The digital economy's physical foundation begins not in Silicon Valley's design labs or Taiwan's fabrication plants, but in the mines and refineries that extract and process the raw materials essential to semiconductor manufacturing. This stage of the value chain represents a critical chokepoint where geopolitical power is concentrated in the hands of a few nations, most notably China, which has systematically built dominance over rare earth elements (REEs) and critical mineral processing.
The Critical Materials Landscape
Silicon: The Fundamental Building Block
Silicon, the second most abundant element in Earth's crust, forms the substrate for virtually all semiconductor chips. However, semiconductor-grade silicon requires extreme purity (99.9999999% or "9N" purity), achieved through energy-intensive refining processes. China dominates polysilicon production with approximately 80% global market share, driven by lower energy costs and massive state investment.
Rare Earth Elements: The Invisible Enablers
Despite their name, rare earth elements are relatively abundant in Earth's crust, but economically viable deposits are geographically concentrated. These 17 elements are essential for:
- Neodymium and Dysprosium: Permanent magnets in hard drives, cooling fans, and precision motors
- Europium and Terbium: Phosphors in displays and lighting
- Yttrium: Lasers and superconductors used in chip manufacturing equipment
- Lanthanum: Optical glass and camera lenses
Other Critical Materials
Beyond REEs, semiconductor manufacturing depends on numerous specialized materials:
- Gallium and Germanium: Compound semiconductors for high-frequency and optoelectronic applications
- Tantalum: Capacitors in mobile devices and servers
- Tungsten: Interconnects in advanced chips
- Cobalt and Lithium: Batteries powering mobile devices and data center backup systems
🌍 Global Rare Earth Elements Production Share
China's Strategic Dominance
The Path to Market Control
China's dominance in rare earth elements is the result of deliberate industrial policy spanning four decades. In the 1980s and 1990s, China invested heavily in mining and refining capacity while Western producers, facing environmental regulations and low profit margins, exited the market. By 2025, China controls approximately 70% of global rare earth mining and an astonishing 90% of refining capacity.
Environmental Externalities
Rare earth extraction and processing generate significant environmental damage, including radioactive waste, toxic chemical runoff, and landscape destruction. China's willingness to absorb these environmental costs— often in regions with weaker enforcement— has been central to its competitive advantage. The Bayan Obo mine in Inner Mongolia, the world's largest REE deposit, has created vast toxic lakes and contaminated groundwater.
Weaponization of Supply
China has demonstrated willingness to use its rare earth dominance as a geopolitical lever. In 2010, China temporarily halted REE exports to Japan during a territorial dispute, causing global prices to spike 10x. In 2025, China implemented export controls on gallium, germanium, and antimony— materials critical for semiconductors and defense applications— in response to Western technology restrictions.
The Refining Bottleneck
From Ore to Oxide: The Processing Challenge
Mining rare earth ore is only the first step; refining it into usable oxides and metals requires sophisticated chemical processing. This stage is even more concentrated than mining, with China controlling 90% of global refining capacity. The process involves:
- Crushing and grinding: Reducing ore to fine particles
- Chemical separation: Using acids and solvents to isolate individual elements
- Purification: Achieving 99.9%+ purity through repeated processing
- Metal reduction: Converting oxides to metallic form
Capital Intensity and Expertise
Building refining capacity requires $500 million to $2 billion in capital investment and 5-10 years to reach full production. More critically, it requires specialized expertise in handling toxic and radioactive materials, which has atrophied in Western countries over decades of offshoring.
⚙️ Rare Earth Processing Flow
Western Response: Reshoring Efforts
United States Initiatives
The U.S. has launched multiple initiatives to rebuild domestic rare earth capacity:
- Mountain Pass Mine (California): MP Materials operates the only U.S. rare earth mine, producing 15% of global output, though ore is still sent to China for processing
- Defense Production Act: Federal funding for domestic refining facilities
- U.S.-Australia Partnership: $8.5 billion joint investment announced in October 2025 for rare earth projects
European Union Strategy
The EU's Critical Raw Materials Act aims to have 40% of annual rare earth processing occur within the bloc by 2030. Key initiatives include:
- Solvay (France): New rare earth magnet production line
- Estonia: Europe's first rare earth separation facility opened in 2024
- Greenland: Exploration of massive REE deposits, though environmental concerns remain
The Reality Check
Despite these efforts, experts project China will maintain 60-70% market share through 2035. The combination of established infrastructure, lower costs, accumulated expertise, and willingness to absorb environmental externalities creates a formidable competitive moat. Western reshoring efforts face 5-10 year timelines and require sustained political will beyond election cycles.
Strategic Implications
Control over raw materials and refining represents the deepest layer of dependency in the digital economy value chain. Unlike chip design or software, which can be developed relatively quickly, building mining and refining capacity requires decades of investment and environmental trade-offs. This makes raw materials the most durable source of geopolitical leverage— and the hardest chokepoint to circumvent.