China’s grip on rare earths is strong, but America holds the demand—and that’s the real leverage.
KEY TAKEAWAYS
The US-China rare earth conflict is about processing, not geology
China refines 90% of rare earths but depends on US and allied demand
New US projects like MP Materials and Lynas Texas are rebuilding capacity
The semiconductor sector isn’t heavily reliant on rare earths–EVs and defense are
Like oil before it, rare earth dominance will erode through innovation and substitution
MY HOT TAKES
China’s rare earth leverage is overstated
Capitalism turns constraints into innovation faster than politics anticipates
The real bottleneck isn’t minerals–it’s infrastructure and investment
Geopolitical power fades when markets adapt
Scarcity stories make great headlines but short-lived monopolies
You can quote me: “The next OPEC moment won’t come from oil fields, it will come from a pile of rocks.”
Pet rocks. It is 1975 and advertising copywriter Gary Dahl is hanging around with a group of his friends. The conversation turns to pets, and his friends, one by one, complain about their furry friends. I don’t know why anyone would complain about their pets–says the Chief Investment Officer who chased his Cavapoo Eloise around the backyard this morning as she went on a barking tirade at exactly 3:28 AM. The culprit was a plastic bag that somehow landed in her backyard. That certainly woke me up–and pretty sure the neighbors as well. 🐶 Gary–enterprising businessman–came up with a novel idea: the perfect pet–a rock. The Pet Rock was born on that night, so the legend goes. It became an overnight success, and everyone had to have one.
Though I had not yet read my first economics book, I wondered how a rock–abundant in my garden–could be sold at such a premium price. Well, I suppose, it depends on what the rock was composed of. You see, I was an inquisitive young man, and I had already read my first geology book–though it was more like a brochure that came with my chemistry set 🧪 (another crazy throwback reference 😉). I understood that some elements were probably worth more than others. Gold popped into mind–don’t worry, I am not going to write about gold–AGAIN! According to my brochure, there were some 104 elements ending in ruthfordium (Rf). Besides the obvious ones used for trinkets, were there others worth more than their weight, I wondered?
Fast forward to today where the periodic table now has 118 elements ending in organesson (Og, 118), discovered around 10 years ago. High tech back then was a Sony Beta Max VCR, and the Concorde Supersonic Jet plied the skies. My family still had a black and white TV! The ARPANET existed, but only in the lab–it didn’t evolve into today’s Internet until many years later. Electric cars only existed at car shows and on Hollywood movie sets as futuristic props. Technology has obviously evolved in a BIG way–a HUGE way–in the 50 years and 14 elements since the Pet Rock was born. And all the future tech we are surrounded by today has vastly different requirements than tech of the 1970s. We are now in an age of Rare Earth Elements (REE). 🪨
If you have been paying attention to international trade since the President first arrived in Washington back in 2017, you would know that those “rare” elements are a point of contention. First, a scant bit of history. The term “rare earth” goes all the way back to the late 1700s, when Finnish chemist Johan Gadolin discovered a strange oxide called yttria in a mineral from Ytterby, Sweden (very creative naming conventions, eh). Over the next few decades, scientists kept finding more of these stubbornly similar oxides. They were hard to separate, harder to purify, and scientists began calling them “earths,” the old word for metallic oxides. Because they appeared in such small, scattered quantities, they picked up the label “rare,” and the name stuck. Ironically, most of these so-called rare earths are about as common as copper or zinc, it’s just their concentration and extraction that make them such a pain to get. Remember that last point.
China, you see, just so happens to dominate the production of rare earth elements–specifically the ones that are critical in many modern applications. That dominance, though, is not about geology. The United States, Australia, and even Canada has abundant reserves of rare earths buried within their borders. The difference is what happens after the rocks are mined. China cornered the processing and refining part of the market, where raw ore becomes usable material, turning what looks like worthless dust into the magnetic necessity of electric motors, turbines, and defense systems. In other words, the “rare” part isn’t the metal–it’s the know-how and infrastructure to turn it into something valuable. And that’s the choke point. Got it so far? Good!
In the 1980s and 1990s, while the U.S. and its allies were off-shoring manufacturing and cheering on the service economy, China did the opposite. It subsidized the dirty, complex chemical processes needed to separate rare earth oxides and built out a complex industry. Western countries, meanwhile, happily bought the finished products, like magnets, batteries, lasers, because they were cheap. Fast forward to today, and China refines around 90% of the world’s rare earth output! Ouch! It also makes over 90% of the high-strength magnets used in EVs, drones, and precision-guided bombs. 💥That’s a HUGE concentration of capability. If Beijing decided tomorrow to halt exports, factories in the US would certainly feel it. But here’s the twist, China also needs the United States just as much! Rare earths aren’t valuable until someone buys the magnets, motors, or electronics they go into. Re-read that sentence! Price is determined by supply AND DEMAND. And America, along with Europe and Japan, is the customer–the demand. That means China’s economic power here is self-limiting. If it weaponizes rare earth exports too aggressively, it risks pushing those same customers into building new supply chains elsewhere. Which, of course, they already are. 😉
History has a way of balancing things. You may have missed it. I admittedly did. In 2010 China restricted rare earth exports to Japan after a diplomatic flare-up. Prices for neodymium and dysprosium went parabolic, investors piled in, and suddenly every miner with a shovel claimed to have the next big rare earth deposit. Within two years, the boom… fizzled out, but the memory stuck. That is actually when the US quietly began rebuilding capacity at Mountain Pass, California, which had once been the world’s largest rare earth mine. It is now run by MP Materials, which not only mines ore but also plans to produce separated oxides and magnets in the US. I emphasize “plans,” because it’s not quite there yet. Australia’s Lynas Rare Earths built out its own processing in Malaysia and is now constructing a US facility in Texas. If you add Canada’s deposits, Europe’s recycling push, and Japan’s partnerships, and you can see the shape of a new global map forming. A map that isn’t completely dependent on China. This is not a six-month story, but rather, it’s more like a five-to-ten-year one. And it’s already in motion. The US Department of Defense is funding magnet plants, and automakers like GM and Tesla are signing long-term supply agreements. To be clear, China still dominates the present, but it may not dominate the future. The more it flexes, the faster the rest of the world innovates around it.
Now, here’s where it gets interesting. Not all “high-tech” depends equally on rare earths. The semiconductor industry, for instance–the crown jewel of modern technology–is not particularly rare-earth hungry. Yes, rare earths play small roles in chipmaking: cerium for wafer polishing, lanthanum and yttrium (remember that? ☝️) for high-performance optics, and a touch of neodymium for the magnets in lithography machines. Here, silicon is still the star of the show. By contrast, electric motors, wind turbines, and missile guidance systems are utterly dependent on rare earths like neodymium, praseodymium, dysprosium, and terbium. These elements make up the ultra-powerful magnets that turn electrical energy into motion. Without them, your Tesla doesn’t move let alone beat me in a drag race. Similarly, your F-35 doesn’t maneuver quite so gracefully. So, when politicians or pundits warn that “China could shut down our tech industry by cutting off rare earths,” they are mostly talking about motors, not microchips.
This is a crucial distinction because it shapes how the US should prioritize its response. We can’t afford to be alarmist about every “critical mineral” that shows up in a headline. The real risk isn’t in your iPhone, it’s in your infrastructure. If you want to see where rare earths matter most, don’t look at the device in your hand, look at the drivetrain under your brother’s plug-in car. 😉 So ya, China holds a bunch of cards today, but the hand is weaker than it looks. For one, the US and its allies remain the largest end-markets for advanced technology.
China’s manufacturing base depends on Western demand for electric vehicles, wind power, and defense-related equipment. Shutting off rare earth exports would hurt Western producers, but it would also collapse China’s own downstream industries that depend on those exports for revenue and scale. Oh, and also, the chemistry isn’t black magic anymore. The US and Australia are not reinventing the wheel, they are just scaling up and cleaning up. Separating rare earths is messy and expensive, but it’s well understood. The challenge has always been economics and environmental regulation, not scientific mystery. Given the right incentives–say, a few billion in government funding or defense procurement guarantees–the US can absolutely make itself independent, and it's doing just that–though it is rarely called out in the headlines. Finally, China faces its own domestic resource limits. Its richest deposits are depleting, and the environmental costs are mounting. Beijing has already consolidated dozens of small miners into six giant state-run firms to enforce tighter control and cleaner operations. That, my friends, is a classic sign of internal strain.
Expect the U.S. to take a layered approach to rare earth independence—expand mining and separation at Mountain Pass and in new deposits across states like Wyoming, Texas, and Alaska. It’s important to note, however, that none of this happens overnight, but it IS happening. Think of it like the energy transition. For decades, OPEC dictated terms. Then shale happened–born out of necessity. The US didn’t make oil less important; it just made OPEC less powerful. The same dynamic is about to play out in critical minerals.
So where does this messy trade spat go? Probably the same place most economic showdowns go–into a quiet truce. China can rattle sabers about export restrictions, but it won’t risk killing its own golden goose. The U.S. will make noise about “critical mineral independence,” but it knows it can’t flip the switch tomorrow. Both sides posture, both sides negotiate, and eventually they settle into an uneasy co-dependence that lasts just long enough for someone to invent a better battery or magnet.
Five years from now, the U.S. and its allies will have new plants running, new supply lines humming, and new substitutes emerging from labs. China will still be a major player, but it won’t be the only player. Its bargaining power will erode the same way OPEC’s did when shale oil flooded the market. Markets adapt. Nations adapt. And capitalism, messy though it is, has a remarkable way of turning constraints into innovation. 💡
Which brings us full circle back to Gary Dahl and his pet rocks. In 1975, people paid real money for something that was literally lying on the ground. It was a fad built on perception, not scarcity. Rare earths aren’t all that different. They’re not rare in nature, they are rare in convenience. We are paying a premium because one country figured out how to clean, refine, and market them better than everyone else. For now. Eventually, that premium fades. New supply comes online. Technology changes. Yesterday’s “strategic mineral” becomes tomorrow’s commodity. We’ve seen this movie before with oil, rubber, steel, and silicon. So yes, this spat with China will probably make headlines, shake a few markets, and inspire another round of breathless commentary about “critical mineral wars.” But give it time. The U.S. will rebuild capacity, allies will fill gaps, and China will shift strategy.
Rocks, it turns out, don’t stay rare forever. Pet rocks were the must-have investment of 1975. They made Gary Dahl a millionaire–for a season. Then everyone realized they were just… well, rocks. My mother offered that very explanation to me when she denied me my very own, non-barking-at-3 AM, pet rock. Rare earths may be a little more useful than that, but the lesson still stands: scarcity stories sell fast, but markets move faster.
YESTERDAY’S MARKETS
Stocks had a bumpy day closing in the green yesterday. China continued its rare earth saber rattling but US Companies delivered big earnings beats. The government is still on vacation, so traders relied on the Fed Beige Book which gave no warnings, but instead a big breathy yawn. 🥱
NEXT UP
No retail trade report or weekly jobless claims thanks to the shutdown.
Fed speakers today: Waller, Barr, Miran, Bowman, and Kashkari.
Important earnings announcements today: Bank of New York, KeyCorp, US Bancorp, and CSX.