The U.S. Wants a Rare-Earths Supply Chain. Here’s Why It Won’t Come Easily.

A bipartisan bill set to be introduced in Congress this week would offer a tax credit for establishing rare-earth magnet production in the U.S., a crucial component for the clean-energy transition. MP Materials efforts to build a local supply chain demonstrate the challenge for American producers.

The bill, to be introduced by Rep. Guy Reschenthaler (R., Pa.) and Rep. Eric Swalwell (D., Calif.), includes a $20-a-kilogram credit for U.S.-made magnets, while manufacturers sourcing 90% of their component parts from U.S. producers could be entitled to a $30-a-kilogram credit, according to a draft seen by The Wall Street Journal. The credit is planned to be phased out by Dec. 31, 2035.

The bill, known as the Rare Earth Magnet Manufacturing Production Tax Credit Act of 2023, is the latest in a list of incentives to encourage rare-earth production as more attention is being focused on the metals and where they come from.

Rare earths such as neodymium, dysprosium and terbium are used in permanent magnets that are needed to help drive motors in electric vehicles, offshore wind turbines and increasingly within robotics. According to experts, they are going to become more crucial as the drive to adopt clean-energy technology grows. Wood Mackenzie’s Rare Earths Market Service estimates demand for rare-earth oxides stood at 171,300 metric tons in 2022 and projects it to grow to 238,700 tons by 2030.

The bill comes amid efforts to revive the Mountain Pass mine, that sits on the border between California and Nevada. It was once the world’s No. 1 source of rare earths—elements valued for their magnetic and conductive properties. Now it is looking to get back in the game and deliver a domestic supply of them for the energy transition, all the way from mine to magnet. 

The Mountain Pass mine started life soon after the gold rush in the 1870s, producing mainly gold, copper, lead and zinc. Production changed over the years, and from the 1960s to the 1990s, it was the primary global source of rare earths. After financial and environmental struggles at the turn of this century, mining at the site was suspended in 2002 before being bought and restarted in 2017 by MP Materials Corp., a Las-Vegas-based rare-earth producer.

“Mountain Pass is arguably the best rare-earth asset in the world. If it were oil, it would be Saudi Arabia,” says James Litinsky, chief executive of MP Materials, which continues to own and operate the mine.  

Yet, during the time when mining was suspended at the site, the rare-earth industry shifted from niche products to reaching critical status in the U.S., Europe and Japan. Now, roughly 60% of all mined rare-earth minerals are sourced from China. Three other major sources exist in Myanmar, Australia and Mountain Pass.

Challenging China’s dominance

While the 60% might not sound that concentrated, the dependence on China is even more pronounced further down the supply chain. The rare-earths supply chain is typically made up of three main parts: mining and concentrating the raw materials, refining them to produce oxides and producing the magnet. In recent years, China has come to control 91% of refining activity, 87% of oxide separation and 94% of magnet production, according to the Centre for European Policy Studies, or CEPS.

“China has a significant dominance of rare earths, and in the back of people’s mind is always the idea of geopolitical tensions and how that could affect production and exports,” said Luisa Moreno, president of Defense Metals Corp., a development-stage mining company based in Vancouver, Canada. “There is not a lot of production outside of China and so in order to supply the market with rare-earth products we will have to bring other projects into production.” 

As companies across the globe consider getting into the business, MP Materials’ experience offers insight into some of the challenges.

The company restarted mining rare earths at Mountain Pass late in 2017, and by 2019 it was producing about 15% of the global market supply of rare-earth concentrates. MP Materials aims to build a refining facility on-site by the end of this year and is investing $700 million in the final stage of the supply chain, building a site in Fort Worth, Texas, to produce magnets. 

Mr. Litinsky said the only reason his company was able to start refining is because it has managed to get the mining stage of the rare-earth process profitable. Offtake agreements, whereby companies agree to buy some of the output, and government support are crucial, but the most important element remains private funding, he said. “This was a private solution,” Mr. Litinsky said, adding that it required business support to move forward.

MP Materials earlier this year, in February, entered into offtake agreements with Japan’s Sumitomo Corp. for rare-earth oxides, and in February 2022, the company secured tens of million dollars in funding from the U.S. Defense Department to design and build a facility to process heavy rare-earth elements. Before that, in 2021, General Motors Co. and MP Materials agreed to a long-term partnership where the latter would supply the car maker with alloys and magnets from its Texas plant.  

“It cannot happen overnight. Each step requires scale and capital, north of $1 billion. But if you miss one step then you do not have a supply chain that’s secure,” Mr. Litinsky said. 

Technical difficulties

Most challengers are learning as they go—this poses another hurdle to establishing full-scale facilities. Defense Metals’ Ms. Moreno said that little knowledge exists outside of China in building the whole supply chain. “Expertise has to be developed. China has it, we have to develop this side, and do it in a competitive and efficient way.”

Junior mining projects are emerging but they often need investment from larger mining companies, which can prove troublesome. Uncertainty over the timing and scale of returns owing to lengthy project times means that the large amount of capital required to bring a project to fruition is hard to secure.

“Strategic development of a rare property involves multiple steps,” said Jim Hedrick, president of U.S. Critical Materials, a prospective mining project based in Montana. Mr. Hedrick said that once a site is discovered it still requires continual exploration and development to determine its size and accessibility. Permitting is another issue as it can take years to obtain approvals. 

According to Ms. Moreno, part of the challenge is that no two deposits are alike—with different impurities within the rock—so most require bespoke processing equipment that alone can cost tens of millions of dollars. 

“There are hard rock mines, clay mines, and some developing sources from tin mines and mineral sands,” said Ryan Castilloux, founder and managing director of Adamas Intelligence, a consulting firm advising on strategic metals and minerals. Concentrators are usually built at the mine but often produce harmful castoff materials such as thorium and uranium, which are radioactive. The mining and concentrate stage alone can cost more than $1 billion to set up and can be the most difficult to establish, according to industry players such as MP Materials. 

At present, only two companies in the world have concentrating facilities outside of China and Myanmar. One is MP Materials and the other is Australia’s Lynas Rare Earths Ltd. Lynas has a facility in Malaysia but it is moving some of that processing—the cracking and leaching portion—to Australia after the Malaysian government moved to limit imports of rare-earth concentrates that contain radioactive elements in an effort to stop harmful waste production onshore. Lynas has appealed this decision. 

Lynas’s waste-treatment facility in Malaysia is an example of how these processing facilities can become a “political hot potato,” Mr. Castilloux said.

There are magnet-production facilities dotted around the world, including Canadian supplier Neo Performance Materials’ facility in Estonia, but again high startup costs and the requirement of specialist equipment and knowledge act as barriers to wide-scale development of the field.

“At the moment, there’s little demand outside of China [for rare earths] but until we have a full supply chain, we don’t have a secure supply chain so you have to build it,” Mr. Litinsky of MP Materials said. “We need to continue to go further.”