China’s Rare Earths Gamble: Why Market Power May Not Last

China has dominated the global rare earths market for over a decade. These minerals — vital for everything from clean energy technologies to smartphones and advanced military systems — have given Beijing a powerful tool of influence. As the source of more than 60% of the world's production, China's control of supply and prices has been dubbed a form of economic weaponry. But as history has proven, market dominance can be fleeting, especially in those markets for which substitutes exist.

Rare Earths: Not So Rare After All

The "rare earths" is a misleading name. Refining and processing can be complex, but the minerals themselves are scattered across the globe. China's dominance is due more to decades of investment in low-cost extraction and refining than to geology. That gave Beijing a quasi-monopoly position and allowed it to weaponise supply when it pleased — most dramatically in 2010, when it cut off exports to Japan during a diplomatic row.

This move, however, did not have the intended effects, it simply spurred Capital to look for rare earths elsewhere, opening up other sources. Markets, when under pressure, tend to adapt.

A Diversifying Supply Chain

New refineries and mines are coming on stream worldwide. The United States has restarted production in California; Australia is expanding operations; and Canada, Brazil, and several African countries are investing heavily in mining projects. What was once a highly concentrated market is slowly becoming more decentralized.

This shift is significant because demand for rare earths can only grow. The world's push for clean energy alone might quadruple demand for such minerals by 2040, according to the International Energy Agency. Electric vehicles, solar panels and wind turbines also require rare earths, and so demand is set to be strong going foreards.

Beijing's Risk of Overplaying Its Hand

China may believe that it will continue to have buyers in its thrall by constricting exports, but the opposite is likelier. With each threat to supply by Beijing, the incentive for governments and businesses to invest elsewhere becomes more compelling. The European Union, Japan, and America are already treating rare earths as a matter of national security, building stockpiles and offering subsidies to domestic producers.

It is a lesson rediscovered in energy markets: Russia's move to utilize gas as leverage spectacularly backfired when Europe diversified at record speed. If China overplays the rare earths hand, it also stands to lose its market power.

Final thoughts: Markets Will Market

Last, world markets are dynamic. As one participant attempts to weaponise supply, others respond by redirecting capital and diversifying risk. The world has already seen this dynamic play out with oil, gas, and food. Rare earths are no different. For all the short-term damage China can inflict, its long-term leverage may decline as purchasers prioritise stability of supply over all else.

If Beijing continues to utilize rare earths as a weapon, it may simply see the world move on — and, in doing so, dilute China's control over one of the most significant industries of the 21st century.

Sources:

The Economist – Editorial, "The trade lesson China needs to learn"

International Energy Agency – The Role of Critical Minerals in Clean Energy Transitions