What can we learn from the latest Rare Earths crisis?

How much of a big deal is China's latest salvo in the global trade war? And will it backfire?

I’ve just recorded a screen for Sky News about rare earth metals and I figured it might be worth a quick download. This is an interesting story, both because there is a decided gap between the various conventional wisdom takes and the likely reality, and because the latest twists and turns in this roller coaster have all sorts of lessons for the wider Material World.

Now, as you’ll already know if you read MW, I didn’t include rare earths as one of my key substances. Why? Because, as I wrote there, “We can make headphones and electric motors without neodymium magnets – though they would be bigger and less efficient. The materials in this book are the very hardest to replace.”

The rare earths are a suite of 17 elements mostly nestled in their own special corner of the periodic table. They are best thought of as metallurgical spices. Add them in small quantities to other metals and they do all sorts of extraordinary things. Yttrium can help make modern jet turbine blades resistant to the astounding heat inside an engine. Add neodymium to iron and boron and you have the strongest magnet known to humankind.

Though they are rarely visible on the surface, the chances are you’ve already interacted with a rare earth element today. If you have a pair of earbuds, the little ones that fit in your ears (and, for that matter, most over-ear headphones too), their speakers are powered by neodymium iron boron magnets. That satisfying snap as you close the case of Airbuds or a modern tablet or laptop? Neodymium magnets. The motors that help robots move their limbs, or raise or lower the windows in a car? Again, motors with neodymium magnets.

Remove these rare earths from the equation and while civilisation wouldn’t grind to a halt, everything would certainly become slower and less efficient. Jet engines would be less efficient. Electric cars ditto.

The funny thing about rare earths, however, is for all that everyone vaguely appreciates that they’re incredibly important, the market is actually surprisingly small. According to Rob West, who regular readers will know is one of the smartest analysts out there on the energy transition, the total size of the Rare Earth oxide market in 2024 was “about the same as the North American avocado market”(!)

This is a function of two things. First, the fact that you actually don’t need all that much neodymium or scandium or yttrium in your special alloys. A sprinkling will sometimes do. Second, prices have been getting lower and lower in recent years. And that, in large part, a function of something else: massive Chinese dominance of the market.

This is something you’ll already be familiar with but it’s worth trotting the numbers out al the same. China is responsible for roughly 70 per cent of all rare earth mining and roughly 91 per cent of all finished rare earth metal production. Those neodymium magnets inside your earphones? There is a good chance they came from the soil of Inner Mongolia, the site of China’s biggest rare earth mine.

Despite their name, rare earths are not very rare. They are to be found in most corners of the world. There are enormous reserves under the ground in Brazil, in India, in Australia and America - as well, of course, as China. But refining rare earths is hard. Very hard - far harder than nearly every other metal refining. By some accounts it takes as many as 100 processes to extract the metals from their ores. It takes enormous amounts of energy along the way. The waste products produced along the way are nasty - nastier than the kind of thing you tend to find at most copper or iron mines (and that stuff isn’t exactly very palatable).

All of which is why in recent decades most G7 nations were perfectly happy that most of the world’s rare earth production was happening somewhere else. Anywhere but in their own backyards. And since China was able to produce these magnets far cheaper than anyone else (the less said about the emissions the better), that meant cheaper consumer electronics for everyone. It meant a company like Apple could shower their devices with neodymium magnets (what else did you think “MagSafe” was?).

But of course, here we are in the midst of a trade war and, once again, rare earths are back on the front pages. The reason, this time around, is that China has announced a set of regulations which mean anyone buying their REE, or the products made with them, will have to apply for a licence from the Chinese government.

It’s hard to say quite how onerous this will be in practice, but it does seem more far-reaching than any of the previous restrictions imposed by Beijing. Quite why China is doing this is, as ever, a bit of a mystery. The obvious explanation is that it’s an attempt to retaliate to the US, though in this case the restrictions seem to apply internationally. The other obvious explanation is that China wants to wield control over certain nooks of the supply chain, including military applications (there’s a lot of rare earths in an F35 fighter jet, for instance).

A more intriguing theory is that China might also be fishing for more information about what applications those rare earths are actually used for. Is this an attempt to map out a somewhat opaque supply chain? One of the strands in Material World is that our understanding of how stuff is made, of the web of relationships and processes that stand between consumers and the raw materials that go into their products - is shockingly primitive. China’s “map” of the global economy is better than anything Western governments have at their disposal. But is this exercise an attempt to improve that map yet further?

Covering this story left me wondering, too, why people aren’t talking about Spruce Pine a bit more. After all, China might have a near monopoly on rare earths, but the US has a near monopoly on the ultra pure quartz you need to make the silicon wafers we turn into semiconductors and solar panels. Should America decide to cut off exports from the rest of the world, it would have just as crippling an effect as these Chinese restrictions.

However… however, the key thing to note here is that in the longer run, restrictions like this will almost always backfire. Why? Because with enough incentive G7 nations will bite the bullet and start refining their own rare earths. This is something Tim Worstall, who unlike most of the rest of us has actually worked in rare earth markets, is convinced of. So convinced, as it happens, that he’s raising funds to actually do it.

Sure, making this stuff domestically, with all the environmental restrictions that implies, would make magnets a bit more expensive, but then again that’s probably a price that can be borne (remember, we don’t need all that much of them, and the whole market is about the same size as the US avocado market).

In much the same way, if America blocked ultra pure quartz exports, then in the short run it would be very disruptive for silicon wafer production, but in the longer run, it would incentivise miners, explorers and refiners to find alternative sources. All of a sudden, synthetically produced quartz would justify its considerably higher price. In short, what look like strangleholds would rapidly dissolve - albeit after a bumpy year or two.

The broader macro lesson here is that for decades we prioritised price over everything else. It made sense to buy all our rare earths from China given the price was so low. It made sense to concentrate all ultra high purity quartz from a single location because that cost so much less than any alternative.

The upshot was a world economy where most stuff got cheaper year upon year. Globalisation wasn’t just about opening up more cheap labour markets - it was about creating supply chains with hyper specialisations for every imaginable component. Only when those supply chains are prodded and bent, as they are right now, do we begin to learn how they actually function.

That, though, is a subject for another day. Indeed, it’s a subject I might have quite a lot more to say about in the coming months...