China is leveraging its rare earth export restrictions to drive a real climb up the industrial value chain.
Thanks to the blockade imposed by Beijing, Chinese advanced materials producers are rapidly gaining ground, eroding the traditional technological advantage of Japanese companies that for decades have dominated the most delicate stages of rare earth refining and processing.
As highlighted by the Financial Times in a report addressing the case, what was once a relationship of interdependence—with raw materials extracted and supplied by China, processed with high precision in Japan, and then re-imported into China for final production—is transforming into a new balance decidedly more favorable to Beijing.
The consequences are not limited to Japan alone, as they risk spreading to Western markets as well, creating potential bottlenecks in global supply chains.
A geopolitical weapon
The restrictive measures adopted by China this year are not the result of a whim but represent a targeted response to geopolitical tensions with Japan.
It all dates back to last November, when newly installed Japanese Prime Minister Sanae Takaichi, in some statements, referred to a possible involvement of Tokyo in a hypothetical conflict scenario over Taiwan. Beijing reacted furiously, first verbally and then, the following February, with tangible retaliation, extending rare earth controls to dozens of companies in the Land of the Rising Sun.
Already last year, China had adopted the same measures in response to aggressive tariffs introduced by the Trump administration on the so-called “liberation day.”
In this context, rare earths thus confirm themselves as a powerful geopolitical lever in Beijing’s hands.
The end of a circular model
Until recently, the system worked in a complementary and stable way: Japanese companies imported rare earths from China, transformed them into high value-added materials and components, and resold these to Chinese companies for the production of finished products.
Today, this flow has stopped or at least slowed down significantly. Chinese suppliers now turn to domestic producers, seizing the opportunity to develop internal skills and reduce dependence on foreign sources.
This shift is particularly evident in the yttrium processing sector, one of the elements added to China’s control list.
China dominates over 90% of the global production capacity of yttrium oxide, a fundamental substance for stabilizing zirconium, a versatile material used in the production of industrial ceramics, electronic components, and dental prostheses.
Japanese leadership at risk
For years, Japanese companies such as Tosoh, Daiichi Kigenso Kagaku, and Shin-Etsu have maintained a world leadership in the purification and processing of high-quality zirconium. China, while strong in the mid-to-low segments of the market, struggled to compete at the highest levels of purity and performance required by the most advanced applications.
According to Rao Xinwei, an analyst at Mysteel based in Shanghai, export controls on yttrium oxide have created a historic window for Chinese companies. They are now multiplying efforts to win international orders, refine their technologies, and expand their global market share.
Investor sentiment is palpable: since the beginning of the year, the stock prices of six Chinese companies specialized in zirconium- and yttrium-based products have recorded increases ranging from 74% to 312%.
Price gap and supply chain repercussions
The restrictions have generated a marked price gap between the Chinese domestic market and international markets.
In China, yttrium oxide is quoted at around $7.88 per kilogram, while in Europe it exceeds $1,175. Significant differences, though less extreme, are also recorded for other rare earth compounds.
Mixed signals come from Japan: according to industry sources, the most severe bottleneck concerns yttrium, while the zirconium situation remains manageable for now.
However, difficulties are not lacking. Aidite, a major Chinese manufacturer of materials and equipment for dentistry, reported having received a communication from Tosoh about a future suspension of deliveries.
It should be noted that most of Tosoh’s zirconium supplies destined for the dental sector are directed to the United States and Europe: any interruptions or delays would therefore directly affect Western customers, generating product shortages or greater dependence on Chinese alternatives.
Outlook
Experts agree that US efforts to build an autonomous rare earth supply chain to provide allies will take years, if not decades, before they can truly challenge China’s dominance.
Meanwhile, Chinese companies continue to gain ground in several segments. Cory Combs of Trivium China points out that domestic producers of magnets and other rare earth-based products have already matched Japanese levels.
Each new cycle of controls accelerates the consumption of Japanese stocks, raises costs for China’s foreign competitors, and strengthens its competitive position.
We may be facing a structural process destined to redraw technological balances in strategic sectors such as electric mobility, advanced electronics, and precision industrial applications. All to Beijing’s advantage.
