Rare Earth, High Risk: Navigating China's Export Controls and the Race to Diversify Supply Chains

Isaac LaneFriday, May 30, 2025 9:52 pm ET
3min read

China's April 2025 export restrictions on rare earth magnets—critical for electric vehicle (EV) motors, robotics, and defense systems—have thrown global automotive production into turmoil. Toyota's recent suspension of hybrid vehicle manufacturing in Kentucky and India's looming threat of auto plant shutdowns by July 2025 underscore the fragility of supply chains reliant on Chinese dominance. With Beijing controlling 90% of refined rare earth magnet production and 99% of heavy rare earths like dysprosium, the stakes for automakers and investors have never been higher. This article explores the immediate risks, geopolitical implications, and the strategic opportunities arising from the scramble to diversify supply chains.

The Supply Chain Crisis: Automakers at Risk

The crisis is twofold: operational disruption and strategic vulnerability.
- Production Delays: EV manufacturers like Tesla and BYD source magnets from Chinese companies like JL Mag, which now face halted exports. Dysprosium oxide prices have surged to $204/kg in Shanghai, pricing many buyers out of the market. Toyota's Kentucky plant—producing hybrid models—shut down in May due to shortages, and European automakers face extended delivery delays.
- Just-in-Time Collapse: Automakers typically hold only 2–4 weeks of rare earth inventories. India's Society of Indian Automobile Manufacturers (SIAM) warned of production halts by late May, with stocks projected to run out by July. The U.S. auto sector, with EVs now 10% of sales, faces similar risks as its domestic refining capacity remains embryonic.

Geopolitical Risks: China's Rare Earth Leverage

Beijing's export controls are a geopolitical weapon, leveraging its near-monopoly to pressure adversaries. Key points:
- Defense Sector Exposure: U.S. fighter jets (e.g., F-35) and submarines rely on 900–9,200 pounds of REEs per unit. China's December 2024 bans on gallium and germanium for semiconductors previewed this strategy.
- No Quick Fixes: Australia's Browns Range project (dysprosium) and Lynas' Texas refinery—critical U.S. partners—are years from scale. China's 90% refining dominance ensures its chokehold persists.

Investment Opportunities: Diversifying the Supply Chain

The crisis creates three clear investment themes: substitutes, recycling, and non-Chinese mining.

1. Rare Earth Substitutes

Invest in companies developing magnet alternatives to reduce reliance on China's heavy REEs:
- Cerium-Based Magnets: Hitachi Metals has pioneered cerium-based alloys, replacing dysprosium. This cuts costs and bypasses export restrictions.
- Neodymium Alternatives: Companies like Albemarle (ALB) are advancing lighter magnets for lower-performance applications.

2. Recycling and Urban Mining

Recycling rare earths from EV batteries and scrap is a near-term solution:
- U.S. Defense Recycling: The DoD's $439M investment in Rare Earth Salts (a startup recycling oxides from old magnets) targets 5,000 tons/year by 2027.
- Global Players: Umicore (Belgium) and Lion Battery (U.S.) offer scalable recycling tech.

3. Non-Chinese Mining and Refining

Invest in firms advancing supply chain independence:
- MP Materials (MP): The U.S.'s only rare earth miner, with a $35M DoD grant to build a heavy REE separation plant. Its Mountain Pass mine targets 1,000 tons/year of NdFeB magnets by 2025.
- Lynas Corporation (LYC): Australia's Lynas USA aims to refine 20,000 tons/year of light REEs by 2026. Its Texas facility is a cornerstone of U.S. strategic autonomy.
- Deep-Sea Mining: Firms like The Metals Company (TSX: TMC) are exploring polymetallic nodules rich in cobalt, nickel, and rare earths.

Risk vs. Reward: Short-Term Volatility, Long-Term Payoff

  • Near-Term Risks: EV stock prices (e.g., Tesla (TSLA)) could face pressure from delayed production. Automakers with no alternative sourcing plans (e.g., General Motors (GM)) are most vulnerable.
  • Long-Term Upside: Firms leading in substitutes, recycling, or mining will dominate post-2027. The DoD's goal of 100% domestic REE sourcing by 2027 guarantees subsidies and contracts.

Investment Strategy

Position for this structural shift:
- Substitutes: Buy Hitachi Metals (Japan) or ALB (cerium).
- Recycling: Allocate to Umicore or Lion Battery.
- Mining: Go all-in on MP and LYC. Diversify with TMC for deep-sea potential.

Conclusion: Act Now or Pay Later

The rare earth crisis is not temporary—it's a geopolitical reset. Automakers and investors who fail to secure non-Chinese supply chains risk obsolescence. The upside for those who act swiftly is massive: $400B in annual rare earth magnet demand by 2030, with 70% growth in recycling markets. The window to position for this shift is narrowing. Act now to capitalize on the next era of supply chain resilience.