Report: China’s Market Dominance for Rare-Earth Elements

April 27, 2022

By: Michael Eddi, Taiwo Ogunbayo, and Margaret D’Annunzio

Concerns over the west’s economic reliance on China are at an all-time high and cover a staggering breadth of industries. But few exports are more critical than China rare-earth elements (REEs) — or raise more urgent questions regarding China and supply chain concentration risk.  The REEs are a set of seventeen metallic elements. These include the fifteen lanthanides on the periodic table plus scandium and yttrium. Rare-earth elements are essential in the creation of virtually all advanced technology ranging from weapons systems critical to national defense to electric vehicles and devices imperative to a society’s modernization and advancement. 

China holds an 84% market share of REEs, creating a highly concentrated marketplace at risk of monopolization. This concentration creates potential crises for the companies who rely on these elements as sanctions and geopolitical conflicts, among other disruptions, could make acquiring REEs incredibly difficult.

According to the France-based International Energy Agency (IEA), China today extracts 60% of all rare-earth elements that are consumed by the global market. The country also refines 87% of the world’s REE supply, so many of the materials mined outside of China’s borders must be sent there for processing.

Analysis of 21 Chinese REE companies on Interos’ global relationship mapping platform reveals the extensive connection between China and supply chain concentration risk: 

  • More than 100 U.S. companies buy directly from these Chinese REE suppliers at tier-1, 3,500 indirectly at tier-2, and more than 102,000 buy indirectly at tier-3. 
  • Nine European firms (European Union plus UK) buy directly from these Chinese REE suppliers at tier-1, and 1,600 buy indirectly at tier-2, while over 56,000 buy indirectly at tier-3. 
  • Electronic equipment and components, machinery, software, and metals and mining are the main industry segments represented in trading relationships surrounding China rare-earth elements.  

The limited growth of western refinement capabilities is largely due to the potential impact on conservational efforts, as mining and refining operations come at the expense of environmental degradation. Despite this, avenues are being explored by North American firms to increase refinement capacity and ability with the goal of further reducing overall dependence on China.  

The Potential Impact of Sanctions on China Rare-Earth Elements

The Interos report includes a scenario matrix that represents seven distinct hypothetical situations with varying degrees of probability examined through the overarching scope of probability and impact. 

By understanding these potential scenarios, customers can use the Interos cloud-based artificial intelligence-powered supply chain risk management solution to game out how these scenarios could impact your business. 

Let’s look at each one in more detail.

Sanction and Tariff Scenarios: Navigating China and Supply Chain Concentration Risk

Scenario 1: Sanctions are placed on Chinese state-owned mines and mining operations 

Scenario Likelihood: Low

Projected Impact to Metals Supply Chain: High

Under this scenario, the American Office of Foreign Assets Controls (OFAC) would sanction Chinese state-owned mines, hence restricting American entities from purchasing or doing business with such mines. With over a dozen Chinese-owned mining companies in China, one-third are state-owned. On December 23 of last year, China approved the merger of three of its largest state-owned mines (MinMetals, the Aluminum Corp of China, and Ganzhou Rare Earth Group). 

This effort helps Beijing consolidate its position over the mining sector by allowing the government to have control over the entire supply chain of China rare-earth elements. This move led to the creation of a single state-owned company with a 70% share of the domestic production quota, which is vital to the creation of high-tech products. Due to the ongoing geopolitical tension between the U.S. and Chinese government, the merger will give the Chinese government the leverage it needs while negotiating with the U.S. Most importantly, it will advance China’s goal of total dominance, pricing power, and influence in rare-earth production. For the U.S. to levy such a sanction, it would need to increase its rare-earth output to mitigate China’s supply chain concentration risk.  

Scenario 2: A targeted sanction placed on C-suite leadership of Chinese mining companies 

Scenario Likelihood: High

Projected Impact to Metals Supply Chain: Low

Under this scenario, the U.S could take a similar approach as it did when it sanctioned Rusal. Using the template from the Rusal sanction, OFAC would designate specific Chinese mine owners, along with the mines they control or own. Concurrent with this designation, OFAC would issue general licenses to minimize immediate disruptions to U.S. persons, partners, and allies. Since the sanction targets a single entity rather than all the mining companies, U.S. entities can go to other Chinese rare-earth element suppliers. The license provided by OFAC would allow them to continue business with the sanctioned companies. In the sanctions levied against Rusal and its leadership, the State Department removed the entity sanction when its biggest shareholder Oleg Deripaska reduced his stake in the company. 

Scenario 3: A sanction is placed on Chinese minerals/metals from the Xinjiang region 

Scenario Likelihood: High

Projected Impact to Metals Supply Chain: Medium

With the U.S.’ latest efforts to curb the harsh treatment of Uyghur Muslims, bills and sanctions have been implemented to ban imports from China’s Xinjiang region. In 2021, President Joe Biden signed The Uyghur Forced Labor Prevention Act, which prohibited imports from Xinjiang and imposed sanctions on individuals responsible for forced labor in the area. Under this scenario, OFAC would require U.S. companies to exit supply chains or ventures that connect them to the Xinjiang region. Mining companies would be required to ask their suppliers to provide an affidavit to determine the product’s origin. In this scenario, the likelihood of this sanction being implemented would be high, but it would also affect American businesses’ supply chains and lead to higher prices in consumer products. 

Scenario 4: Sanction metal producers and mining companies and designate them to the NS-CMIC 

Scenario Likelihood: Low

Projected Impact to Metals Supply Chain: Low

Under this scenario, the U.S. government would prohibit American investments by “U.S. persons from purchasing or selling publicly traded securities of any persons designated or determined to meet certain criteria, including having operations in defense and related materials sector or the surveillance sector of the Chinese economy or being affiliated with such entities.” Designating a company as Non-SDN Chinese Military – Industry Complex Companies List (NS-CMIC list) prohibits U.S. investments in Chinese companies that undermine the security or democratic values of the U.S. and its allies. Presently, none of the Chinese mining companies have ties to the military complex making the likelihood of such a sanction being implemented low, and its effect on the supply chain rated insignificant.  

Scenario 5: Quota on any U.S. persons or entity importing over 50% in rare-earth minerals and metals from China.

Scenario Likelihood: Low

Projected Impact to Metals Supply Chain: High 

Under this scenario, the U.S. would place a quota on U.S persons or entities importing over 50% of their overall rare-earth metals imports. Any Chinese metal and minerals imported over the 50% threshold would be required to pay a 10% tariff. The President would then exercise his authority under Section 232 of the Trade Expansion Act of 1962. Section 232 of the Trade Expansion Act of 1962 “allows any department, agency head or ‘interested party’ to request that commerce investigate to ascertain the effect of specific imports on U.S. national security”. President Trump utilized this approach when he imposed a 10% tariff on aluminum imports with exemptions for Canada and Mexico to protect national security. Implementing a similar strategy on China rare-earth elements would be detrimental to American entities and consumers. It would increase the price of imported goods, create inefficiencies, and trigger retaliation from China. The probability of this sanction being implemented is low as it would have a high impact on the supply chain.

Scenario 6: Sanctioning of Chinese mining companies operating in Afghanistan/Africa 

Scenario Likelihood: High

Projected Impact to Metals Supply Chain: Low

With the U.S. exit from Afghanistan and the Taliban takeover of the country, China is working on filling the void by offering economic investment in the country’s mining sector. Though politically and economically unstable, Afghanistan holds copper, cobalt, iron, sulfur, lead, silver, zinc, niobium, and 1.4 million metric tons of rare-earth metals, which the Taliban will seek to exploit. As of March of 2022, mining company Metallurgical Corp of China has discussed plans to open an office in Afghanistan’s capital city Kabul in early spring to begin mining copper and lithium. Currently, the U.S. maintains sanctions on the Taliban as an entity with the power to veto any moves by China and Russia to ease United Nations Security Council restrictions on the military group[i]. Additionally, the U.S. has frozen nearly $9.5 billion in Afghanistan’s reserves and the International Monetary Fund has restricted Afghanistan access to its resources. Using this approach, OFAC can possibly sanction Chinese mining companies in Afghanistan and certain African countries and prohibit American entities from purchasing rare-earth metal from mining companies located in the targeted regions. Due to the U.S. having other options to buy its metals and minerals, possible sanctions here would not invoke issues with Chinese supply chain concentration risk. As such, the probability of such a sanction being implemented is high, with a low chance of impacting the supply chain. 

Scenario 7: Sanctioning of American individuals or entities from doing business with Chinese mining companies acquiring minerals and metals from Taliban/Afghanistan 

Scenario Likelihood: High

Projected Impact to Metals Supply Chain: Low

Under this scenario, OFAC would sanction American individuals or entities doing business with Chinese mining companies acquiring minerals and metals from Afghanistan or the Taliban. Currently, the Taliban has been designated as a Specially Designated Global Terrorist (SDGT) under Executive Order 13224. This order prohibits transactions with persons who commit, threaten to commit, or support terrorism. It also prohibits U.S. individuals and entities from making any contribution of funds to or for the benefit of entities or persons named on the OFAC-controlled master list of Specially Designated Nationals & Blocked Persons. 

Using the guidelines provided in this order, the U.S. would sanction persons and entities doing business with Chinese firms acquiring rare-earth elements from the Taliban. This sanction’s probability is high with a low impact on the supply chain. It would be easy for U.S entities to require a supplier to provide a country of origin for its minerals. This approach would also encourage more transparency in the supply chain and ensure compliance with the Executive Order. 

Download the full report

Contact Interos to Learn More

The last two years have shown the importance of supply chain visibility. Our supply chains find themselves under constant threat from disruption, with China rare-earth elements at the center. Concentration risk serves as one of the most difficult risk factors to plan for as certain parts of the world dominate particular industries, like China’s control over REEs.  

By understanding your supply chain and these inherent risks you can make proactive plans to line up secondary suppliers or contingency plans in the face of changes. 

Contact Interos to learn more about how we can provide enhanced visibility into your supply chain to better identify these risks.

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