China's Strategic Export Control Upends Rare Earth Markets

China’s decision to restrict graphite exports is expected to have a significant impact on the global battery production costs, particularly in the electric vehicle industry, which is currently experiencing a crucial phase in the energy transition. Although countries like the US are reducing their dependence on China’s rare earth minerals, China still holds a dominant position in the global supply chain.

In the long term, these export controls imposed by China may actually encourage the development of alternative sources of supply, which would enhance global energy security and market stability. For years, China has been strategically building its dominance in rare earth minerals, vital for clean energy supply chains. The nation has been investing heavily in its own domestic wealth of these minerals, while also expanding its influence and acquiring resources in developing nations across Asia, Africa, and Latin America.

China’s focus on building energy security to meet its growing demand for energy has given it a major advantage in the global clean energy sector. In contrast, the West has failed to keep up with Beijing’s rapid investments. Last year, China alone accounted for nearly half of global spending in the renewable energy sector, far exceeding the investments made by the US and the European Union.

Rare earth minerals are crucial in this massive spending. China currently possesses 34% of the world’s rare earths and controls 70% of global rare earth mining. It also has at least 85% of global capacity to process these minerals into manufacturing materials. This heavy reliance on Chinese supply chains poses a risk to global markets trying to achieve their energy and climate goals, not just for China but also for countries like the US. In fact, the US has been lagging behind in rare earth minerals, only starting to invest after years of under-investment.

However, the market dynamics are slowly changing due to increased competition, particularly from the US, as well as a shifting strategy by China itself. Although China reported a significant amount of rare earth exports last year, there has been a slight decline compared to previous years. Additionally, the US has been reducing its dependence on Chinese rare earth imports, albeit gradually.

Now, China is further restricting graphite imports through temporary export control measures aimed at protecting national security and interests. This move will lead to an increase in graphite prices, which will create challenges for EV battery manufacturers, especially those outside of China. However, the rise in prices and concerns about the security of supply are expected to drive the development of alternative sources, which is crucial to support energy transition goals.

China’s efforts to meet its own energy demands and ensure energy security may continue to impact its rare earth exports. While short-term price shocks could pose challenges, the long-term implications of diversifying global clean energy supply chains are positive. Greater diversity in supply would enhance the resilience and sustainability of the global economy, and address the current lopsided market, thus strengthening global energy security.