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China and Rare Earths: Risks to Supply Chain Resilience in Europe

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This analysis argues that the EU and NATO’s efforts to strengthen supply chain resilience in critical raw materials are vulnerable to the People’s Republic of China’s leverage on key industry actors. It studies the case of the planned expansion of Silmet, Europe’s only rare earths processing plant, as well as the entities that control the plant and their current and historical ties to the Chinese market, the PRC party-state, the People’s Liberation Army, and China’s defence sector.

Silmet’s ownership – Neo Performance Materials: Estonia’s Silmet, a rare earths processing plant that was established in the Soviet era to produce enriched uranium, is currently controlled by the Canada-based company – Neo Performance Materials (NPM). Silmet processes rare metals, including rare earth elements, that the EU has identified as critical raw materials. There are plans by Silmet’s ownership to expand into producing rare earth magnets, which are essential for the green transformation and modern military equipment.

A history of PRC state ownership and intervention: NPM has a history of Chinese ownership. Its magnet-producing subsidiary, Magnequench (MQ), was acquired from General Motors in 1995 by a consortium of two Chinese state-owned enterprises coinciding with the PRC government’s plan to develop the rare earths sector. By 2001, MQ production facilities were relocated to China. In 2005, MQ merged with Canada-based AMR Technologies, and Chinese shareholders’ shares were not disclosed. In 2006, AMR Technologies changed its name to Neo Material Technologies (NEM).

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For several years, both Silmet and NEM were owned by US investors. To increase supply chain resilience in the rare earths sector, US company Molycorp acquired Silmet in 2011 and NEM in 2012. However, in 2015, Molycorp filed for bankruptcy — just after the PRC government caused rare-earth element (REE) prices to plummet by temporarily easing market controls. Prior to Molycorp’s bankruptcy, US-based Oaktree Capital Management (Oaktree) established a joint venture with a PRC state-owned asset management company to invest in distressed assets inside and outside of China.

In 2016, Oaktree, due to the secured debt it issued to Molycorp prior to its bankruptcy, became NPM’s majority shareholder and the owner of former Molycorp assets, including Silmet, Magnequench, and other REE processing facilities in China.

Neo Performance Materials and the China market: As of 2022, NPM’s largest shareholder is Wyloo, a company owned by the Australian private investment group Tattarang. Tattarang’s owners have personally reaped significant financial benefits through Fortescue Metals Group, selling iron ore to China, which still accounts for as much as 88% of Fortescue’s revenue. Other evidence — documented in this analysis — points to ties between Tattarang’s ownership and PRC political influence operations. NPM is similarly dependent on the Chinese market, from which it derives approximately 32% of its revenue. In addition, research shows that NPM has four production facilities located in China.

Military-industrial framework — More oversight needed: In Estonia, NPM’s newly established magnet-producing subsidiary briefly had a name similar to that of Hangzhou Permanent Magnet Group (HPMG), a company established by former PLA servicemen and an important supplier for the PRC defence industry and the PLA. NPM Silmet’s lawyers were negotiating for the purchase of patents and licences from HPMG.

Although that deal was ultimately unsuccessful and HMPG is not known to have any active links to Silmet, the incident points to a risk that in the future, without proper due diligence and government scrutiny, the PRC’s defence-sector companies could become involved in projects of strategic significance to the EU and NATO, such as REE magnet production. Furthermore, this analysis separately shows that NPM subsidiary in China already has indirect links with defence research institutions.

 

Source: ICDS

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