The Pentagon's $700M Rare Earth Bet: Strategic National Security Move or Market Misstep?

The U.S. Department of Defense's $700 million investment in rare earth elements (REEs) represents a high-stakes gamble to secure critical supply chains for national security. By partnering with MP Materials and Saudi Arabian mining giant Maaden to develop a rare earth refinery in Saudi Arabia, the Pentagon aims to reduce U.S. reliance on China, which dominates over 80% of global rare earth refining capacity and 90% of magnet production according to reports. While this move is framed as a necessary step to counter Chinese geopolitical leverage, it raises pressing questions about financial sustainability, market competitiveness, and the risks of creating a de facto monopoly.

Geopolitical Risks: A Fragile Alliance and a Vengeful Rival

The U.S.-Saudi collaboration underscores the Trump administration's pivot to strengthen ties with the Kingdom, exemplified by the sale of 48 F-35 stealth fighter jets and 300 Abrams tanks. This partnership, however, is fraught with tension. Israel has warned that the F-35s could erode its qualitative military edge in the region, a legal obligation for the U.S. to uphold. Meanwhile, Saudi Arabia's deepening economic ties with China-despite its U.S. arms deals-pose a dual risk: Beijing could exploit access to advanced U.S. technology through Saudi intermediaries, while Riyadh's strategic autonomy might shift under Chinese economic pressure according to analysis.

China's response to the Pentagon's rare earth initiatives has been equally calculated. In 2025, Beijing reportedly introduced a "validated end-user" (VEU) system for rare earth export licenses, complicating U.S. defense contractors' access to materials critical for F-35s and communications equipment. While a temporary truce in export controls was reached during the Trump-Xi summit, China's 90% dominance in refining ensures its long-term leverage according to industry analysis. Analysts warn that the U.S. is merely replacing one vulnerability-Chinese supply chain control-with another: over-reliance on a single domestic producer, MP Materials, which now benefits from Pentagon-backed price floors and guaranteed purchases according to research.

Financial Risks: Price Floors, Predatory Pricing, and Political Whiplash

The Pentagon's financial strategy hinges on guaranteed purchase contracts and price floors, such as the $110 per kilogram floor for neodymium-praseodymium oxide in the MP Materials partnership-far above the current market price of $72 according to financial analysis. While this ensures short-term stability for U.S. producers, it creates long-term fiscal exposure. If market prices rebound, the Pentagon could face billions in overpayments. Worse, Chinese state-backed enterprises, which can sustain below-cost operations, may retaliate with predatory pricing or expand capacity to undercut U.S. projects according to market analysis.

The risk of a "national champion" is equally concerning. By granting MP Materials exclusive Pentagon-backed contracts, the U.S. risks stifling competition in a market that requires diversification to mitigate supply shocks. As one expert notes, "The Pentagon's equity stake in MP Materials could inadvertently create a monopoly, leaving the U.S. vulnerable to its own supplier's pricing power or operational failures" according to a research report. This dynamic is compounded by political uncertainty: a shift in administration could abruptly halt funding, leaving projects like the Saudi refinery in limbo according to financial analysis.

Strategic Necessity vs. Market Realities

Despite these risks, the Pentagon's investment is arguably a necessary evil. Rare earth elements are indispensable for military hardware, electric vehicles, and clean energy systems. China's ability to weaponize its supply chain dominance-evidenced by past export restrictions-demands a diversified global supply base according to industry analysis. The U.S. is not alone in this effort; allies like Australia, Japan, and South Korea are also investing in processing capabilities according to defense officials.

However, success will require more than government subsidies. Developing alternative supply chains demands time, capital, and innovation. For instance, research into rare earth alternatives or recycling technologies could reduce dependency on primary mining. Yet, these solutions remain nascent. In the interim, the Pentagon's gamble on MP Materials and Saudi Arabia must be balanced with investments in multiple producers and international partnerships to avoid repeating past mistakes.

Conclusion

The Pentagon's rare earth bet is a strategic imperative in an era of U.S.-China rivalry. Yet, its financial and geopolitical risks cannot be ignored. While the immediate goal of securing supply chains is laudable, the long-term viability of this approach depends on avoiding over-reliance on a single entity or country. As the U.S. races to build a resilient rare earth ecosystem, it must tread carefully: the line between national security and market misstep is perilously thin.