China Controls 90% Rare Earth Refining
Defense stocks face a critical vulnerability as China controls ~70% of rare earth mining and over 90% of refining, essential for military technology. RE Alloys (ALOY) aims to be the first North American heavy rare earths producer by end-2024, with new legislation requiring North American sourcing for defense materials starting 2027. The company just secured a DLA contract for strategic metals samarium and gadolinium.
China's dominance extends beyond refining; it also holds a commanding position in intellectual property, accounting for 81% of the 22,040 global patent families filed for rare-earth technologies between 2014 and 2024. This deep-seated expertise represents a significant barrier to entry for Western nations attempting to build a competing supply chain. The strategic metals samarium and gadolinium are critical for advanced military hardware. Samarium-cobalt (SmCo) magnets are essential in precision-guided missiles and "smart bombs" because they retain their magnetic properties at high temperatures. Gadolinium is used in nuclear control systems, specialized alloys, and defense electronics. A single F-35 Lightning II fighter jet requires approximately 418 kg (over 920 pounds) of rare earth elements for its advanced sensors, lasers, and flight control systems. Similarly, a Virginia-class submarine uses a massive 4,600 kg (over 10,000 pounds) for systems like sonar and electric drive motors. The 2027 deadline stems from the Defense Federal Acquisition Regulation Supplement (DFARS), which will prohibit the use of rare earth magnets and other strategic materials mined or processed in China, Russia, Iran, or North Korea in any defense-related products. This forces a complete "mine-to-magnet" traceability for all defense contractors. To counter this dependency, the U.S. Department of Defense is actively funding domestic projects. One major initiative involves MP Materials, which is building a new magnet manufacturing campus in Northlake, Texas, backed by a $1.25 billion investment, aiming to create a fully domestic supply chain. REe Alloys is positioning itself as a key player by partnering with the government-backed Saskatchewan Research Council (SRC) in Canada. The SRC operates the first rare earth refinery in Canada, which will feed REe Alloys' metallization facility in Ohio, creating a vertically integrated North American supply chain for defense-grade alloys. This North American push includes classifying allies like Canada, the UK, and Australia as 'domestic' sources to accelerate the creation of a secure supply chain. The Pentagon is on track to meet its goal of a sustainable "mine-to-magnet" supply chain capable of supporting U.S. defense needs by the 2027 deadline.
