The past decade of work proving up Australia’s deposits of rare-earth minerals is beginning to pay off, with a number of firms getting close to production. But the supply chains for rare earths still run through China, and that’s unlikely to change any time soon.

Last week’s Australian Rare Earth Conference hosted by the Australian National University and ASPI heard reports of progress and geological challenges from 16 companies in addition to presentations by Resources Minister Madeleine King, Chief Scientist Cathy Foley and academics.

There’s a sense that the sector is achieving critical mass, that the policy frameworks both in Australia and in the US are delivering support, and that the outlook is one of exponential increase in demand.

Yet, for all its promise, the sector is mainly populated by small and speculative stocks. The major resource companies like BHP and Rio Tinto are focused on simplifying their resource portfolios and have left the difficult rare-earth sector alone.

The ASX lists 35 rare-earth companies. Lynas—the leading non-Chinese producer—heads the list with a market value of $7.9 billion, followed by Iluka, valued at $3.8 billion. Iluka is spearheading the Australian government’s strategy to develop a domestic rare-earth processing capacity and in April was awarded a $1.2 billion non-recourse loan to build a rare-earth refinery at its operations in Eneabba, about 300 kilometres north of Perth. Lynas and Iluka are the only two rare-earth interests included in the S&P/ASX200.

Then come the next two promising candidates, Arafura, worth $530 million, and Hastings, worth $450 million. Both are well advanced in securing contracts for their output.

Behind them come a tribe of smaller hopefuls, including 20 firms valued at less than $50 million each. In addition to these are several dozen companies that have rare earths as one of their interests, typically alongside other critical minerals. There are also non-listed companies in the field.

It’s not unusual for Australian resource sectors to be crowded by small players. About half the 65 ASX lithium stocks are worth less than $50 million, although that is a much richer sector, with a dozen businesses worth more than $1 billion.

What has kept the rare-earth sector small is the difficulty of processing and the lack of transparency in the market. It is the antithesis of gold, whose processing is straightforward and pricing is universal. Neodymium, praseodymium and dysprosium may be the metals of the future, but the only window into their pricing comes from expensive proprietary surveys of transactions among Chinese mining and processing businesses. No superannuation fund is going to stump up equity on the basis of that.

The Japanese government delivered the breakthrough for Lynas, which has one of the world’s highest quality deposits at Mount Weld northwest of Kalgoorlie. China banned rare-earth sales to Japan amid a dispute over islands claimed by both nations in 2010.

The Japanese government arranged the funding for the development of the Mount Weld mine and the construction of a processing plant in Malaysia and lined up customers to sign off-take agreements. It took eight years to get the processing plant to produce material of the required specifications, but Japan was patient, rolling over the funding until the operation worked.

The idea that government support was needed to achieve lift-off inspired the Australian government’s decision to finance the development of a processing plant for Iluka. Iluka is a long-established mineral sands miner. It used to send rare-earth-rich sands to a processing plant in France, but that trade stopped in the early 1990s because of local opposition to radioactive waste. Iluka kept stockpiling the rare-earth sands, which were a by-product of its other operations. While the government has provided the $1.2 billion non-recourse loan, Iluka is contributing $200 million and its one-million-tonne stockpile.

Unusually, the deal was done without off-take agreements, but Iluka is confident there will be customers for its product. The plant will also process rare earths from other operations. Northern Minerals, which has been producing concentrate for the highly valued dysprosium (a heavy rare earth) from a pilot plant since 2018, last week announced an agreement to send product to Iluka. Iluka is confident its plant will be able to handle the two very different types of ore.

Arafura has gone a different route, seeking contracts from end users to underwrite its development. It has signed a non-binding off-take agreement with Hyundai and a memorandum of understanding with General Electric, giving it exposure to both electric-vehicle and wind-turbine end users. It is also getting $300 million in government debt funding and is planning a processing plant.

Major US firms have difficulty in dealing with small suppliers, but the recently legislated US Inflation Reduction Act provides an incentive in the form of tax credits for companies that obtain critical minerals from the US or its free-trade partners, rather than from China.

Hastings has also sought to underwrite its development with off-take contracts. It has an off-take contract with German firm Thyssenkrupp and a memorandum of understanding with the Belgian company Solvay, which took over the processing plant that Iluka once sent its sands to at La Rochelle, on the French Atlantic coast. It will sell them a mixed rare-earth ‘carbonate’ rather than building its own refinery.

Another Australia-based rare-earth company, VHM, last week adopted a different strategy, signing an export deal to sell output from its project near Swan Hill in Victoria directly to China’s huge Shenghe Resources. The rare-earth-rich mineral sands in western Victoria are huge and have been likened by some in the sector to Saudi Arabia’s oil reserves.

The involvement of the Australian, Japanese and US governments in fostering the development of rare-earth projects is driven by a desire to achieve supplies that are independent of China.

Western Australian critical minerals analyst Kingsley Jones argues that China is no longer pursuing a monopoly of rare-earth supply. Its strategy, he says, is one of ‘monopsony’, as the sole buyer of rare earths. China’s share of raw material supply has dropped from 85% to 60% as demand has outstripped the capacity of its own mines, some of which have been shut for environmental reasons.

Where China retains a monopoly is in processing and fabrication. Mined rare earths must first be turned into a carbonate, which is a relatively simple process, and then refined into an oxide, which is much more complex. Then the oxide is turned into a metal, which may be alloyed before it is fabricated into permanent magnets and the huge range of other products using some portion of rare earths.

China holds between 85% and 90% of all the downstream processes. Global production of permanent magnets was 174,000 tonnes last year, of which Japan accounted for less than 9% and China nearly all the rest.

Lynas still sends oxide to China to be turned into metal, and Iluka and Arafura are expected to do so too. Even the processing that does take place outside China relies on Chinese suppliers for the chemical reagents.

The aspiration for Australia to capture more of the downstream processing must confront the dearth of metallurgy graduates from Australian universities, after employment in the sector was squeezed by the closure of smelters and metals manufacturing over the past 20 years. Australia’s metals processing industry is microscopic compared to China’s, and China also dominates in research in the sector.

China plainly sees geopolitical advantage in its lock on the rare-earth sector. However, it also intends to dominate the manufacture of downstream products, including electric vehicles, wind turbines and batteries.