The Rare Earth Dilemma: How China Gained the Upper Hand Over the Western Defense Sector

China’s Rare Earth Strategy and the West’s Response

Back in 1992, Deng Xiaoping, China’s then-leader, made a statement that should have been a wake-up call for Western nations: “The Middle East has oil; China has rare earths.”

Despite this warning, Western countries spent the next three decades treating rare earth processing as a low-priority, low-value industry—outsourcing it to the lowest bidders. During this time, companies like REalloys (NASDAQ: ALOY) quietly began developing domestic processing capabilities, even as most of the sector remained focused elsewhere.

China’s Dominance in Rare Earths

China recognized the strategic importance of rare earth elements early on, treating them as a critical asset. Today, China is responsible for about 90% of global rare earth processing, encompassing not just extraction but also the refining and manufacturing that transform raw materials into components for advanced technologies like jet engines and wind turbines.

This dominance was achieved through decades of targeted investment, government-backed financing, aggressive pricing strategies, and export controls designed to keep competitors at bay.

The effectiveness of this approach became clear when, during trade negotiations last year, China threatened to restrict rare earth exports. The U.S. government quickly shifted its stance, highlighting the vulnerability created by this dependency.

REalloys: Building an Independent Supply Chain

While the rare earth supply crunch has only recently captured headlines, REalloys anticipated these challenges years ago. As others reacted to China’s moves, REalloys and its partners were already establishing a supply chain independent of Chinese influence.

In March, REalloys announced that it had secured full funding to construct the largest heavy rare earth metallization facility outside of China, following a successful $50 million public offering. The new facility, costing around $40 million, will produce approximately 30 tonnes of dysprosium and 15 tonnes of terbium annually—key materials for high-performance magnets used in military and aerospace applications.

How China Engineered Its Rare Earth Monopoly

China’s control over the rare earth market was no accident. Over thirty years, the country methodically built its monopoly while Western nations allowed their own processing capabilities to erode. A bipartisan Congressional investigation in late 2025 detailed China’s playbook: massive state funding, legal frameworks to control pricing, and market flooding to undercut foreign investment.

Committee Chairman John Moolenaar summarized the situation: “From smartphones to fighter jets, Americans rely on minerals that China manipulates for its own benefit. China’s control over rare earths is a direct threat to our economy and security.”

The impact is already visible. For example, when China tightened export controls in 2025, Ford was forced to halt production at its Chicago Explorer plant due to a shortage of rare earth magnets. The implications are even more severe for defense supply chains, which operate with tighter margins and less flexibility. Companies like Palantir Technologies (NASDAQ: PLTR) and Axon Enterprise (NASDAQ: AXON) depend on rare earths for critical hardware, tying national security infrastructure to a fragile supply chain.

REalloys’ Strategic Approach

While much of the industry was slow to react, REalloys took a proactive stance. Based in Euclid, Ohio, the company’s growth was fueled by collaborations with the U.S. Department of Energy and Department of Defense. Rather than focusing solely on mining, REalloys prioritized developing the expertise and technology needed to convert processed rare earths into high-grade alloys for defense applications.

This involved building relationships with suppliers, advancing processing technologies, training skilled metallurgists, and ensuring products met stringent military standards—a process that takes years to perfect.

REalloys also secured an exclusive agreement for 80% of the output from North America’s only heavy rare earth processing facility, operated by the Saskatchewan Research Council. This plant was developed without any reliance on Chinese technology, using custom-built equipment and AI-driven controls to achieve higher purity with fewer workers than comparable Chinese facilities.

Every stage of production—from raw material to finished alloy—takes place in North America, free from Chinese technology, chemicals, or investment.

The Challenge of Closing the Gap

The distance between REalloys and other Western competitors is significant, and bridging it will take years, not months. Mining and processing rare earths require entirely different skill sets. While many companies focus on extraction, transforming ore into defense-grade metals involves complex chemical processes and precise quality control.

Some firms previously purchased Chinese processing equipment, but lack the expertise to operate it effectively. Additionally, Chinese-made machinery often requires components that can only be sourced from China, making these operations vulnerable to supply disruptions.

According to Tim Johnston, REalloys’ co-founder, it could take three to seven years for a new competitor to reach a similar level of capability—assuming they start now and avoid using Chinese technology or parts.

Upcoming Regulatory Changes

The urgency is heightened by new regulations set to take effect on January 1, 2027. Updated DFARS rules will prohibit the use of Chinese-origin rare earth materials in U.S. defense systems, covering every step from mining to final fabrication. Previous loopholes that allowed contractors to reclassify Chinese materials will be closed, and the Pentagon will enforce compliance through audits and legal penalties.

This means all defense suppliers must secure verified, non-Chinese sources for rare earth metals and magnets. Meanwhile, China is increasingly using its rare earth output domestically, with only the surplus being exported under strict licensing controls—a vulnerability highlighted by the International Energy Agency.

REalloys’ Expansion and Future Outlook

REalloys’ latest funding will support the construction of the Heavy Rare Earth Metal Facility, with materials initially processed in Saskatoon and then finished in Ohio. The company aims to begin operations in early-to-mid 2027, reaching full commercial capacity later that year. Annual production is expected to reach 400 tonnes of defense-grade rare earth metals, scaling up to 600 tonnes by 2028-29.

The U.S. government has shown confidence in REalloys, with the U.S. EXIM Bank providing a $200 million letter of intent to support supply chain development and the Department of Defense awarding a contract worth up to $1.7 million for facility design.

Looking ahead, REalloys plans to target an annual output of 18,000 tonnes of heavy rare earth permanent magnets in its next phase.

Strategic Importance for the West

While China will continue to dominate rare earth processing for the foreseeable future, the goal for the U.S. and its allies is not to overtake China, but to establish enough independent capacity to support their own defense needs and reduce strategic vulnerabilities. REalloys is among the few companies working closely with the U.S. government to achieve this objective.

Anticipating the rare earth crisis years in advance, REalloys has positioned itself to deliver critical materials just as new regulations come into force—less than a year from now.

By Charles Kennedy

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