Strategic Shifts in Rare Earth Supply Chains: Southeast Asia's Role in Diversifying Away from China

The Geopolitical Imperative of Rare Earth Elements

Rare earth elements (REEs) are the invisible backbone of modern technology, critical to electric vehicles, wind turbines, and defense systems. Yet, China's near-monopoly on processing-controlling 90% of global refining capacity, according to a Discovery Alert report-has sparked urgent efforts to diversify supply chains. Southeast Asia, with its vast reserves and strategic partnerships, is emerging as a pivotal player in this transition.

Southeast Asia's Reserves: A Resource-Rich but Underdeveloped Hub

Vietnam, Malaysia, and Thailand collectively hold over 40 million tonnes of REE reserves, positioning the region as a key supplier of raw materials. Vietnam alone possesses 22 million tonnes, second only to China, according to an Eco-Business analysis, yet its annual production of 600 tonnes pales compared to its potential. Malaysia's 16 million tonnes of non-radioactive REEs and Thailand's 4,500 tonnes, the Eco-Business analysis adds, further underscore the region's significance. However, Southeast Asia remains entrenched in upstream mining, exporting unprocessed ore to Chinese refineries. This dynamic leaves the region vulnerable to price volatility and geopolitical leverage held by China.

Geopolitical Alliances: Breaking China's Grip

The most consequential development in 2025 is the proposed China-Malaysia rare earth refinery, a joint venture between Khazanah Nasional and a Chinese state-owned enterprise, according to a Kitco report. This partnership marks a historic shift: China, long protective of its processing technology, is now offering expertise in exchange for access to Malaysia's 16.1 million tonnes of reserves, the Eco-Business analysis notes. The refinery, expected to process both light and heavy REEs, could position Malaysia as a regional hub for high-tech manufacturing, the Discovery Alert report suggests.

Meanwhile, Australia's Lynas Rare Earths has pioneered heavy rare earth production in Malaysia, challenging China's dominance in this niche, Eco-Business reports. Broader alliances, such as the U.S.-Japan-India-Australia (Quadrilateral) partnership, are also accelerating investments in sustainable extraction and recycling technologies, according to a Geopol analysis. These initiatives aim to reduce reliance on China while navigating environmental and regulatory hurdles.

Processing Investments: Progress and Pitfalls

Malaysia's push to establish two processing plants by 2028, according to a MIDA statement, reflects its ambition to ascend the value chain. However, the country's lack of advanced refining technology and concerns over radioactive byproducts remain significant barriers, Kitco reports. Similarly, Vietnam's 2030 mineral law reforms, as identified in an IEA analysis, seek to attract foreign investment, but political instability in Myanmar-a key HREE supplier-complicates regional efforts, the IEA analysis adds.

Globally, China's control over 85% of refining capacity, the IEA analysis notes, ensures its continued influence, even as Southeast Asia and other regions expand their footprints. For investors, the region's potential is tempered by risks: environmental scrutiny, inconsistent regulatory frameworks, and the high costs of technology transfer.

Strategic Implications for Investors

Southeast Asia's role in supply chain diversification hinges on three factors: resource accessibility, geopolitical alignment, and technological collaboration. While the region's reserves are abundant, success will depend on overcoming downstream bottlenecks. Investors should prioritize projects with ESG-compliant partners, such as Lynas's operations in Malaysia, Eco-Business suggests, and monitor geopolitical shifts like the China-Malaysia refinery's progress, the Kitco report notes.

For nations seeking to reduce China dependency, Southeast Asia offers a strategic bridge-but not a panacea. As a Geopol analysis notes, "The region's potential is undeniable, but true independence requires sustained innovation and infrastructure investment."

Conclusion

The rare earth supply chain is at a crossroads. Southeast Asia's reserves and partnerships signal a shift toward a multipolar system, yet China's dominance in processing remains formidable. For investors, the region represents both opportunity and risk-a landscape where geopolitical strategy, technological advancement, and environmental stewardship must converge to unlock value.