The United States’ over-reliance on China for supplies of rare earth materials is no secret. But realization of the problem isn’t necessarily translating into meaningful progress toward solving the problem.
The need for the U.S. to wean itself off dependence on China for rare earth materials, which are essential components of a wide range of high-tech products, from defense weaponry to cars and consumer electronics, has been understood for at least a couple of decades. And efforts in that direction are underway — federal backing and private investment are currently driving development of domestic rare-earth production capabilities, especially at the Mountain Pass mine in San Bernardino County, California, operated by MP Materials.
In fact, Mountain Pass holds the world’s largest deposit of carbonatite, an igneous rock that’s a major source of several rare earth elements, as well as the lightweight metal niobium, and phosphate.
In all, the U.S. accounts for about 12% of global rare earths mining, according to Moody’s Ratings. But mining is just one stage in the complex rare earth supply chain, which also includes processing, metals and alloys production, and magnet manufacturing. The U.S. has just 1% of worldwide refining capacity, reports Moody’s. China, meanwhile, accounts for fully 91% of global refining activity, while producing more than 70% of the world’s supply of rare earth metals.
The ramifications for U.S. industry are immense. Moody’s cites defense and aerospace as the sectors facing the highest credit risk over the next two to three years, because of “irreplaceable heavy rare earths and opaque supplier dependencies.” In addition, uncertainties over rare earth supplies threaten automakers’ ability to scale production of electric vehicles.
Claire Li, vice president of credit strategy with Moody’s, notes that while rare earths typically represent a “modest” share of total production cost, any interruption in supply can bring operations to a halt. Such disruptions stand to reduce U.S. gross domestic product by billions of dollars, Moody’s says, citing modeling by the U.S. Geological Survey.
“These risks remain difficult to access,” Moody’s says, “because disclosure of rare earth exposure from manufacturers and their supply chains is limited.”
The U.S. once held a commanding share of global rare earth production, but environmental concerns, regulatory scrutiny and skyrocketing costs forced closure of the Mountain Pass mine in the 1990s, handing China an opening in the race to dominate the market. MP Materials acquired the Mountain Pass site in 2017, reopening the mine and ramping up production of rare earth oxides, but it has a long way to go before regaining the market position enjoyed by the U.S. in the 1950s. (In fact, MP Materials sought Chinese investor backing to help it get Mountain Pass up and running again.)
Other efforts to ramp up domestic rare earth activity in the U.S. include a magnet-production facility in Fort Worth, Texas, also operated by MP Materials; Round Top Mountain in West Texas, run by USA Rare Earth; and the White Mesa Mill in Utah, under construction by uranium producer Energy Fuels. Even taken together, however, those operations don’t add up to production capacity that would seriously rival that of China in the near future.
Moody’s seeks to measure the credit risk that various industrial sectors face from a lack of guaranteed access to rare earth materials. Li says the firm applies “three Rs”: reliance, replaceability and response capacity. That’s why defense and aerospace are seen to be especially vulnerable, although the former has the advantage of access to inventories maintained by the U.S. Department of Defense to keep production moving. Still, the ultimate determination of risk to any supply chain becomes harder to calculate as analysts delve into second- and third-tier suppliers, “who are not that transparent.”
Last year, China announced licensing restrictions on certain heavy rare earths, but agreed to delay a second wave of tighter controls until November of this year. Even if it agrees to remove or relax the ban, however, China retains the power to cut off rare earth supplies at any time. Li calls that state of affairs “a wakeup call” for companies to diversify their high-tech supply chains, whether that means bolstering U.S. production or turning to other countries with mining and refining capabilities.
Li says insurers today view the question of rare earths supply “as part of overarching supply chain resilience,” an issue that has been “top of their mind since COVID.”