Critical minerals become essential to AI chips and national security
As governments race to scale artificial intelligence and advanced semiconductors, securing rare earth supply is becoming essential to AI chip manufacturing
A reliable supply of rare earths is increasingly central to the production of advanced AI chips, as manufacturers push the limits of performance, energy efficiency, and thermal stability in data centers and high‑performance computing systems.
Beyond headline investments in chip fabrication plants, the AI boom depends on a steady flow of specialized materials that enable next‑generation logic, memory, and interconnect technologies. Critical minerals are embedded deep within the semiconductor value chain, shaping yields, reliability, and operating costs at scale.
“Our biggest vulnerability is time,” said Gracelin Baskaran, director of the Critical Minerals Security Program at the Center for Strategic and International Studies. “Even though billions are being spent now, it takes years to mine, process, separate heavy rare earths, and ultimately manufacture permanent magnets.”
She said China’s dominance across processing and manufacturing leaves Western economies exposed across multiple layers of the AI supply chain, from semiconductor fabrication to downstream industrial systems.
At the chip level, several rare earths and closely related critical minerals play a direct role in AI semiconductor performance, influencing efficiency, heat tolerance, and interconnect speed:
Gallium and germanium underpin compound semiconductors and fiber‑optic links used in AI accelerators and data‑center interconnects.
Yttrium is used in coatings and laser materials that improve chip efficiency and reduce cooling energy.
Europium enhances optoelectronic and laser materials and is used to dope compound semiconductors.
Gadolinium improves heat resistance in GPUs and AI accelerators under heavy workloads.
Lanthanum is used in high‑k dielectrics to improve transistor insulation and energy efficiency.
Beyond chipmaking, the expansion of the AI ecosystem depends on permanent magnets used in robotics, automation, and electric drivetrains that support data centers, factories, and autonomous systems.
“China produces about 93% of permanent magnets, and that concentration leaves the rest of the world exposed when supply is restricted,” Baskaran said.
As demand accelerates across the broader AI economy, reliance on rare‑earth‑based motors and components is rising in parallel with semiconductor and compute infrastructure growth.
Processing bottleneck
These challenges were discussed on December 9 at the Global Boardroom conference in London, organized by FT Live. The discussion took place in a panel titled “The race for critical minerals — what a win will mean,” which examined how supply‑chain vulnerabilities intersect with industrial policy, AI development, and national security. Leslie Hook, natural resources editor at the Financial Times, moderated the panel.
While headlines often focus on new mining projects, speakers said midstream processing is the true choke point in the critical minerals race. Separating, refining, and converting raw materials into usable inputs for chips, batteries, and power systems is energy‑intensive, capital‑heavy, and frequently unprofitable.
Baskaran said separating a ton of rare earths requires between nine and thirteen times more energy than extracting them from the ground. She said energy costs alone can determine whether processing projects survive, noting that China’s advantage was built in part on decades of access to cheap coal‑fired power and large‑scale industrial infrastructure.
She said upfront capital subsidies alone are not enough to make projects viable.
“What processing facilities really need is ongoing operating support,” she said, noting that refining charges for metals such as rare earths and zinc are often negative. “Nobody is going to build a refinery with a 75‑year horizon if it consistently loses money.”
Market distortions
From an industry perspective, Lim Wei Hung, executive director and chief operating officer of Southern Alliance Mining, said government intervention has become unavoidable as market failures intensify.
He said recent collapses in nickel and lithium prices were driven by mass production, particularly from Indonesia, where rapid capacity expansion has reshaped global supply. Vertically integrated producers, he said, can absorb losses in refining by relying on upstream mining profits, forcing higher‑cost competitors out of the market.
He said integrated supply chains allow companies to keep producing even when parts of the value chain lose money, prolonging oversupply and discouraging new investment elsewhere.
For private miners, Lim said there are few tools to manage volatility.
“As a private company, we are price takers,” he said, adding that hedging is often impossible in illiquid markets. Survival depends on cost discipline, ore quality, and operational efficiency rather than market timing.
Lim said geology ultimately determines which projects endure. Higher‑grade deposits and favorable mineral composition can offset price swings, particularly in rare earths where heavy elements command higher value in advanced manufacturing and defense applications.
“If your minerals are higher grade and have better composition, particularly in heavy rare earths, that is what compensates for price volatility,” he said. He said producers with a balanced output across light and heavy rare earths are better positioned than those reliant on a narrow set of elements.
He added that processing economics also depend on secure access to inputs such as power, water, and chemical reagents. Outside China, few countries have fully mapped these dependencies, leaving processing plants vulnerable to supply disruptions and cost shocks.
Regional strategies
Annika Seiler, principal energy specialist at the Asian Development Bank, said many developing economies want to move beyond exporting raw materials but face scale, cost, and capability constraints.
She said the world faces an estimated $200 billion shortfall in mining and processing investment through 2030, driven by price volatility, fragmented permitting regimes, and weak enabling environments.
“We are currently facing a shortfall in mining investment of around $200 billion through 2030,” Seiler said. She said the ADB is focusing on a holistic approach that includes policy reform, infrastructure development, data transparency, and environmental standards to attract long‑term capital.
Seiler said regional cooperation is essential for countries that lack sufficient scale to build standalone processing industries. The ADB is supporting low‑carbon industrial corridors linking mining with midstream processing across Southeast Asia and Central Asia, alongside policy harmonization to reduce regulatory friction.
She said environmental and water stewardship must be central to any critical minerals strategy, particularly in regions where mining has historically been associated with pollution and biodiversity loss.
Environmental trade‑offs
Processing constraints are compounded by environmental challenges, especially for rare earths. Baskaran said rare earth production generates significant waste, including wastewater and radioactive residue.
She said past resistance to domestic processing reflected a “not in my backyard” approach that is no longer viable as countries seek supply‑chain security. New projects are being forced to adopt cleaner technologies and closed‑loop systems to reduce environmental impact.
She cited closed‑loop water systems at U.S. projects as examples of how innovation can mitigate environmental risks, particularly in water‑stressed regions. Restrictions on exporting Chinese processing technology, she added, are accelerating the development of alternative methods outside China.
“These technologies are not perfect, but they are cleaner than before,” she said.
Beyond Asia, Africa and Central Asia are emerging as pivotal regions in the global minerals race. Baskaran said Africa remains one of the least explored continents geologically, despite offering higher returns on exploration investment than Australia, Canada, or the United States.
Energy shortages, governance risks, and long investment horizons remain major barriers. However, she said increased competition among investors from the United States, Europe, the Middle East, and Asia is improving deal terms for host countries.
She said better agreements increasingly include stronger environmental standards and commitments to reinvest mining revenues into infrastructure, energy, and education. At the same time, she cautioned that value‑added processing must be commercially viable, with regional processing hubs offering a more realistic model than duplicating facilities country by country.
Strategic priorities
As critical minerals become central to AI, semiconductors, and defense, tensions between climate policy, industrial strategy, and national security are sharpening.
Baskaran said Europe’s higher environmental standards increasingly diverge from U.S. priorities, complicating supply chain coordination. She said the minerals policy cannot be siloed any longer.
“We are not going to meet our minerals goals without thinking about manufacturing, national security, and clean energy together,” she said.
For governments pursuing AI leadership and semiconductor resilience, the panel’s message was clear: without sustained investment in processing, energy systems, and human capital, control over critical minerals will remain the limiting factor shaping technological, economic, and security outcomes.