for most rare earth imports. According to the US Geological Survey, China accounted for at least 58% of global REE production last year, and possibly as much as 80% if illegal and undocumented production activities are included. In some cases, such as heavy REE processing, China has 100% control of the market.
The problem here is not only that the CCP has monopoly control over global rare earth supply chains, but it is willing to use that power to coerce and control others. The question is not hypothetical. Realizing that controlling the global market is a useful economic lever, the CCP has used this power to coerce its trading partners on more than one occasion.
In 2010, it effectively restricted rare earth exports to Japan after a Chinese fishing trawler collided with a Japanese coastguard vessel near the disputed Senkaku Islands.
More recently, he threatened to limit supplies of rare earths to US defense contractors, including Lockheed Martin, because of US arms sales to Taiwan.
The CCP’s coercive use of its REE monopolies is reason enough for some nations to seek to build sovereign resilience and protect themselves from manipulation.
Japan, the United States and Australia have each sought to improve their supply chain resilience. Japan has invested in Australian company Lynas for more than a decade to provide it with alternative supplies. The US government recently did the same for Department of Defense REE supply chains. However, unilateral efforts no longer seem sufficient to secure alternative supply chains.
The CCP does not want to lose control of this key market. And it used a series of measures to prevent the diversification of supply chains. China regularly adjusts its national production quotas and subsidizes rare earth prices. He uses this power to strategically flood the market when he wants to drive out competitors and deter new market entrants.
Zhang’s work shows that the CCP is not just using economic means to prevent the dilution of its monopolistic control over global rare earth supply chains. It is also willing to use a range of covert and clandestine non-competitive means to maintain its market position.
Setting up alternative REE supply chains is hard enough. The CCP’s actions, including its information campaigns, are rapidly increasing the complexity of the challenge. The key strategic message here for Australia, Japan, the United States and other like-minded countries is that market forces alone will not solve this problem.
Policy makers at the national level cannot solve this problem alone. Creating alternatives to the global supply chain that promote healthy competition and resilience will require minilateral efforts. Here, Australia, as a source of REE, needs to work with countries like the United States and Japan.
For starters, Japanese, Australian and US policymakers need to address several issues to accelerate the creation of alternative supply chains.
For investors, financing new or emerging rare earths carries substantial geopolitical risk. To mitigate this, policymakers should consider establishing a sovereign risk fund for REEs to cover the commercial risk associated with overt and covert activities of the CCP.
The Australian government needs to consider how it could encourage Australian industry and entrepreneurs to move up the rare earths value chain. Policy levers, including fiscal measures, will be critical to success. There is significant potential in the establishment of multi-ore mineral processing centers in Australia.
Policymakers and industry will need to find ways to mitigate the effects of China’s market-distorting tactics and more normal demand ebbs and flows. Various mechanisms are needed, including mini-lateral storage of REE ore and market interventions that flatten demand.
Australia needs to embrace Industry 4.0 technology and move up the REE value chain so that it is more than just a miner. Japan and the United States should see the mutual benefits of this approach. After all, there is no point in creating a resilient supply chain for rare earth minerals if miners still have to send them to China for processing.
Although these suggestions provide options, they are only a starting point. Over the next year, ASPI intends to increase public discourse and awareness of REEs in Australia. It is only through better policy that Australia and its allies will achieve a secure and resilient supply chain for critical rare earths in the 21st century.