The Pentagon’s Rare Earth Gamble: Smart Strategy or State-Crafted Monopoly?

The Pentagon’s direct investment in rare earth miner MP Materials marks a decisive shift in US industrial and defence policy – one that shatters decades of Republican orthodoxy against ‘picking winners’. Faced with Beijing’s export controls on rare earth elements and magnets – critical to both defence systems and electric vehicles – the Trump administration has stepped in where the private sector and market forces failed.

China’s rare earth stranglehold is no abstract threat. In April, Beijing imposed export controls on certain rare earths and magnets in retaliation for US restrictions on chip exports. The result was immediate: overnight, US and European manufacturers, including automakers like Ford, were forced to idle factories.

The defence sector is even more vulnerable. US military hardware – from fighter jets to guided missiles – relies on specialized magnets, of which China supplies nearly 90%. Yet despite these clear risks, defence contractors and their suppliers have shown little urgency to diversify.

The reasons are simple: rare earths sit far down the supply chain, Chinese magnets remain far cheaper, and no company wants to shoulder the extra cost alone if competitors can still buy from China. There has been little impetus from government to fix the problem. In the UK, defence companies will not invest to de-risk supply chains unless the Ministry of Defence requires it.

The Pentagon has taken a lead, cutting through corporate inertia with decisive intervention. In June, it agreed to invest $400 million to acquire a stake in MP Materials and guaranteed the company above-market prices for its magnets for a decade. In effect, the Pentagon has revived a version of the World War II-era ‘cost-plus’ model that built the Arsenal of Democracy.

The deal will help MP Materials build a second US magnet facility, expanding its total capacity to 10,000 tonnes of rare earth magnets annually. The Pentagon has committed to buying all the magnets from the new facility – removing commercial risk for the company and ensuring a secure supply for defence and commercial needs alike.

The Risks of Creating a ‘National Champion’

However, backing a single company carries its own risks. By becoming a major equity holder in MP Materials, the Pentagon is concentrating future capacity in one player rather than cultivating a broader, more resilient supply base. This approach could inadvertently squeeze out other US magnet makers who lack similar guarantees or government backing.

Moreover, the intervention raises a broader policy question: is it wise to lean so heavily on one firm, or should the US government adopt a more comprehensive industrial strategy? Tax credits, demand-side incentives, and support for multiple producers could build a more competitive, diversified rare earth ecosystem which could help de-risk other sectors.

The Pentagon could end up paying heavily to support MP Materials. It has guaranteed to pay the difference between the market price and a price floor of $100 per kg of neodymium (Nd) and praseodymium (Pr), whether oxide, metal or concentrate. Current market prices are around $72 a kilogram.

In addition, it has promised to guarantee at least $140 million a year in earnings before interest, taxes and other items (EBITDA) for MP Materials’ new magnet facility, as part of an offtake agreement.

On the other hand, it can share in the upside if prices or magnet earnings rise beyond certain thresholds.

A Necessary Cost

The Pentagon’s move is a necessary first step to break the stalemate that left the US defence sector exposed to Chinese leverage. China eased magnet exports in June, after the US and China reached a trade agreement in Geneva, doubling shipments to the US from the previous month – but the underlying risk remains: supply chains can still be cut off at any moment.

But competition from Chinese rare earth magnets will not disappear and industries that source from China could still enjoy a cost advantage in the marketplace.

Strategic dependency on China won’t be broken by a single investment. The Pentagon’s bold step is necessary – but not sufficient. Without a broader, market-building strategy, the US risks replacing one vulnerability with another: dependence on a single domestic supplier.

© RUSI, 2025.

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