The Rare Earth Equation: China’s Leverage, Geopolitics and the Investment Frontier
Authors: Justin Kew, Martin Sacchi
Rare earth elements have moved from the margins of materials science into the centre of geopolitics. They underpin the technologies driving the energy transition, defence modernisation and the next wave of industrial policy. The shock from China’s latest tightening of export controls shows how strategic and fragile this domain has become.
China has built an unparalleled position. It currently produces around 70% of the world’s rare earths and controls nearly 90% of the downstream processing, refining and magnet-making capacity. This dominance is the result of decades of industrial policy, heavy subsidisation and an acceptance of the environmental burden that other nations avoided. While the US, Australia and parts of Africa host sizeable deposits, few possess the midstream chemical and metallurgical infrastructure required to turn ore into functional magnet materials.
In 2025, Beijing reinforced its grip through new export controls. April’s restrictions covered seven key elements including samarium, dysprosium and scandium, while October’s expansion added five more, now enveloping nearly all magnet-critical materials used in wind turbines, electric vehicles and defence electronics. The controls extend to exports of processing technology and, crucially, to any product made abroad that contains Chinese rare earth inputs. It was a subtle but significant escalation: a move from simple resource control to regulatory extraterritoriality.
Washington viewed the measures as aggression. Beijing described them as sovereign self-defence in response to extended US semiconductor and chip-tool restrictions. Either way, the result has been a new phase in economic statecraft, one in which rare earths function as both deterrent and bargaining chip.
For China, the calculus is clear. By asserting control at the chokepoint of the supply chain, it signals that pressure on its high-tech ambitions will be met by pain in the West’s industrial base. For the United States and its allies, the lesson is equally clear: dependence on China for strategic inputs is no longer tenable. The G7 has agreed to coordinate export-control policy and accelerate diversification, while the EU has advanced its Critical Raw Materials Act to build domestic refining and recycling capacity. But industrial self-reliance in this field will take years. In the meantime, Beijing’s asymmetric leverage endures.
Europe is already feeling the strain. After China’s April measures, several magnet-dependent manufacturers reported delays and temporary shutdowns as export licences slowed shipments. Magnet exports to the US fell sharply even as overall Chinese shipments rose, reflecting the selective friction introduced by licensing. Auto and turbine producers with thin inventories discovered how few alternative suppliers exist.
For investors, this tension brings risk but also rare opportunity. The global decarbonisation and defence build-out cannot proceed without stable access to neodymium, praseodymium, dysprosium and terbium. Supply-chain localisation is becoming both an industrial policy objective and an investment thesis. Projects developing deposits in Australia, Canada, Brazil and Africa now benefit from political support and capital incentives. Yet the real bottleneck lies not in mining but in processing and separation. Facilities capable of refining mixed concentrates into high-purity oxides are scarce, costly and technically complex. Governments are beginning to offer subsidies, loan guarantees and offtake agreements to bridge that gap, as illustrated by the US Department of Defense’s investment in MP Materials’ Mountain Pass facility.
Another opportunity lies in magnet manufacturing. Demand for high-performance permanent magnets is rising rapidly in EV motors, wind turbines, robotics and weapon systems. Western manufacturers are racing to develop higher-temperature, lower-rare-earth alloys and to establish integrated “mine-to-magnet” models. The frontier also includes recycling and “urban mining”: recovering rare earths from discarded electronics and motors, a process far less resource-intensive than primary mining and one that aligns with ESG imperatives.
Investors must, however, recognise the inherent risks. Environmental permitting, cost inflation, and technological uncertainty remain formidable barriers. Processing chemistry is notoriously complex, and without scale and integration, Western operators struggle to match China’s cost base. These are long-cycle investments requiring patient capital and often state partnership. Yet the strategic premium attached to self-sufficiency, particularly in defence and clean energy, suggests political commitment will persist across administrations.
The geopolitical landscape will continue to evolve. China’s export regime demonstrates that it is willing to use supply-chain power as leverage but also that it prefers control to outright disruption. Western governments, for their part, must balance the need for resilience against the inflationary effects of decoupling. The likeliest medium-term scenario is a managed competition: a gradual diversification of supply, punctuated by periodic shocks whenever trade relations deteriorate.
In this environment, rare earths sit at the intersection of industrial policy, geopolitics and capital allocation. Their scarcity is not geological but geopolitical. The states and investors that build credible non-Chinese supply chains, whether through mining, refining, recycling or substitution, will shape the industrial architecture of the energy transition and the defence economy alike.
Until then, the rare earth equation remains one of mutual vulnerability. China cannot easily weaponise exports without damaging its own credibility as a trading partner, while the West cannot sustain its industrial ambitions without Chinese inputs. Between these constraints lies a volatile equilibrium, one that will continue to define the next decade of strategic competition.
Sources:
Reuters (Oct 2025) China tightens rare earth export controls;
Al Jazeera (Oct 2025) China expands rare earth restrictions;
Financial Times (Sept 2025) Europe is the biggest loser in US-China rare earth wars;
South China Morning Post (Aug 2025) China’s rare earth magnet exports to US decline amid trade uncertainty;
Wood Mackenzie (2025) Impact of China’s new critical-mineral export controls;
RFF (2025) The strategic game of rare earths;
Atlantic Council (2025) Mapping China’s strategy for rare-earths dominance;
CSIS (2025) Consequences of China’s new rare-earths export restrictions;
Techcet (2025) China’s dominance in rare-earth supply chains;
Reuters (Oct 2025) G7 agrees to keep united front on China export controls.