Introduction
Critical minerals have received a surge of attention recently, much of it tied to China’s dominance of extraction and processing and recent application of export controls on minerals with defense applications. Policy discussions tend to focus on “critical minerals” collectively, but it is important to distinguish those needed for agriculture and transportation from those needed for national security. Every mineral deemed essential for U.S. national security, economic security, and supply chain resilience and included on the official list of critical minerals maintained by U.S. Geological Survey list is important for its own reasons, but there are a few elements whose looming shortage now borders on an emergency, requiring extra focus from policymakers. Certain “heavy” rare earth elements are among them.
What are Heavy Rare Earth Elements?
Rare earth elements (“REEs” or “rare earths”), a subset of critical minerals, comprise 17 elements on the periodic table that share similar chemical properties. Due to their unique magnetic and heat-resisting characteristics, certain REEs are essential in advanced science and technology areas, ranging from consumer products and medical devices to large-scale energy and weapons systems.
REEs are categorized into two subgroups based primarily on their atomic weights: the “light” rare earth elements (“LREEs”) and the “heavy” rare earth elements (“HREEs”). The HREE family includes gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium, and yttrium. While REEs in general have many important industrial applications, HREEs are particularly critical for use in advanced technological areas. For example, dysprosium and terbium enhance the functionality of permanent magnets—used as components in electronic devices, electric vehicles, and wind turbines—by strengthening the thermal and magnetic properties of the magnets. Yttrium is utilized in medical surgical devices, electronic displays, industrial cutting and welding, and jet-engine coatings, among other applications.
Given their critical utility, it is significant that HREEs are substantially scarcer than LREEs. REE deposits around the world are typically primarily composed of either LREEs or HREEs, but not both, with HREE-dominant deposits being geographically confined to a handful of countries. Additionally, while all REEs must go through resource-intensive and heavily polluting separation and refining processes to become industrially useful, the processing capabilities for HREEs are even more concentrated than deposits of these minerals, with nearly all global HREE processing capabilities being located in China.
The Geography and Political Economy of HREE Mining and Refining
China holds a dominant position in the global REE supply chain, controlling 48% of proven global reserves and 70% of mining output. However, the world’s reliance on Chinese producers for HREEs is even more acute, with China exercising a virtual monopoly over certain elements. Ionic clays, which are the most significant source of HREEs, have been found mostly in South China and parts of Southeast Asia, including Vietnam and Myanmar. Consequently, Chinese producers have carved out a powerful lead with regards to HREE extraction. Some industry estimates indicate that China produces 85% of the world’s holmium oxide, 90% of its thulium oxide, 98% of its dysprosium, and 99% of its yttrium. Not all HREE supply chains are dominated by China to such an extent. Chinese production of terbium and erbium, for instance, is in line with its production of rare earths generally. That being said, the fact remains thatthe global supply chain for these elements, when viewed holistically, is heavily reliant on Chinese production, even compared to the market for rare earth elements generally.
Globally, both private and public sector actors are attempting to develop alternatives to Chinese sources of heavy rare earth elements. Exploration in both Vietnam and Brazil’s Parnaiba Basin have indicated that both countries have substantial reserves of several heavy rare earths, including dysprosium, erbium, and ytterbium. Several of these projects have attracted substantial foreign direct investment. At the same time, production in mines in Western Australia is gradually reducing Chinese dominance over dysprosium production.
These alternatives to Chinese supplies are not, however, likely to be short- or even medium-term solutions to global dependence on China for these commodities for three reasons.
First, many of these projects are still in the exploration phase, potentially requiring years of investment before they can produce heavy rare earths at a level commensurate with Chinese mines.
Second, China has actively invested in its own heavy rare earth extraction projects abroad, gaining effective control of heavy rare earth extraction outside of China, including in areas such as northeastern Myanmar—where Kachin separatists dependent on Chinese buyers control one of the world’s most promising heavy rare earth projects—as well as in the Democratic Republic of the Congo, and Egypt.
Third, Chinese firms account for 99% of global HREE processing capacity, a virtual monopoly outside of processing for certain ultra-niche applications. While alternatives to Chinese heavy rare earth processing have attracted interest and capital in countries such as Vietnam, Malaysia, France, and Australia, Chinese refineries retain an immense lead that will take years to erode, with the first heavy rare earth processing facility owned by an American firm operating in the United States only coming partially online in July of last year.
Given this combination of factors, it is likely that, absent substantial effort to diversify global HREE supplies and refining capabilities, Chinese producers will retain a dominant position in the international HREE supply chain.
Chinese Export Controls on HREEs
This past year, China’s control over HREEs was underscored when President Xi imposed rigorous export controls on these commodities. While China has deployed similar restrictions on minerals such as graphite in the past, recent controls were far more extensive. In April, export controls were widened to include alloys containing lutetium, yttrium, dysprosium, and terbium, as well as commodities incorporating HREEs, such as certain high-end magnets. These controls, which remain in place, require Chinese suppliers to obtain a license from the Ministry of Commerce (MOFCOM) before export, granting China significant control over critical global supply chains.
Chinese policymakers expanded these controls further in October. In this second round of regulations, MOFCOM applied export licensing requirements to additional elements such as holmium, erbium, thulium, and ytterbium, along with certain products and components containing these elements. This expansion effectively extended Chinese export controls to cover all HREEs, as well as certain production equipment and services related to rare earths extraction and refinement. Critically, these regulations included provisions allowing extra-territorial enforcement, requiring foreign purchasers of Chinese-origin commodities and products to acquire MOFCOM licenses for reexport to third countries, thereby extending Chinese control over HREE transactions that have minimal direct links to China. This underscored China’s readiness to leverage its dominance in the sector to exert substantial influence over international markets, with affects felt across several strategic sectors in the United States, including aerospace and defense production.
While a “trade truce” reached later in October 2025 between Presidents Trump and Xi led to a one-year suspension of the October controls and offered some relief to firms dependent on Chinese HREEs, these events underscored China’s ability to use its control over HREEs as leverage in discussions with U.S. policymakers. Indeed, the October truce was made possible only after major U.S. concessions, including pausing the Bureau of Industry and Security’s Affiliates Rule, which would have extended U.S. export licensing requirements to affiliates of certain non-U.S. entities subject to additional export restrictions. The necessity of the truce itself exemplifies ongoing instability caused by U.S.-China tensions over HREE flows, with several U.S. manufacturers reliant on HREE-based magnets citing uncertainty about the longevity of the truce between the two countries as the root cause of persistently lax orders. Additionally, recent actions by China, including the announcement that it would modify its dual-use export control regulations to ban exports of rare earths, certain permanent magnets incorporating HREEs, and a variety of other dual-use technologies to Japan over its Prime Minister’s remarks on Taiwan, signal an ongoing strategy of using control over the rare earths supply chain to exert geopolitical influence. The likelihood that such measures could be used as part of broader Chinese foreign policy implies future uncertainty for the United States, its allies, and businesses reliant on Chinese HREEs.
Recent U.S. Government Actions Addressing HREE Supplies
Motivated in part by China’s strategic use of its control over HREE production, the U.S. government has recently focused its policy agenda on revitalizing the American critical minerals supply chain. Over the past year, the federal government has taken significant steps to secure reliable supplies and incentivize domestic investments into expanding production capacity.
On the diplomatic front, the Trump Administration has undertaken several initiatives to collaborate with countries possessing HREE deposits or processing capabilities. For example, the United States and Australia reached a framework agreement in October 2025 to expand HREE investments through strategic stockpiles, permitting reforms, pricing support, and a $1 billion financing commitment to be made within six months. This agreement was followed by a memorandum of understanding with Malaysia—currently home to the only operational HREE supply chain outside China—to facilitate information exchange and technical cooperation.
The Administration has also launched broader international initiatives to secure key supply chains that could have implications for critical minerals, including HREEs. For example, Secretary of State Marco Rubio will be convening an inaugural ministerial meeting on critical minerals in Washington in early February which may result in a framework for international cooperation. In addition, as described in our prior alert, President Trump issued a proclamation on January 15 directing the U.S. Trade Representative and the Department of Commerce to pursue negotiation of international agreements to address the threat to national security posed by imports of processed critical minerals and related U.S. dependences on the same. Furthermore, the Pax Silica initiative, described by the Department of State as its “flagship effort on AI and supply chain security” has direct implications for minerals policy, although the initiative does not single out HREEs.
Domestically, the federal government has taken a multi-pronged approach. It has made loan commitments and equity investments to domestic businesses developing REE processing capabilities. Included among the Department of Energy’s critical minerals funding opportunities announced last year was a round focused on recovering and refining REEs from unconventional feedstocks. The Defense Logistics Agency has also signaled intent to expand its HREEs holdings in the National Defense Stockpile, the federal government’s strategic reserve of raw materials.
Policy and Business Considerations
Constricted access to very critical minerals, including HREEs, is a specific policy challenge that likely requires nuanced solutions distinct in some ways from general critical minerals supply chain strategies.
As with lithium, LREEs, and other critical minerals, processing is as, if not more, important than extraction. While China has previously flooded markets with lithium to fend off competition, it is unlikely to do so with HREEs or important LREEs such as samarium neodymium, or praseodymium, all of which have defense applications and have been subject to export controls. To the contrary, China has already taken action to curtail exports and could eventually decide to simply cease exporting gallium, antimony, and defense-relevant REEs. The potential for similar actions by China regarding HREEs, particularly in light of last year’s measures, remains a key vulnerability for the United States.
Clients should be aware that policymakers may take extraordinary steps to find near-term or even medium-term solutions. Covington will continue to monitor this space closely.