Chinese export controls on rare earth elements could hit economic activity in the US and Europe by US$3tn, yet limited access to financing and market volatility are holding back investment in diversifying supply.
Demand for rare earths is projected to increase by 50% by 2035, driven by the development of electric vehicles and a range of industrial uses, the International Energy Agency (IEA) said in a report out today.
China holds a 60% share of the rare earth mining market and 91% of global refined output, but the security of that supply is threatened by the country’s use of export controls, the agency said.
Restrictions introduced in April last year caused temporary shutdowns for several western automotive producers, and although a major wave of further controls was suspended until November this year, the IEA said “underlying risks to economic security remain”.
“If these rare earth export controls were implemented in full, the economic value of downstream production at risk would reach US$6.5tn per year for countries outside China,” it said.
“The United States and Europe face the greatest exposure with potential direct economic losses estimated at over US$1.5tn each.”
The automotive sector, electronics, defence and data centres are among the sectors at highest risk.
The IEA estimated that US$60bn in public and private investment is required over the next decade to meet projected demand for rare earths from outside China, across mining, refining and downstream manufacturing.
Production from existing facilities is expected to meet only half of mining demand, and a quarter of demand for refined materials. The completion of announced projects, particularly in Australia and the US, would significantly bolster rare earth mining but refining and production is lagging, the agency said.
Although the investment required is “dwarfed” by the potential economic cost of supply disruption, the report found financing is constrained by structural costs and market factors.
Mining projects typically require early-stage financing before the viability of a project has been confirmed, and costs can be driven higher by environmental requirements, as well as labour and energy expenses.
At the same time, rare earth mining projects are often owned by smaller companies with limited access to balance sheet financing, forcing them to seek external equity or debt financing.
But volatility and a lack of transparency around pricing can affect cash flow projections, raising the cost of capital and deterring institutional investors. The report noted that average price volatility for rare earths was around double that of natural gas over the past decade.
Price discovery is hampered by a lack of overall liquidity, a dependence on spot markets centred in China, and uncertainty over the market impact of trade restrictions, the agency added.
“This market structure makes it difficult to develop key financial tools that are commonly used to hedge risks in other commodity markets,” it said.
“The lack of reliable spot market prices, particularly outside China, complicates the creation of long-term supply contracts and offtake agreements, which are critical for project developers seeking to hedge risks.”
Export credit and development finance
Policymakers in non-Chinese markets have attempted to increase financing to the rare earths sector, for instance through Australia’s Critical Minerals Strategic Reserve and the US International Development Finance Corporation’s Critical Minerals Consortium.
The IEA cited Export Finance Australia’s support for the Eneabba Rare Earths Refinery project, which will be the country’s first refinery to produce separated rare earth oxides.
The Australian export credit agency announced in December it would provide an additional A$475mn (US$335mn) in financing for Eneabba, on top of a 2022 government loan totalling A$1.25bn.
The Export-Import Bank of the United States has also shown its intent to support the sector, last year issuing a letter of interest to Rare Element Resources for a project in Wyoming.
However, export credit agencies and development finance institutions face difficulties supporting rare earth projects under standard lending criteria, the IEA said.
It recommended policymakers provide facilities that “reflect the strategic and commercial realities of these projects”, including through extended tenors, lower collateral thresholds and co-financing across different parts of processing infrastructure.
Governments should also consider financing commitments in developing markets with rare earth reserves or refining potential, the IEA added.
