Defense on Edge: Investing in Alternative Rare Earth Sources Amid China’s Export Controls

The modern defense industry relies heavily on a group of 17 metallic elements known as rare earth elements (REEs). These elements, while not necessarily “rare” in the earth’s crust, are seldom found in concentrated, economically extractable deposits. Their unique magnetic, luminescent, and catalytic properties make them essential for a wide range of defense applications, from missile guidance systems to stealth technology. However, the supply chain for these critical minerals is highly concentrated, with China dominating global production and processing. This dominance has led to concerns about supply security and potential geopolitical risks, prompting increased interest in investing in alternative rare earth sources and defense on edge strategies.

The Rare Earth Element Imperative for Defense

Rare earth elements are the “vitamins” of modern military technology, enhancing the quality and performance of various defense systems. They are essential components in:

Precision-Guided Munitions: REEs enable accurate targeting and control in missiles and smart bombs. For example, the Joint Direct Attack Munition (JDAM) guidance kit contains rare earth magnets in its fin actuation system.
Radar and Communication Systems: Yttrium is integral to high-performance radar systems like the AN/SPY-6 Air and Missile Defense Radar, enhancing tracking of airborne and maritime threats.
Military Aircraft and Aerospace Technology: REEs are used in electric motors, actuators, pumps, generators, and engine subsystems of aircraft, critical for flight control, targeting, and power systems. F-35 fighter jets require around 418 kg of REEs per unit.
Naval Vessels and Submarines: Virginia-class submarines require a whopping 4,600 kg of REEs. These elements are used in electric drive propulsion motors, pump systems, and sonar transducers, enabling quiet propulsion and high-performance sensing underwater.
Electronic Warfare: REEs amplify signals and enhance resolution in electronic warfare systems, strengthening surveillance, navigation, and threat detection capabilities.
Space Systems: Satellites rely on REEs for various functions, including communication, navigation, and surveillance.

The Department of Defense (DoD) has noted that approximately 78% of U.S. weapons programs contain components that depend on rare earth magnets. Without a secure and stable supply of these minerals, national security interests worldwide are at risk.

China’s Dominance and Export Controls: A Wake-Up Call

Since the 1990s, China has strategically positioned itself as the dominant player in the rare earths market. Currently, China accounts for over 60% of rare earth production worldwide and nearly 85% of refining capacity. This dominance stems from deliberate state subsidies, lax environmental regulations, and a vertically integrated supply chain.

China’s export restrictions on REEs in 2010, following a maritime dispute with Japan, offered an early demonstration of their geopolitical leverage. While the World Trade Organization ruled the restrictions illegal in 2014, this signaled a new era of economic coercion wherein access to critical minerals could be used as geopolitical bargaining chips.

More recently, China has implemented significant export controls on rare earth elements, triggering substantial disruptions across international supply chains. These restrictions target materials essential for advanced manufacturing, renewable energy technologies, and defense applications. The strategic policy shift represents China’s evolving approach to resource management, with far-reaching consequences for global industries.

In October 2025, China expanded its export-control reach to superhard materials, rare-earth processing equipment and raw materials, medium- and heavy-rare-earth products, and lithium-battery and artificial-graphite anode materials. The regulations also establish the “0.1 percent rule” – if a product manufactured abroad contains Chinese-origin rare-earth materials representing more than 0.1 percent of its total value per independently usable unit, its onward export to a third country may also require MOFCOM approval.

These export controls appear strategically timed amid escalating global trade tensions, leveraging China’s dominance in critical minerals as a powerful negotiating tool.

Investing in Alternative Rare Earth Sources: A Multi-Faceted Approach

In response to China’s dominance and export controls, the United States, the European Union, and allied countries have begun prioritizing rare earth independence. This involves a multi-faceted approach:

Diversifying Mining and Processing Locations:
- Australia: Australia’s Lynas Rare Earths is the largest producer of separated rare earths outside of China. Iluka Resources is another Australian company with rare earth operations.
- United States: MP Materials operates the Mountain Pass mine in California, the only active rare earth mine in the U.S.
- Brazil: Brazil has the world’s second-largest rare-earth reserves after China. Serra Verde Rare Earths began operations in Brazil in 2024, becoming the only ionic clay REE project outside China to achieve commercial scale. Aclara Resources is opening a rare-earths mine in Brazil to supply a processing plant to be built in the U.S.
- Canada: Defense Metals Corp. is developing the Wicheeda Project in British Columbia, a carbonatite-hosted LREE deposit.
- Malaysia: Malaysia is actively promoting cooperation with China in the field of rare earth processing.
- Other Regions: African nations such as Malawi and Burundi, and Southeast Asian states including Vietnam and Myanmar, are emerging as critical players.
- Developing Recycling Technologies:
- Recycling from End-of-Life Products: Companies like Cyclic Materials and REEcycle are focused on recovering rare earths from end-of-life products, building a secure, local, and sustainable supply chain.
- Recycling from Waste Streams: Researchers are exploring alternative sources for REE, such as ocean bottom sediments, continental shelf sediments, river sediments, stream sediments, lake sediments, coal ash, and industrial wastes.
- Innovative Recycling Processes: Researchers at Kyoto University have developed a novel method for the efficient separation and recycling of rare earth elements from end-of-life magnets, called the Selective Extraction-Evaporation-Electrolysis (SEEE) process. ReElement uses a chromatographic separation process to recover rare earth elements from magnets with reduced solvent usage.
- Investing in Alternative Materials:
- Ceramic Magnets: Ceramic magnets (ferrite magnets) offer a promising alternative to rare earth-based magnetic materials.
- Iron-Nitride Magnets: Niron Magnetics is commercializing iron-nitride magnets for REE-reliant applications like power generation and electric vehicles.
- Aluminum Alloys: Aluminum alloys provide a versatile alternative to rare earth-dependent metallic materials.
- Graphene-Based Technologies: Graphene-based materials are being explored as potential replacements for REEs in various applications.

Investment Opportunities in the Rare Earth Sector

Investors looking to capitalize on the growing demand for rare earths and the push for supply chain diversification have several options:

Mining Companies: Investing in companies involved in the mining and processing of rare earth elements, such as MP Materials, Lynas Rare Earths, and Aclara Resources.
Recycling Companies: Investing in companies focused on recycling rare earth elements from end-of-life products and waste streams, such as Cyclic Materials and American Resources Corp.
ETFs: Investing in exchange-traded funds (ETFs) that hold a diversified basket of rare earth mining and processing companies, such as the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX).
Mutual Funds: Investing in mutual funds that focus on rare earth and platinum group producers, such as the Dolefin Rare Earth Elements Fund in Switzerland.

Navigating the Risks and Challenges

Investing in the rare earth sector is not without risks and challenges:

Environmental Concerns: Mining and processing rare earths can have significant environmental impacts, such as water pollution and habitat destruction.
Political Risk: Investing in foreign mining companies carries political risk, as government policies and regulations can change.
Technological Advancements: The development of cheaper and better alternatives to certain rare earth metals could reduce demand.
Market Volatility: The rare earth market can be volatile, with prices fluctuating significantly due to supply and demand imbalances and geopolitical events.

The Future of Defense on the Edge

As geopolitical tensions rise and the demand for advanced military technologies increases, securing a stable and diversified supply of rare earth elements is paramount. Investing in alternative rare earth sources, developing innovative recycling technologies, and exploring alternative materials are crucial steps in mitigating the risks associated with China’s dominance and ensuring the defense industry remains on the cutting edge. By embracing a multi-faceted approach and carefully considering the risks and challenges, investors can play a vital role in shaping a more secure and sustainable future for the defense sector.