State subsidies, flouting environmental norms: How China cornered the rare earth market

The autonomous region of Inner Mongolia is a vast territory, shaped like a great crescent, that stretches for 2,400 kilometres across northern China. While the area has traditionally been renowned for livestock, today the region embodies the stranglehold that China has over the supply of rare earth elements, as it is home to one of the world’s largest reserves of rare earth elements, accounting for some two-thirds of known reserves at Bayan Obo in Inner Mongolia.

“China is a resource-rich country, to begin with,” says Amit Kumar, a staff research analyst of China Studies at the Takshila Institution, an independent centre for research and education in public policy. China holds approximately 36–38% of the world’s known rare earth reserves, particularly rich in light rare earth elements such as cerium, lanthanum, and neodymium. The production of rare earth elements primarily consists of two components: mining of the rare earth elements and processing of the mined elements, as they contain impurities. “You also need to process it into the required or requisite materials, which are used for magnets,” adds Kumar.

Recognising the value early on—as far back as the 1980s—China began systematically investing in rare earth mining and refining capacity. “China has gone outside and acquired mining rights, etc., through various means. Winning tenders, even if other players come, they can offer a better price or not ask for royalties. Why they can do this is because they have a great state support mechanism,” explains Kumar. Rare earth miners in China receive massive subsidies and support from their respective Chinese financial institutions. Apart from state subsidies, Chinese firms also received land grants and tax breaks. 

Foreign competitors could not match China’s artificially low prices. The state-supported development spans the entire rare earth element supply chain—from mining to refining to high-tech manufacturing (e.g., magnets, batteries, defence technology). “The Chinese companies which have acquired mining rights outside China also send the mined elements back to China. The companies that process the rare earth elements in China also buy them from other mining companies. That is one of the biggest reasons behind China’s dominance,” says Kumar. 

In the 1990s and 2000s, Chinese overproduction led to a decline in the prices of rare earth elements. Western mining companies, such as Molycorp in the U.S., could not sustain operations and shut down. This undermining of global players has culminated in China currently mining nearly 70% of all rare earth elements and processing about 90% of all rare earth elements. It has created a powerful feedback loop where the control of supplying rare earth elements also fuels dominance in green tech, defence, and electronics. Many countries, including the U.S. and India, became accustomed to heavily relying on China for the supply of rare earth elements. 

Another factor that has contributed to China’s success has been its willingness to flout environmental norms that countries in the West follow stringently. Rare earth mining and refining are environmentally destructive, generating toxic waste and radioactive materials (especially heavy elements like dysprosium). China accepted the environmental cost that other countries avoided due to stricter regulations. This helped undercut international producers on cost. Illegal mining and lax enforcement made the actual human and ecological costs invisible in official figures.

“China doesn’t comply with environmental considerations or laws. The laws are lax in China. The process of both mining and processing is very polluting, and is energy-intensive as well. In the West, mining and processing companies must comply with strict environmental laws,” says Kumar. There are stringent compliance requirements, and companies are liable for carefully and safely disposing of all pollutants generated during the process, which increases costs. This is not the case with China.

One way China undercuts its Western counterparts is by using coal to power the machinery in mining and processing. “China today consumes more coal than the rest of the world combined. It is coal power that is powering the processing industries. It is cheap, but it is also polluting. None of the Western players or competitors of China have the same advantage. That plays a role because it brings down the cost for cross-industry. These are some of the advantages that China has,” avers Kumar.

It is because of these factors that China has been able to deflate the prices of rare earth elements, and has been able to force the competitors out of the market over the years. “The government thinks that control over the supply of rare earth elements is an insurance against the Western world, which they can use as a tool of coercion. So they want to maintain this advantage that they have created over the last two, two-and-a-half decades,” adds Kumar.

Initially, a retaliatory move against U.S. President Donald Trump’s tariff impositions, India found itself caught in the crosshairs of China, which was heavily restricting the export of rare earth elements. The automotive industry is on tenterhooks, as no consignment of rare earth elements from China has come since April, and with inventories depleting, production cuts look imminent. “The limited availability of rare earth magnets remains a concern, underscoring the need for a national strategy on critical materials to secure the future of EV and mobility manufacturing in India,” said Shradha Suri Marwah, president of the industry body Automotive Component Manufacturers Association (ACMA), last week.

According to Kumar, while companies previously seeking the supply of rare earth elements from China have received approval, Indian companies will inevitably receive approval as well, but it will be delayed. “There will still be frictions. It will not be smooth sailing when it comes to India.” The stranglehold of China has become a source of vulnerability for governments worldwide. “Everybody has realised that China’s dominance in this sector has become a problem for them, and something needs to be done to address this problem,” he adds.

At this point, Kumar posits that the best alternative for India to build a resilient supply chain is to partner with like-minded nations, including European nations, Australia, the U.S., and Japan. “Japan was the first country targeted by China on rare earth elements in 2010, and since then, they have reduced its dependence on China. Australia is a resource-rich country, whereas the U.S. is the second-largest producer of rare earth elements, but most of it is exported to China for processing. So, clearly there is a coalition of like-minded countries that India can work with,” he says.

Last week, the U.S. Department of Defence became the largest shareholder of rare earth elements miner MP Materials, after agreeing to buy $400 million of its preferred stock. It used to send the mined elements to China for processing; however, the U.S. government is now prepared to invest, announcing a minimum floor price to compete with the state support and backing that China has, which enables them to sell their products at a lower cost. “I think that’s the way to go ahead, and this will be the beginning of breaking China’s dominance in the sector, but it will take some time, about a decade or so.”