Podcast: How Can China's Grip On Pentagon Rare Earth Supply Chains Be Broken?

Rare earths are essential for a wide variety of defense systems to function, but the U.S. is largely reliant on China for these strategic metals. Listen in as experts discuss what can be done.

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Matthew Fulco (00:29): Welcome to this week's Check 6 podcast. I'm Matthew Fulco, Aviation Week's business editor. This week on Check 6, we're looking at critical minerals and their importance in aerospace and defense supply chains. Rare earths and other critical minerals like gallium, germanium and antimony are essential for a wide variety of defense systems to function. But the United States has limited domestic production capabilities and is largely reliant on China. For these strategic metals, China's increasing weaponization of these supply chains is putting significant pressure on the Pentagon to diversify suppliers. The Trump administration and China recently reached an agreement under which Beijing has agreed to ease its most recent rare earth export controls implemented in April in response to U.S. tariffs. But the relaxation of these controls does not apply to rare earths used in military applications. Joining me today are Mahnaz Khan, vice president of policy critical supply chains at Silverado Policy Accelerator, Cory Combs, Trivium China's head of critical mineral and supply chain research, and Matt Sloustcher, executive vice president of corporate affairs and chief communications officer at MP Materials. Thank you Mahnaz, Cory and Matt for being here today. It's a really interesting time for minerals in aerospace defense. So I thought we could start out today just by talking about why critical minerals, rare earths and others are so important for the aerospace defense industry and maybe use the F-35 Lightning II fighter jet as an example. Matt, would you want to tell us a little bit about that?

Matt Sloustcher (02:13): Sure. Happy to. Rare earth materials are really the building blocks for modern technology and rare earth magnets in particular are critical for the conversion of either energy into motion or in the case of a generator motion into energy. So if it moves, it requires lots of power. It needs to be incredibly reliable at high temperatures, it's probably going to take rare earth magnets and other sorts of rare earth materials and critical materials in general. And so when you look across aerospace and defense, and I'll focus in on the defense supply chain, there is not a single major U.S. defense system that does not require rare earth materials inside that system, not a single. And so really the supply chain for those materials is necessary in order for us to build the systems, build the technologies that not only power our economy, but power our national security systems.

Matthew Fulco (03:22): Mahnaz, is there anything you'd like to say about that?

Mahnaz Khan (03:25): Sure. Going back to what Matt said in the F-35 jet, I think that's a perfect example and it's always referred to in policy circles. And the reason is that F-35 jet has about 900 pounds of rare earths. That's about 3% of the weight of that jet. You had a great graphic on LinkedIn showing every single critical mineral in that F-35 jet, and I was looking at it from the lens of what Silverado calls strategic defense critical minerals, which are critical minerals that we are most exposed to from China. So every single part almost of that jet has a strategic defense critical mineral that means besides the tubing and the wiring and the landing gear, we cannot make that F-35 jet. So that's a bit scary. Also, when we're talking about defense applications, when you look at the news, this most recent Israel-Iran conflict, you saw these ballistic missiles flying around. You saw drones, you saw we used what they call a bunker bomb blaster. Those all have rare earths to guide those type of weapons. So without rare earths, we cannot engage in modern warfare, we can't strike our targets and we just can't win.

Matthew Fulco (04:45): So they really are essential to not just the F-35, but a lot of other defense systems that are used in our industry. And when it comes to both production and processing of rare earths and other critical minerals such as gallium germanium and antimony, which China recently or several months ago imposed an export ban on China has around 60% of global production capacity for all critical minerals and 85% of processing. And I thought we could talk a little bit about how China has gotten to such a dominant point in this industry and how they're leveraging that in competition with the United States. Cory, could you talk a little bit about how China has become so dominant in critical minerals and their thinking around critical minerals and competition with the United States?

Cory Combs (05:47): China's dominance and critical minerals, long and short comes down a lot of, and in many cases to the processing side, many of these minerals can be found across the world, but even if you can extract them to make them useful, you have to process them and refine them into particular goods. In the case of rare earths, for example, you pull out an ore that might contain 2 or 3% of the material you actually want. You have to then process that into one, a specific piece of the ore that you want. So maybe you're separating out neodymium for magnets and samarium for magnets from other ores that you do not want, and you process them into an oxide. That oxide then gets moved into a magnet. That magnet is then put into other machinery, of course gets assembled. And so what we have in many cases is a relatively complex supply chain between the ground and the mineral resource coming out of the ground and the actual applications that we need. Now, what's happened in China is really a threefold strategy over the course of decades, much of which was really domestically focused, but that has huge trade in geopolitical advantages. The first was an effort to hold more material out of the ground from the 60s and 70s onward.

(07:00): The rare earth industry in particular grew rapidly post reform opening in the 80s. As much of the western landscape offshore, that's a very environmentally damaging low profit industry and so many offshore to China. And so China has these strong upstream advantages. Beyond that, they invested heavily over the last 30 years in moving into that midstream, making those materials into magnets. And increasingly today, over the last five, 10 years, they're increasingly adept at using that industrial policy to advance the downstream production.

Matthew Fulco (07:35): And with this dominance that China's achieved in recent decade, really it's been in the last two years or so that we see China has started to impose more restrictions on the export of rare earths and other critical minerals. And we know that there's a history to that, that the first example we know of was about 14 or 15 years ago when they temporarily imposed a ban on exports of to Japan. But really in the past two years, this has accelerated with regards to the United States. And I want to talk a little bit about how China has gradually tightened the news on the export of rare earths and especially the seven rare earths that they imposed restrictions on in April, and why those in particular are important for aerospace and defense. Mahnaz, would you want to comment on that?

Mahnaz Khan (08:37): Sure. Everyone brings up the Japan example. And yes, this has been going on for 15 years. I think people forget that there was a WTO case that the United States along with Netherlands, I believe in Japan also imposed on China. That was resolved. And then in the Trump one, under the first administration, China actually imposed tariffs on rare Earth. So now what we see we're in this escalating trade war again, we imposed 125 or so percent tariffs on China. They came back and retaliated. Now we see them using a new tool that they, as you said, have been using for the last two years, which is export bans and export controls. So this started under the Biden administration because we were restricting and using export controls on semiconductors. So they retaliated on the upstream part of the supply chain, which is where they're most competitive. We see this tit for tat war that has escalated in the last six months.

(09:41): Now they also imposed a tariff on us. And then there's this new wrinkle. There was an agreement made a couple of weeks ago where they said they will allow faster approval for these, for non-defense applications. That means for car companies, they probably will approve them faster, but it's still in place for defense applications that we know of right now. So that's still problematic. We won't have access still to those types of rare earths coming out. The other thing, and I think some folks speculate that there might be more export bans in the future, I don't see that happening. What I see is the next play for China to get their tariffs to come down more is that they will either significantly curb production. They have consolidated their rare earth industry since 2021. They've learned to do that after the first Trump administration. And so they can control price, they can control supply very easily, and they can just stop production if they need to. And I think that's also problematic with these export controls that are in place

Matthew Fulco (10:48): With regards to China's role in the industry and the fact that they continue to be as dominant as they are. They're often, I know that in the case of MP Materials, Matt, that your company had previously still China was still involved in your production or processing. Is that right? But as of April, that's no longer true. Could you talk a little bit about that?

Matt Sloustcher (11:15): Sure. So I think Cory touched on this early on, but China's got enormous scale, particularly in the midstream separation and refining of rare earths and the downstream magnet manufacturing. And what that means is they're not only the dominant producer to the world, but they're the dominant consumer, both of rare earth concentrate and refined rare earths because they manufacture most of the world's magnets. So it is true that for much of MP's history, beginning in 2017, we were producing a rare earth concentrate that could only be marketable and saleable in China. And what we did as a company was use that base concentrate business to reestablish separation and refining capability at Mountain Pass in California that is now producing refined rare earths that are marketable in a broader array of geographies, including in Japan, including in South Korea, including in the United States where we are now producing magnets ourselves in a downstream factory in Texas. So there's a bit of an irony here where China is the world's dominant supplier, but for all of the upstream companies producing materials that feed into this rare earth supply chain, they are also the largest customer.

Matthew Fulco (12:37): Something that I wanted to touch on that we spoke about earlier, these dual use export controls on both the raw rare materials themselves and the magnets, and that there's uncertainty about whether China is going to relax those controls. So the first question is what are the prospects for China as part of negotiating with the United States to relax those controls because that's really critical for the defense sector. And then second, and if they don't, what are we looking at in terms of risks? If those export controls on those rare earth and magnets with military applications are not relaxed, then what does that mean for the aerospace defense industry? Cory, what are your thoughts on that?

Cory Combs (13:29): Absolutely. Bottom line is we're advising our clients in no uncertain terms. Diversification is key. Go to Mountain Pass, go to Lynas, go to wherever you need to diversify. These controls may be relaxed, but they're not going away. Now, there are a lot of things we're not certain about. There are a lot of things that are unclear, and I realize that it's on that level of certainty can sound a little jarring, but I want to be clear about where we are and are not certain. We are certain that when China comes to the classification of a material as dual use, there is a good case that heavies in particular are in fact dual use. This is important because there's more leverage or there's more space I should say, to bring back, for example, the ban on graphite where some of the particular graphite compounds that are being restricted or banned are not agreed to be.

(14:14): And China, in other context, such as the nuclear buyers group, have actually agreed that is not in fact dual use application and this kind of stuff. It really does matter from a bureaucratic standpoint and an internal policymaking standpoint, we don't see a real possibility of Beijing declassifying heavy rare earths as dual use goods. Now the other separation I want to make very clear, and this is essential for those who are mapping out the risk horizons as a lot of our clients are. There are two different issues at play. One is the existence of restrictions, not bans, but restriction just means the exporter has to have a license approved by the Ministry of Commerce before they can actually export. What that license requires among other things, is a very detailed description of the end use along with the end user in some people may have heard about the verification, including things like photographs of the factory, right?

(15:03): They're getting very specific about this stuff. And the reason is they're very, very serious about keeping these materials out of the hands of military end users and defense contractors. The other side of it, which is very much in flux, and this is where the uncertainty lies, is China's ability to weaponize these controls at a base level. They're kind of mirroring U.S. and EU policies around dual use restrictions that apply to things like uranium, things that people agree should be controlled. We won't all agree that these should be controlled, but it's using the same policy framework. What Beijing had also done was to weaponize those and say we're actually going to justify restrictions that are not in fact dual use in order to get back at the U.S. or other actors, EU and others. So the degree of weaponization is absolutely in flux. That's a point of leverage. So I can absolutely anticipate that they will streamline exports, allow exports to go through to actors, they were restricting, but I do not anticipate that they're going to fully declassify heavy rare earths as dual use altogether,

Matthew Fulco (16:06): Right? As it gives them a crucial point of leverage in competition with the U.S. in trade discussions and otherwise. And when it comes to that leads into a key issue. We just talked about diversification and the ability to build more resilient supply chains that are no longer dependent on China. And so wanted to ask Mahnaz, how would you evaluate our diversification efforts and what do you see in the near and medium and the long term for how the U.S. working with its allies can build greater resiliency in rare earth supply chains for aerospace defense?

Mahnaz Khan (16:55): Sure. So I think we see some good signals coming out of this administration. A couple weeks ago, the United States, along with the G7 and other partners, including Australia, India, and Korea, signed off on the G7 critical minerals action plan, which promotes a standard space market and innovation. So that's very positive. That's a great international signal from this administration. And last week, the administration during the quad foreign ministers meeting announced a quad mineral initiative. How we see this right now, we also see that there's bilateral deals and partnerships going on most recently with the DRC in Rwanda, earlier with Ukraine, and then a partnership with Saudi. So very positive signals at Silverado, we are really advocating for a quad plus mineral trade agreement because we need to send the right demand signals to move the market away from China. So that's building in supply chain credits, building in potentially a stockpile, a commercial stockpile for rare earths, that sort of thing.

(18:05): Because at the end of the day, when businesses are looking to source, China is usually 99% of the time the cheapest price. So you have to even the price with your allies and create those incentives and all the allies need to be offering the same incentives to create this ex-China market. So that's what we're working on at Silverado. And I will say a plurilateral trade agreement in this space has not been done before. We are looking in this administration to do these bilateral agreements under the Biden administration. There was more on the U.S.-Japan critical mineral agreement, but doing this at a larger scale with our allies, everybody's kind of in the same boat with these export controls on these medium and heavy rare earth. So I think it's time to get serious on creating that agreement.

Matthew Fulco (18:51): Thank you, Mahnaz. And when it comes to what we're doing here in the United States, Matt, maybe we could just talk a little bit about to what extent are we building some independence from China here in the U.S. and what are the prospects for our domestic critical mineral production processing capabilities?

Matt Sloustcher (19:12): Thanks, Matt. I think we're in a much better position than many realize and really on the cusp of being put in the position where we can largely take this issue off the table. When MP Materials was founded in 2017, the U.S. had zero capabilities across the full rare earth supply chain, and we restored Mountain Pass from cold idle into now the second largest rare earth mine in the world. We produce over 45,000 tons of rare earths and concentrate annually at Mountain Pass today. We've also restored the capability to produce refined rare earths at Mountain Pass, and there are projects to build downstream magnetics capability as well, both inside our company and with third parties. So while there are gaps to plug and scale to build the idea that we have zero points of failure or single points of failure in the supply chain can be erased quickly.

(20:12): I think with focus and attention, we often talk about government and what is government's role. And certainly I view government's role as leveling the playing field, but it's only also going to take manufacturers and large manufacturers that commit to diversify and take the advice that Cory is giving them. I think this is really important in the context of the defense and aerospace. You cannot build a defense sized resilient supply chain for critical minerals. These are very small industries when you're talking about relative to the commercial supply chain that will, I think, evolve over time as the future of warfare and the future of aerospace evolves, things like drones and robotics. But today, what you really need for resiliency is a vertically integrated supply chain at scale that can satisfy commercial industry. And I think that is the key and what we should aim for because it not only creates commercial resiliency, but also ensures that we have the materials we need for the defense and aerospace supply chain.

Matthew Fulco (21:19): Agreed. The needs of defense industry are much smaller than the commercial side, and yet it is so crucial for the United States for national security, that critical mineral supply chains are made more resilient and less dependent on China. And so with that, that's a wrap for this week's Check 6 podcast. Special thanks to our podcast producer in London, Guy Ferneyhough. If you haven't already, be sure to follow Check 6 on Apple Podcasts, Spotify, or wherever you listen so you never miss an episode. If you found today's discussion helpful, please consider leaving us a star rating or review. Better yet, share this episode with a friend or colleague. Thank you for checking in with Check 6 and have a great week.

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