How China is controlling Australia’s – and the world’s – rare earths trade

As the European Union felt the rock-like certainty of US military support crumble beneath its feet last month, speculation spread of a diabolical betrayal: the Americans had installed a kill switch on the F-35 fighter jets sold to foreign countries that would render them useless at the touch of a button.

The fear remains despite an official denial by the Pentagon.

More recently, it was the United States on the back foot as China unveiled its own potential kill switch across some of the most crucial military hardware on which the US – and its allies – rely.

In response to US President Donald Trump’s tariffs, the Chinese government ordered restrictions on the export of a wide range of critical minerals and magnets, which are as essential to military capabilities as they are to the green economy with their use in turbines and electric vehicle batteries.

At the core of China’s moves to implement de facto bans is its domination of the rare earths sector, and it is not hard to see where it will hit.

Asymmetric trade weapon

Let’s start with the contentious F-35 fighter. It requires more than 400 kilograms of rare earths to maintain its status as the world’s top fighter jet.

The Virginia-class nuclear submarines Australia is pursuing from the US under AUKUS at a cost in the hundreds of billions of dollars requires more than four tonnes of rare earths, according to US defence sources.

The US Department of Defence needs rare earths for weapons guidance systems, radar, precision-guided bombs, lasers, satellites and night-vision goggles.

Military drones, which have become an essential weapon of war – as shown in the Ukraine conflict – also rely on powerful rare earth-dependent magnets for their lightweight electric motors.

It means that while rare earths account for a tiny sliver of the $US700 billion ($1.1 trillion) in trade between the two countries, they are potentially the most valuable of China’s asymmetric trade weapons with the ability to heavily impact its rival’s defence capability at little cost.

“China has some real leverage here,” says Joshua Ballard, chief executive of NASDAQ-listed USA Rare Earth.

“Each and every buyer in the US now has to ask permission to import rare earth metals or magnets from China. China can turn those exports off or on at will, and will likely focus on those industries that will cause the most pain to the US, and thereby the Trump administration.”

The White House stepped up its response to China’s de facto ban with a critical minerals probe last week to “evaluate the impact of imports of these materials on America’s security and resilience”, and test its reliance on foreign suppliers.

“President Trump recognises that an overreliance on foreign critical minerals and their derivative products could jeopardise US defence capabilities, infrastructure development, and technological innovation,” said a White House fact sheet.

“Critical minerals, including rare earth elements, are essential for national security and economic resilience.”

This week, the US fast-tracked Rio Tinto and BHP Group’s stalled Resolution Copper mine in Arizona, a potential source of the red metal and other rare minerals that could supply about 25 per cent of America’s annual copper needs.

But the administration has arrived late at the critical mineral party.

Successive US governments have been trying for years to break China’s utter domination of this sector. This includes the US Department of Defence helping to fund plans by ASX-listed Lynas – the only current rival to China’s dominance – to set up a heavy rare earths-processing plant in Texas.

Middle East has oil, China has rare earths

China has spent decades destroying or dismantling all competition and ensuring that for these crucial elements, all roads lead to the middle kingdom.

How? Let’s jump back to 1998. Japan’s Winter Olympics are under way in Nagano, Bill Clinton is about to be impeached over the Monica Lewinsky scandal in the White House, and France has won the FIFA World Cup.

Out of the public spotlight, another event is unfolding that will have far greater geopolitical significance and come back to haunt the White House and the West decades later, marking an important crossroad for China’s future control of rare earths and the products they help create.

In mid-western Indiana, an obscure company with a Sodapop-sounding name, Magnequench, starts closing its facilities, laying off hundreds of workers and shipping its technology and intellectual property to China.

At the time, Magnequench enjoyed a near monopoly in its niche market as the only US producer of permanent magnets – a groundbreaking technology developed by General Motors and Sumitomo Corporation with the backing of the Pentagon that underpins modern high-tech weaponry.

Magnequench’s dismantling in 1998 and the transfer of its technology to China followed the company’s sale by General Motors three years earlier to an investment firm called Sextant Group. What few knew at the time was that Sextant was likely acting as a front company for two state-owned Chinese enterprises with close familial ties to the country’s then newly deceased former supreme leader Deng Xiaoping.

Deng had spent more than a decade cementing his vision to make China the world’s rare earths leader. “The Middle East has oil, China has rare earth,” the supreme leader famously said.

Inside Magnequench’s permanent magnets were key elements mined from the Earth’s crust that gave the magnets a unique ability to maintain their magnetism (permanency) while functioning under high temperatures – the elements were rare earths.

Four rare earths in particular – neodymium, praseodymium, dysprosium and terbium – are considered essential for modern defence and other technologies, while the latter two, known as “heavy” rare earths, are key to making high-performing magnets and are among the most expensive metals on the planet. While not necessarily rare in the Earth’s crust, they are difficult to find in concentration and complex to extract.

The creation of a monopoly

At the start of the 21st century, China overtook the US in the number of patents filed in the sector. It was employing thousands of rare earth and critical mineral scientists in more than 300 dedicated research institutes and 40 universities. It had put its entire industry under state ownership, and established control over much of the global chemical and technological know-how needed to extract, refine and smelt critical minerals and rare earths.

The US and Europe, having effectively withdrawn from the race, were on the sidelines.

Beijing’s determination to carve out a global rare earths monopoly led to it not only controlling their mining, but also dominating methods of extracting, smelting and sintering – bonding elements together with heat and pressure – and many of the downstream technologies and manufacturing industries they underpin, including permanent magnets.

China now produces 90 per cent of the world’s permanent magnets and is the globe’s only source of refined heavy rare earths, along with multiple other strategic elements.

‘China views control over rare earth elements and other critical materials as the new battlefield in a worldwide geopolitical struggle.’

A peer-reviewed analysis compiled by 17 world experts

It maintains its stranglehold with a 13 per cent tax on rare earth exports and regulates prices and the availability of key minerals to crush any competition – crimping or pumping up supply using the four state-owned companies that control its entire industry.

Beijing has a well-earned reputation for punishing detractors and disloyal customers.

“During the 2023 calendar year, Lynas burned through cash just to keep going because the Chinese collapsed the oxide price. We’ve lost count [of] the number of times that’s happened since Lynas started operation in 2010,” says mining industry veteran Chris Bevan, who heads up a private company, Metallicum Minerals Group, that wants to build a rare earth smelting, sintering and magnet-manufacturing facility in Australia.

A peer-reviewed analysis compiled by 17 world experts and submitted to eight US government bodies, including the US Armed Services Committee and Department of Defence, concluded in 2023: “China views control over rare earth elements and other critical materials as the new battlefield in a worldwide geopolitical struggle.

“[Its] motivations are not merely economic in the traditional sense. Rather, these mineral resources are being leveraged as a geopolitical fulcrum for China’s economic advantage and technological domination of downstream technologies and related industries,” the analysis said.

The race for rare earths in Greenland and Australia

Trump doubled down on his suggestion that the US should take over Greenland late last month.

“I think Greenland is going to be something that maybe is in our future,” he said.

A week later, Vice President J.D. Vance turned up in a surprise visit to the autonomous Danish territory, an unwelcome intrusion that set off another wave of hand-wringing across Europe.

Greenland’s strategic importance in the Arctic Circle and its abundance of critical minerals is clearly a prize worthy of presidential attention.

But unlike Australia, the remote territory is gripped by months of freezing winter with much of its mineral wealth unexplored, and its exploitation opposed by many Inuit inhabitants.

When the “heavy metal” penny of China’s dominance finally dropped among Canberra’s politicians in the early 2020s, the Morrison government rushed to build capacity, approving a $1.25 billion loan (later boosted by another $400 million) to ASX-listed Iluka Resources to build Australia’s first integrated rare earths refinery in Western Australia.

Not to be outdone, Lynas turned on production last year at its newly built $800 million mixed rare earth-processing plant in Kalgoorlie from which it ships the carbonate output for further refining in Malaysia.

Soon after Prime Minister Anthony Albanese took power in 2022, he rolled out a long-awaited critical minerals strategy and followed up with a $2 billion expansion in critical minerals financing.

But Bevan says the government’s strategy of funding more critical mineral refining is playing into Beijing’s hands. “It’s all going to end up in Shanghai for distribution among four smelters owned by the Chinese, which turn everything into either metals or magnets,” he says.

“To break this monopoly, you have to produce metals, you have to produce alloys, and you have to produce the high-performance permanent magnets.”

In their analysis, the 17 world experts pull no punches about who should fix the bottleneck.

“It is exclusively on the US and allied governments to create a solution to this problem. The monopoly is maintained to undermine the US and allied governments,” they say. Expecting the private sector to pull a “win” in the face of China’s complete domination is futile.

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