Why OEMs Are Diversifying Rare Earth Element Sourcing

Trade tensions and licensing shifts mean that OEMs (original equipment manufacturers) around the world are looking to diversify their sources of rare earth elements (REEs).

At present, China dominates in rare earth elements production, but countries and specific manufacturers are beginning to invest in domestic production.

Given China's influence over cost, escalating trade wars point towards further geopolitical tension. As a result, many producers are looking elsewhere to rejuvenate their supply chains.

Now, a study from S&P Global Mobility examines the risks regions are facing.

Growing tensions

In response to trade wars and political tension, China introduced a new licensing process for exporting REEs.

This was posed as an attempt to uphold sustainable practices and encourage enforcement of rules and regulations.

Exporters now need to get specific licenses in order to ship REEs abroad.

China produces approximately 90% of the world's rare earths—60% of the production is through China and the country is responsible for 90% of its processing capacity—and the elements are vital to several industries.

Currently, 17 REEs are used across the defence, electronics, energy and electric vehicle (EV) industries. 

The licensing process was introduced in response to US President Trump's tariff hike—the US only has one rare earths mine, relying on China for most of its supply—but this new process will affect countries around the world.

It has emphasised the risk of relying on one country for supply chains, as it has the potential to impact industries and economies around the world.

As a result, other nations are attempting to diversify their sources and look at domestic production. This, however, will be an expensive and challenging option, as replicating China's infrastructure will not be easy.

The larger impact

The new regulations could result in major disruption across a range of sectors, particularly automotive manufacturing. The EV industry especially will see an impact of these new regulations, as more consumers are calling out for clean energy and electronics.

There are seven elements in particular which have been put under more intense scrutiny, two of which are vital to the automotive industry: dysprosium and terbium.

Three major US OEMs expressed concern over these new regulations and its impact on the automotive supply chain. In June, Ford had to temporarily shut down its production line.

Negotiations have, however, taken place between Washington and Beijing, resulting in a temporary six-month license simplification process being set up to make exporting easier for US OEMs.

By July, China began approving licenses for the automotive industry, meaning the exporting of REEs will be more simple. 

From speakers to electric motors, many automotive components rely on magnets and REEs. 

Battery electric vehicles (BEVs) and hybrid vehicles, for example, rely on magnets containing neodymium, dysprosium and terbium for thermal management within traction motors.

The reliance on these materials for the motors, not to mention their limited supply, means the automotive industry is particularly vulnerable to export restrictions and supply chain bottlenecks. 

Supply chain diversification

Countries around the world are looking into alternatives to China.

North America and India, in particular, are moving towards domestic extraction and production, though this will be a mid- to long-term procedure. 

This will help them gain regional control over the supply chain, bringing their production closer to home and making it more reliable in the face of geopolitical turmoil.

REE investment is happening within Europe, but many countries are exploring alternative technologies. 

In an attempt to remove magnets from motors, Europe is shifting toward externally-excited synchronous motors (EESM), which include a copper wire instead of a magnet. Renault and BMW have already moved to using EESM, with more OEMs expected to follow suit.

By 2035, predictions show that 41% of all European motors will be EESMs. 

Although China has granted export licenses and resumed REE shipments, this event has exposed the risk of single-supplier dependence. 

Regions around the world are now investing in new technologies in order to diversify their supply chains, but results will not be achievable in the short-term. As demand accelerates, OEMs are feeling the pressure to produce alternatives to quench reliance on China's rare earth elements.