China's rare earth supply chain begins at mines in regions like Bayan Obo and ionic clay deposits in the south, where the country extracts over 70% of global heavy rare earths and controls 60% of mining overall. These ores, rich in elements like dysprosium and terbium, undergo initial concentration before shipping to centralized processing hubs. Why this matters: Beijing's strategy prioritizes not just extraction but the full downstream system-separation, refining, metal production, and magnet fabrication-where it holds 90%+ of capacity. Western firms abandoned these capital-intensive, polluting steps decades ago, allowing China to build an unmatched integrated machine that turns raw ore into precision components for electric vehicle motors, wind turbines, defense guidance systems, and consumer electronics.
The chain flows to separation facilities, where complex chemical processes isolate individual rare earth oxides. These feed metal smelters producing dysprosium and neodymium metals, then alloyed into NdFeB magnets at factories supplying giants like Tesla and Lockheed Martin. A 5% quota increase for 2026 mining, coupled with shrinking Myanmar imports-the key source of heavy rare earth clays-creates acute supply rigidity. Exacerbating this, late 2025 export bans targeted military-use materials and tech, slashing shipments for magnets and electronics, directly pressuring global factories reliant on Chinese output.
This dominance stems from deliberate policy: quotas cap domestic mining to enforce scarcity, while export controls weaponize supply. Heavy rare earth prices, like dysprosium at RMB 2.19 million per ton, reflect tightness, empowering Chinese firms with pricing power as global chains restructure. For products, light rare earths like neodymium drive EV and wind power magnets (94% Chinese production), while heavies enhance high-temperature performance in fighters and missiles.
Geopolitics drives the 'why' behind urgency. The U.S. DoD, invoking Defense Production Act, funnels billions into alternatives, spotlighting REalloys' Euclid, Ohio facility-the sole North American site converting heavy rare earths to defense-grade alloys via Kazakhstan feedstock and Saskatchewan processing. This closed-loop bypasses China, with MP Materials ramping Fort Worth magnets from U.S.-separated oxides. Lynas advances Australian cracking, NioCorp starts mine portals, and USA Rare Earth eyes Texas-to-Oklahoma integration by 2028. Yet, overseas buildout lags years behind, ensuring China's medium-term leverage persists, reshaping investor bets toward midstream choke points.