November 5, 2021 | Policy Brief

China Consolidates Rare Earth Supply Chain

November 5, 2021 | Policy Brief

China Consolidates Rare Earth Supply Chain

Peng Huagang, secretary general of China’ State-owned Assets Supervision and Administration Commission, confirmed last month that the Chinese Communist Party (CCP) will “promote the restructuring of rare earths to create a world-class company.” While it remains unclear what this “restructuring” entails, Peng’s declaration indicates the CCP will not stand by as the United States and its allies seek to diminish their reliance on China for rare earth elements.

Peng’s remarks come on the heels of China Minmetals Corporation’s September Shenzhen Stock Exchange filing, which announced a planned restructuring with China Aluminum Company (Chinalco) and the People’s Government of Ganzhou, a municipality in southeastern China. A merger would create China’s “second-largest rare earth producer by capacity,” according to Reuters, behind China Northern Rare Earth Group. The latter is the world’s largest supplier of rare earths.

China Minmetals, Chinalco, and China Northern Rare Earth Group are three of the “Big Six” corporations formed during a consolidation of the industry three years ago. Peng’s comments may confirm reports that China now plans to consolidate the Big Six into two mega-producers — one in the north, responsible for light rare earths, and one in the south, responsible for heavy rare earths.

This prospective consolidation comes amid increasing concern in Washington about U.S. dependence on Chinese rare earths. In response, a February executive order issued by President Joe Biden identified critical minerals as one of four key areas in need of a complete review and better policy options to reduce risks to the supply chain. That review recommended numerous steps “to increase the resilience of strategic and critical material supply chains” by expanding domestic production and processing capacity and by working “with allies and partners to ensure a secure global supply.”

The White House’s fact sheet summarizing the review highlighted a $30 million Defense Department technology investment agreement with Australia’s Lynas Rare Earth Ltd — which the Pentagon noted is the “largest rare earth element mining and processing company outside of China” — to establish a light rare earth processing facility in Texas.

This and other investments and grants are important but pale in comparison to the scale of the efforts necessary to shift away from Chinese rare earth supplies. Between 2016 and 2019, the United States imported 80 percent of its rare earth compounds and metals from China, according to U.S. Geological Survey data.

While U.S. rare earth mineral deposits are abundant and China holds approximately 37 percent of global rare earth reserves, Chinese companies have a near monopoly on processing, which turns the raw minerals into magnets and other products essential for weapons systems, electric vehicles, telecommunications equipment, and many other goods. For this reason, China’s state-owned Global Times, citing Chinese experts, has dismissed previous U.S. efforts to expand domestic and allied production and processing as “wishful thinking.”

To meet the challenge, the U.S. government — using economic incentives such as tax credits and guaranteed purchase contracts — should encourage the private sector to increase production. In so doing, Washington can offset the costs to U.S. firms of mining and processing rare earth elements in a more environmentally sustainable way than that used by Chinese companies.

Additionally, the State Department should implement a diplomatic strategy for rare earth supply chains that encourages allies and partners to simultaneously increase production and restrict Chinese investment in their domestic rare earth industry.

Finally, pursuant to section 1260H of the National Defense Authorization Act for Fiscal Year 2021, the Department of Defense should list the Big Six corporations and other companies in China’s critical mineral ecosystem as “Chinese military companies,” since they are “military-civil fusion contributor[s] to the Chinese defense industrial base.” This listing and a parallel Treasury Department designation would ban U.S. persons from trading in the public securities of these companies.

The CCP is strategically focused on rare earths, but America’s innovative private sector and robust alliance network can be important assets in countering China’s domination of the industry.

Annie Fixler is a research fellow at the Foundation for Defense of Democracies (FDD) and deputy director of FDD’s Center on Cyber and Technology Innovation (CCTI), where she also contributes to FDD’s China Program. Louis Gilbertson is a CCTI intern. For more analysis from the authors, CCTI, and the China Program, please subscribe HERE. Follow Annie on Twitter @afixler. Follow FDD on Twitter @FDD and @FDD_CCTI. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.


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