backIntroduction
The race to secure supply chains for rare earth elements ("REEs") has become one of the defining geopolitical and economic challenges of our time. REEs are essential to the manufacture of permanent magnets used in advanced consumer electronics, defence and aerospace systems, and clean energy technologies. Global demand for REE-derived products is projected to more than double in value over the next decade, rising from US$4.12 billion in 2026 to US$9.89 billion by 2034, a compound annual growth rate of 10.2%1https://www.fortunebusinessinsights.com/rare-earth-elements-market-102943..
Whilst key REE ore deposits are distributed across the globe, approximately 90% of global processing and separation capacity (including the proprietary technology and expertise required to develop and operate it) is located in China.
This concentration creates a fundamental bottleneck that gives rise to acute energy, economic and national security concerns for western nations. The challenge is not one of geological access alone. Investment in, and control over, REE deposits is potentially within the reach of western governments and mining companies, but without commensurate processing and separation capacity outside of China, access to raw materials will not resolve the underlying dependency. Developing new processing capacity is technically and environmentally demanding, enormously expensive at scale, and can take five to ten years to progress from a final investment decision to fully optimised commercial operations. Short to medium-term supply shortfalls and price volatility are, on any realistic assessment, highly likely to impact western nations in the coming years and risk giving rise to serious supply chain security issues affecting critical industries.
The sheer scale of China's own plans for REE-derived components means that supply to Europe or the United States could be curtailed simply by virtue of China electing to prioritise the needs of its domestic market. Despite recent diplomatic efforts, particularly by the United States, there appear to be limited prospects for China stepping away from the stringent export controls placed on key REEs in April 20252Ministry of Commerce and the General Administration of Customs [2025] No. 18 (“Announcement No. 18”), implementing export controls over 7 rare earth elements: samarium, dysprosium, gadolinium, terbium, scandium, lutetium and yttrium.. Against this backdrop, western governments are increasingly alive to the geo-strategic implications arising from domestic constraints on midstream processing capacity and are taking legislative and executive action to stimulate capacity expansion.
The approaches adopted in Europe and the United States to address these issues have recently seen some divergence in both pace and philosophy. This article examines the emerging regulatory frameworks on both sides of the Atlantic and considers the legal and commercial challenges to be addressed in unlocking investment in this critically important infrastructure.
The Legislative Landscape: Europe and the United States
The story up until January 2025 was generally one of alignment in approach across the United States, Canada, the United Kingdom, Japan, Australia, South Korea and Europe, through the introduction of legislation and initiatives which sought to harness raw material supply from primary mining assets, stimulate domestic mining and processing, and foster collaboration between nations to break and diversify existing supply chain dependencies.
The European Approach: Facilitative
In Europe, the primary legislative instrument is the Critical Raw Materials Act (the “Act”), which establishes targets for domestic processing capacity by 2030. The regime covers the entire critical minerals value chain and is not limited to rare earth processing capacity. Under the Act, strategic projects inside and outside of the EU are selected to receive support with regard to permitting, the securing of offtakers and access to finance (e.g., from EU funding programmes and the European Investment Bank). The first round designated 47 projects inside the EU and 13 projects in third countries. The second application round closed in January this year with more than 160 applications, showing strong interest.
Notwithstanding the steps taken under the Act, the EU’s progress towards its key 2030 targets under the legislation appears slower than anticipated. In particular, the target of 40% of critical raw materials demand being processed in Europe by 2030 now appears hugely challenging. For example, there is currently almost no large-scale permanent magnet manufacturing capacity in Europe, and the EU suffered a major setback when GKN cancelled plans earlier this year for its European rare earth permanent magnet factory, citing as a reason for the cancellation an inability to compete with the cost of production in China.
The European approach has so far been predominantly facilitative by relying on regulatory frameworks, targets and incentives. One may question whether these steps alone will be enough to unlock the bottleneck created by China’s dominance in midstream processing capacity and to avoid the risk of medium-term REE supply shortfalls and price volatility in Europe.
The United States: An Interventionist Turn
From January 2025, the incoming Trump administration doubled down on the energy, defence and economic security issues posed by REE supply chain vulnerabilities and initiated an altogether more interventionist approach. This has included direct financial intervention in private sector markets to remove perceived barriers to investment and funding.
The centrepiece to this new approach is the engagement with MP Materials, the operator of the Mountain Pass complex, which is currently the only rare earth mine and processing site in the United States. The Department of War took the unprecedented step of investing US$400 million in preferred stock in MP Materials, with warrants for a future increase in the Department of War’s holding of up to 15% of the company's shares. In addition, the Department of War entered into a 10-year offtake agreement with MP Materials for the purchase of sintered neodymium-iron-boron (NdPr) permanent magnets from its proposed new 10X magnet manufacturing facility. As part of the wider financing and public-private partnership package, the US Government also provided MP Materials with price floor protection, guaranteeing MP Materials a price of at least US$110 per kilogram of NdPr to insulate MP Materials from price fluctuation risk and to support its proposed midstream conversion facility expansion.
These arrangements, together with an additional investment of US$150 million from the Office for Strategic Capital, have created a platform for the financing of the planned expansion of the Mountain Pass midstream conversion capacity and the construction of the new 10X magnet manufacturing facility. JP Morgan and Goldman Sachs also contributed to the development of the new 10X magnet manufacturing facility and the expansion of existing midstream conversion facilities at Mountain Pass on the strength of this government support.
Beyond direct domestic investment, the United States has also entered into direct cooperation agreements with countries having access to REE raw material supply and processing capability, including Japan3https://www.whitehouse.gov/briefings-statements/2025/10/united-states-japan-framework-for-securing-the-supply-of-critical-minerals-and-rare-earths-through-mining-and-processing/., Australia4https://www.whitehouse.gov/briefings-statements/2025/10/united-states-australia-framework-for-securing-of-supply-in-the-mining-and-processing-of-critical-minerals-and-rare-earths/. and Saudi Arabia5https://www.whitehouse.gov/fact-sheets/2025/11/fact-sheet-president-donald-j-trump-solidifies-economic-and-defense-partnership-with-the-kingdom-of-saudi-arabia/.. These agreements encompass joint investment projects, joint strategic stockpiling initiatives and collaboration on measures for price support. This approach extends the concept of "friend-shoring" beyond memoranda of understanding, to incorporate strategic alliances and investment commitments that often encompass defence equipment supply and other strategic considerations, with the objective of locking-in and diversifying REE supply. For example, the strategic cooperation agreement between the USA and Saudi Arabia is reported to have led to the formation of a strategic joint venture between the Department of War, MP Materials and the Saudi mining company, Maaden. It is understood that the joint venture includes plans for the joint financing and development of rare earth separation capacity in Saudi Arabia using MP Materials’ expertise and technology and Saudi feedstock and feedstock sourced from third countries. The direct involvement of the US Government in a foreign mining and process plant venture represents a genuine step-change in approach.
In a sector characterised by long lead-times, high capital intensity and profound national security implications, facilitative legislative frameworks and policy support alone may be insufficient to address the midstream processing capacity shortfalls discussed in this article. Direct government intervention and a shift away from free market dynamics through the use of government equity investment, offtake commitments, price floors or strategic partnerships is likely to be required to unlock the private capital required to develop processing capacity at the pace demanded by current geopolitical realities.
Key Challenges to the Development of New Processing Facilities
Whilst the political and strategic imperative is clear, developers and financiers of new REE processing capability face a variety of complex and interrelated challenges. These will inevitably require detailed analysis on a project-by-project basis, but the principal issues are outlined below.
Operating Model
The desired positioning of a facility along the operating model spectrum will be a key early consideration for developers.
At one end of the spectrum are developers operating a fully merchant "tolling" facility, processing feedstock on behalf of third parties. At the other are those who will seek to purchase unrefined REE and sell the refined product, thereby assuming commodity price risk on both the feedstock and the offtake. Where a project sits along this spectrum will materially impact its overall risk profile and the nature of financing it can expect to attract, with knock-on effects for feedstock strategy and commodity price exposure.
To the extent that the processing facility is integrated with downstream mine and beneficiation assets and upstream end product manufacturing, there will be opportunity for a high degree of control and value creation. An integrated model which includes processing from unrefined ore to separated oxides, metals, alloys, and ultimately to sintered magnets, will benefit from extremely high levels of value creation. For instance, unprocessed REE ores may be valued at US$100 to 300 per tonne, whereas finished magnet products are typically valued in the range of US$200,000 to 500,000 per tonne.
On the face of it, an integrated model of this kind can be seen to insulate the processing facility from downstream feedstock supply and price fluctuations and upstream processed ore demand and price fluctuations. In practice, this is often illusory as the individual parts of the value chain will typically be owned and operated by different affiliate companies and will each be subject to distinct investment, governance and financing structures. Even if this is not the case, in locking in price certainty within the integrated parts of the value chain, the owner of the asset will just be shifting the market risk elsewhere, e.g. to the party selling end products to the market. Whilst full details are not yet available, it would be sensible to assume that the Department of War permanent magnet offtake agreement with MP Materials (discussed above) is structured to absorb a degree of risk in this regard,
Feedstock Security
Volume certainty and chemical specification of feedstock are likely to be front and centre of any investment analysis. Investors and funders will wish to understand whether feedstock is coming from a single source or counterparty and the certainty of that supply. Key questions include: is the supplier a trader or producer? What does the credit analysis look like? How certain is supply given global demand for REE, resource security considerations and the risk of trade restrictions and what contractual protections are in place to prevent the supplier from simply breaching contract if it receives a better economic offer elsewhere?
If feedstock is expected to come from multiple sources that are geographically dispersed, this potentially mitigates concerns around volume and counterparty failure but creates additional complexity where the resulting feedstock physical and chemical specification is more varied, with implications for the ongoing optimisation of the plant and potentially necessitating in-built design tolerances. In practice, the feedstock supply beneficiation circuit (i.e., crushing, grinding, and separation) will need to be optimised from a flow sheet perspective to meet the specific requirements of the conversion facility. It will then be for the developer of the conversion facility to ensure that contractual feedstock input specifications along with its integrated feedstock conditioning and pretreatment facilities are capable of offering a high degree of required certainty around conversion facility input and processing requirements.
Ethical sourcing requirements are also likely to feature prominently in the near term, presenting challenges for conversion facilities relying on feedstock from multiple sources without fixed longer-term arrangements, this being particularly the case where these requirements are mandated through legislation, in jurisdictions such as the EU. Close attention will need to be paid to labour conditions in source countries, particularly the use of child labour. Certificates of origin, blockchain trackers and product passports are all terms we are likely to hear more about as the sector matures. The fact that a jurisdiction or government may not be focussed on such requirements today will not preclude future evolution in this regard. We would expect investors and funders to be alive to this, and they will therefore expect projects to future proof their supply strategy to take requirements of this nature into account.
Commodity Price Exposure
Developer exposure to commodity price fluctuations, both in terms of feedstock supply and processed REE offtake, is a critical risk factor. There will be a balance to be struck between maintaining potential upside to REE price increases, achieving some degree of feedstock certainty (at least in terms of volume), and recognising that this is a supplier's market. Any processing facility seeking debt finance whilst maintaining some level of pricing exposure will need to work through these issues with potential funders and can expect detailed market due diligence.
A key consideration in the context of feedstock supply will be the extent to which the wider project structure can be used to manage and absorb feedstock price fluctuation risk. For instance, price swings for unrefined REE feedstock may be capable of being absorbed (practically or contractually) within offtake pricing for refined REE given the high degree of value differential between product at these different stages of the value chain. A likely concern for midstream processors will however be the risk of future additional midstream capacity coming online and/or the risk of the market being flooded with supply from the Chinese market, both factors having the ability to depress refined REE pricing. Given commodities of this kind are thinly traded, it is unlikely at this stage that this pricing risk may be hedged, so the solution will all revolve around appropriate contract structuring and protections.
The price floor of US$110 per kilogram of NdPr guaranteed by the US Government as part of the MP Materials arrangements directly addresses this challenge by providing a baseline against which private sector financiers can underwrite risk. In terms of wider solutions which may be introduced to insulate domestic midstream processing capacity build out from risks of this nature, it may be possible for governments to consider the introduction of wider pricing intervention by effectively creating a price floor on imported REE materials through appropriate trade measures. There will of course be a balance to be struck here between protecting emerging midstream processing capacity, and the economic, legal and political challenges that may arise from such a move in an environment, where security of supply is of central importance.
Offtake Strategy
Achieving a binding, long-term, take-or-pay contract with any degree of pricing certainty with an original equipment manufacturer (“OEM”) or component manufacturer is likely to be challenging, or potentially unattractive for the OEM from an economic perspective. Whilst memoranda of understanding and framework agreements abound, these are not necessarily binding, long-term offtakes that can underpin a financing.
Offtake strategy and structuring will underpin the investment thesis for both investors and debt providers. Securing early engagement and buy in from investors and debt providers to the terms being procured will be of fundamental importance and this process should take place as early as possible in the project development cycle, prior to definitive agreements being entered into and whilst there remains an element of competition in the funding strategy.
Even if a long-term take or pay offtake agreement can be achieved with an OEM, it is unlikely that the OEM will agree to be locked into any such arrangement indefinitely. For instance, delay to supply caused by construction delays is likely to provide the OEMs with walk away rights. An indirectly relevant example of this was the loss by Northvolt in the battery manufacturing sector of its key offtakers as a result of plant ramp up, quality and yield shortfalls for its new facility. This ultimately led to the insolvency of Northvolt and huge losses for its investors. With the deployment of nascent technical solutions at scale, mid-stream processors will need to be highly cognisant of their ability to meet offtake requirements by any hard-wired supply longstop date. Developers will need to build in adequate contingencies in their project budget and programme, as well as other contractual protections, with the view to avoiding the trigger of any offtaker release clauses.
The extent to which debt providers will accept any element of uncontracted capacity risk on the offtake will be driven by the extent of any agreed contracted capacity, an assessment of how this contracted element fits within the overall financial model, and detailed market analysis, projections and risk assessments for the uncontracted element of project output. Our view is that acceptance of material merchant risk will be hugely challenging for the REE market in the short to medium term absent meaningful Government support or demand signals.
Construction Risk
It is important to recognise that REE midstream processing facilities of this nature will represent a high risk, technically complex and environmentally challenging proposition for developers.
As with the deployment of any nascent technological solution in the midstream processing space, planning to achieve early design integration for all aspects of the technical solution will be very important. This should be encouraged and facilitated through the feasibility design and the front-end engineering (“FEED”) stages, with hands-on support from technology providers and their engineering teams in the development and articulation of the basic design package and its integration into the wider FEED package.
Contracting frameworks will need to be carefully considered and the risk allocation for delay, cost overrun and quality shortfalls properly understood. Historically, there is precedent for fixed-price, turnkey engineering, procurement and construction (“EPC”) contracts being successfully deployed in various process-based sectors. However, in a growing sector with evolving technology and with delay and cost overrun risk being front of mind, it may be challenging to achieve these terms at economical rates. This is an area in which we are seeing innovation and the deployment of construction contract delivery structures which accommodate a degree of design or liability disaggregation but incorporate terms to manage this disaggregation risk through incentives, contractual processes and procedures. We have seen buy-in from contractors, investors and funders to these new hybrid models for construction implementation.
We are also likely to see use of engineering, procurement and construction management (“EPCm”) and other related hybrid contracting solutions in this sector, which will create its own challenges in terms of interface management, risk allocation and time and cost certainty, but when properly implemented can be an effective delivery tool. The further the project moves away from a conventional EPC contracting model, the more likely the developer is going to be required to provide some level of completion support to underpin the perceived retention by the developer of time and cost risk. The shift away from a conventional EPC solution will also provide opportunity for innovation and optimization in project design development outside of the rigours of the fixed price and programme EPC solution, which is likely to be important if projects of this nature are to be successfully realised. There is a trade off to be considered between, on one hand, optimizing bankability and reducing the need for developer completion support and, on the other, the need to manage outturn capex costs and to provide the opportunity for design optimisation and innovation to enhance overall prospects of successful project delivery.
Future Expansion and First-Mover Advantage
Part of the short-term rationale for developing new processing and conversion capacity in the United States or Europe is the ability to capitalise on first-mover advantage and gain a material part of the value chain by subsequently expanding plant capacity or developing new facilities. For investors and funders supporting an initial plant, this will represent both an opportunity and a challenge. Whilst attracted by the potential for further growth, investors and funders will want to ensure there is no slippage of management focus and, ideally, that the first plant is operating at steady state before new facilities are developed. In other sectors, such as mining, refining and LNG, there is precedent for building in the flexibility to perform future expansions and incorporating this into financing documentation, subject to certain financial and technical tests being satisfied. These are all issues that we are seeing play-out in real time as developers look to construct and/or expand initial REE processing capacity, whilst at the same time seeking to lock in control at other stages of the REE value chain, through M&A activity and capital investment.
Conclusion
There is an indisputable need for new REE processing and conversion facilities in the United States and Europe. Without them, the gap in the supply chain will continue to grow, ultimately acting as a bottleneck for achieving technology and defence security.
Investment in these projects is required now; if we do not find ways to facilitate investment in the short term, the effects will be felt throughout the REE ecosystem in the coming decade and beyond. Fortunately, for the right projects there is both political and commercial support, with increasing appetite from private equity, private credit, commercial banks and multilaterals.
The challenge for policymakers and the private sector alike is to ensure that the legal and commercial frameworks are in place to translate political will into operational capacity before the window of opportunity closes. The recent interventionist approach seen by the United States will undoubtably yield results. It remains to be seen if the European Union and other western governments will follow a similar path to achieve similar results. All current indications are that the United States is setting the pace and it is for others to now find a way to catch up.