How Chinese Export Licenses Have Throttled the Critical Mineral Supply Chain

Article Highlights:

• With China controlling 90% or more of the refining capacity of many critical minerals, there are very limited options for companies looking to source the raw materials from outside of China.
• Because China controls the production process for virtually all rare-earth elements, it often has a stranglehold on materials that might otherwise serve as reasonable replacements for each other. In other words, China is the Option A, B, and C for manufacturers looking for specific properties, weakening the viability of alternative countries and supply chains.
• While there are many supply chain and logistical challenges to overcome to develop a non-China critical mineral supply chain, another looming difficulty is aligning incentives in the U.S. and other Western countries.

Over the past two years, Chinese export controls have caused global supply chain challenges for companies that rely on critical minerals. Major automakers like Ford and BMW have reported significant supply chain impacts, and the larger global automotive industry has struggled with the restrictions. In some cases, they've even stopped vehicle manufacturing as a result of shortages of critical minerals used in components for seat motors, vehicle lighting modules, and permanent-magnet motors.

Electronic component manufacturer TDK and automation and medical device manufacturer Omron have also reported supply chain impacts to varying degrees. All this disruption comes from a previously little-used Chinese export control regime—one that's become a major diplomatic tool for China.

Background on Chinese Export Controls

In 2024, China initiated export license requirements for antimony and a few other superhard materials. They also added export license requirements for certain mineral processing equipment. That same year, China instituted a presumption of denial standard for export licenses for gallium, germanium, and other associated products destined for the United States. While these announcements didn't draw much attention at the time—and impacted few industries—these early restrictions in 2024 would lay the groundwork for the comprehensive export controls program to come.

Jumping ahead to 2026, China has now restricted at least 17 minerals and related materials for export. These restrictions don't apply strictly to the U.S., either; they're in effect for every other country in the world, too. While companies can purchase finished goods that contain these products, exporting the raw material and many derivatives of these minerals requires a license that's often difficult to acquire. Even this workaround to purchase finished components that utilize critical minerals hangs in the balance of the U.S.-China trade deal, which could potentially expire in early November 2026.

In the span of just two years, China created a robust export controls program around critical minerals, the products that use them, and the machinery to process them. This new, potent export regime has given the nation significant leverage in diplomatic relations and the policy decisions of other countries—evidence, perhaps, that China's strategic controls have been a major success for the U.S. rival.

Why Are Chinese Export Controls So Effective?

While China's export control regime as a policy tool is obvious—the impacts are already being felt—it's important to understand why these controls are so effective in the first place.

For companies trying to look elsewhere for critical minerals, the options are extremely limited. There are a multitude of issues that need to be overcome for businesses and governments looking to configure alternative supply chains that don't rely on China and the whims of the Chinese Communist Party (CCP).

Many of them, however, roll up to one of three main reasons:

• Critical minerals are difficult to replace.
• Critical minerals are difficult to extract, refine, and process.
• Incentive structures must be aligned for new players to enter the critical minerals production market.

Critical Minerals: Rare and Irreplaceable

Chinese dominance over critical minerals is nothing new. For the better part of two decades, China has been ramping up critical mineral mining and refining capabilities both domestically and abroad. Its weaponization of this status quo is what's now causing concern across manufacturing industries globally. With China controlling 90% or more of the refining capacity of many critical minerals, there are very limited options for companies looking to source the raw materials from outside of China.

Many of the critical minerals Chinese firms mine and refine in such large numbers have properties that aren't easily replicated by other materials. For example, some critical minerals increase the strength of magnets along with maximum operating temperatures, even when small quantities are utilized relative to other materials in a magnet. Other rare earth minerals can control electricity better than conventional silicon under demanding conditions like high voltages, high switching frequencies, and high temperatures.

As alluded to earlier, the challenge with these materials is how irreplaceable they are. There are very limited alternatives with the same properties in nature. And because China controls the production process for virtually all rare-earth elements, it often has a stranglehold on materials that might otherwise serve as reasonable replacements for each other. In other words, China is the Option A, B, and C for manufacturers looking for specific properties, weakening the viability of alternative countries and supply chains.

This is why companies looking to develop high-performance products in the electronics, medical device manufacturing, and defense sectors often struggle to make their products without the involvement of China.

Issues Abound in the Mineral Supply Chain

One of the chief reasons these Chinese export controls are so effective is because of the challenge of configuring alternative supply chains for many of these critical minerals. There are multiple obstacles at play:

• Processing and Refining Are Highly Concentrated: While many critical minerals can be extracted outside of China, the refining and processing of these resources is often dominated by China.
• Alternative Production Is More Expensive: Mining, refining, and manufacturing critical mineral products in the U.S. or Europe often requires higher labor, energy, construction, and environmental compliance costs. Chinese state subsidies—both direct and indirect—can also create an artificially lower cost for their own processing steps.
• New Mines and Processing Facilities Take Time: Exploration, permitting, financing, construction, and commissioning can take many years, preventing alternative supply chains from being established quickly.
• Rare-Earth Separation Is Technically Difficult: Rare-earth elements have similar chemical properties and require complex, multi-stage processes to separate into high-purity materials. Moreover, large amounts of toxic waste and pollution can accumulate using current separation methods, making identifying new sites for critical mineral processing difficult.
• Expertise and Workforce Are Limited: Diversified supply chains require specialized separation chemists, metallurgists, engineers, equipment specialists, and experienced plant operators. China is a leading producer of college graduates that specialize in these positions. Many Western countries, on the other hand, only produce a small fraction of what's needed to support a ramped-up critical minerals supply chain.
• Some Minerals Are By-Products: Minerals such as gallium, germanium, indium, tellurium, and bismuth are commonly recovered while producing or refining other metals. The IEA estimates that approximately half of the strategic minerals it examined are produced as by-products, limiting the ability for them to be mined independently.
• New Supply Chains Need Investments: Mines, separation facilities, metal and alloy plants, magnet manufacturers, and downstream customers must be developed in a coordinated fashion. The upfront costs of this type of undertaking are massive, and a market for the minerals must be confirmed.
• Specialized Equipment Is Highly Concentrated: Some separation, metal-making, and magnet-manufacturing processes require equipment available from very few suppliers outside of China. The result is higher costs and multi-year lead times.

While this list is not exhaustive, one clear takeaway is the scale of the challenge for nations interested in developing a critical mineral supply chain independent of China. These obstacles are not going to be surmounted quickly, and will likely need international coordination and planning behind them if nations in Europe and North America want to eventually match China's production.

Misaligned Incentive Structures

While there are many supply chain and logistical challenges to overcome to develop a non-China critical mineral supply chain, another looming difficulty is aligning incentives in the U.S. and other Western countries.

A recent policy report by Resources for the Future (RFF) outlined the challenges that governments face in incentivizing companies. According to RFF, these businesses must deploy large amounts of capital into a capital-intensive industry despite the price volatility of the minerals they'd be investing in. In addition, the companies would be pursuing mining and refining in contexts where it could take years before their investment is matched by a commensurate return. It's a significant gamble, one that many businesses are simply too risk-averse to take on.

The reality is that many large companies are looking for short-term and relatively secure profits, and the critical mineral industry does not operate on those time horizons. This misalignment disincentivizes investments from larger corporations, steering them away from mineral mining in places like Africa (where China has purchased or invested in many mines).

The time and financial investments required have led to many cases of Western companies selling their mining rights to projects that have critical mineral potential to Chinese companies.

For their part, Chinese companies have shown significantly more patience. These firms are willing to wait for projects to turn a profit, while also being willing to take on more risk. In addition, these businesses have shown a willingness to operate in countries with unstable political environments: they've acquired dozens of mining projects in politically troubled regions over the past decade. These factors seemingly apply to both state-owned companies and private companies within China. With these businesses buoyed by state-backed financing, a broader focus on the end-to-end supply chain, and long-term planning from the Chinese government, it's no wonder they dominate mining and refining critical minerals.

While the U.S. and its European allies have taken some actions to address this barrier to creating alternate supply chains, there's been little tangible progress to date. U.S. Vice President JD Vance has proposed a price floor among allied countries in an attempt to stabilize prices. As of now, however, there hasn't been sufficient effort to robustly address the high risks and narrow path to profitability for businesses taking on these international mining projects. While many firms may express interest in entering the mining and refining sectors of critical minerals, there may not be enough incentive for them to do so today.

Given these stubborn challenges, companies may need to start developing alternative strategies. These include designing their products in a way that minimizes critical mineral risk. Because if China decides to shut off the flow of critical minerals and their associated components, the rest of the global manufacturing base will not be prepared. A supply chain crisis is all but guaranteed to follow.

How Should Companies Respond?

Unlike other supply chain risks, addressing potential critical mineral shortages requires immediate attention (this is in part due to the outsized impact that mineral restrictions can have on production continuity virtually overnight). For companies that utilize components containing critical minerals, the following steps are critical to fortifying yourselves against China's export restrictions—and the lurking threat that they'll only grow more prohibitive over time.

1. Collect Full Material Declarations (FMDs) for Components: This will provide a full mineral analysis of each component. These FMDs can be used to help your company identify critical mineral risks in your supply chain.
2. Identify Alternate Components: These alternatives should ideally reduce dependence on Chinese-dominated critical minerals. If necessary, organizations can go a step further and pursue alternate designs that can achieve similar product properties with less dependence on critical minerals.
3. Implement Mitigation Strategies: In cases where critical mineral exposure can't be reduced, businesses should look into pursuing other mitigation strategies. These include raw mineral stockpiling and the identification of alternate supply chains. Anything that can help companies establish relationships with alternative material pipelines is advantageous in a production ecosystem so thoroughly controlled by China.

While these steps are just a high-level overview of what companies can do to reduce their risk exposure to critical minerals, there's a lot of work embedded in those three steps. But while this process may seem overwhelming, Z2 has a range of solutions that can be used synergistically to streamline the risk mitigation process.

How Can Z2 Help?

Z2's software solutions can assist with steps one and two: collecting FMDs and identifying alternative components.

For step one, Z2 provides a solution that allows users to view FMD data for many of their components significantly faster (millions of FMDs are accessible within the tool). Z2 can also assist with contacting your suppliers to acquire missing FMDs if needed. This data will tell you which critical minerals are in which components.

For step two, Z2 can help you identify alternate components with similar electronic properties that may have less critical mineral exposure. Finally, Z2 addresses step 3 through a mineral dashboard that provides insights on mineral mining and processing locations, government sanctions, forced labor risk, and pricing data. The goal of these capabilities is to give your team the tools, insights, and visibility to effectively undertake this massive endeavor of reducing critical mineral risk.

To learn about how Z2 helps businesses address their critical mineral dependencies and reduce raw material risk, schedule a free trial with one of our product experts.