Processing and Refining Bottlenecks: The Most Concentrated Link in the Chain

While public attention often focuses on mining as the critical vulnerability in mineral supply chains, the processing and refining stage is frequently the tighter bottleneck. Processing transforms raw ore into usable industrial materials: concentrates, refined metals, battery-grade chemicals, and specialty compounds. This mid-stream stage is where the supply chain is most concentrated, most technically demanding, and most dominated by a single country: China.

The distinction between mining and processing concentration is crucial. A mineral can be mined in a dozen countries but processed in just one or two. For many critical minerals, this is precisely the situation. Australia, the DRC, Chile, and Indonesia are major miners, but the ores they produce are shipped to China for processing into the refined forms that manufacturers actually use. This means that even aggressive diversification of mining supply does little to reduce overall supply chain vulnerability if the processing stage remains concentrated.

China's Dominance in Mineral Processing

China's position in critical mineral processing is unmatched by any single country's position in any comparable industrial sector. The scale of this dominance is worth documenting in detail:

• Rare earth processing: China performs over 85% of global rare earth separation and oxide production. It also controls approximately 90% of rare earth metal production and over 90% of permanent magnet manufacturing. Even rare earths mined in Australia, the United States, or Myanmar are predominantly shipped to China for processing.
• Lithium chemicals: China refines approximately 65% of the world's lithium into battery-grade lithium carbonate and lithium hydroxide. While lithium is mined primarily in Australia, Chile, and China itself, the conversion to battery chemicals is overwhelmingly Chinese.
• Cobalt refining: Despite producing minimal cobalt ore domestically, China refines roughly 70% of the world's cobalt into cobalt sulfate and other chemicals for battery cathodes. Chinese companies also own significant mining operations in the DRC, creating vertical integration across the supply chain.
• Nickel processing: China processes approximately 35% of global nickel into forms suitable for battery cathodes, with Chinese-invested facilities in Indonesia pushing this share higher. Indonesia's nickel processing sector, which has grown rapidly due to Chinese investment and technology, adds an additional layer of Chinese influence.
• Natural graphite: China processes over 90% of the world's battery-grade spherical graphite. Even natural graphite mined in Africa or other regions must be sent to China for the purification, spheroidization, and coating processes required for battery anodes.
• Gallium and germanium: China produces over 95% of global gallium and approximately 60% of germanium. These minerals are recovered as byproducts during aluminum and zinc processing, respectively, and the processing infrastructure is almost exclusively Chinese.
• Manganese: China refines over 90% of the world's battery-grade high-purity manganese sulfate, a key input for NMC battery cathodes.

Why Processing Became So Concentrated

China's dominance in mineral processing did not emerge overnight. It is the result of decades of deliberate industrial policy, massive state-backed investment, competitive energy costs (particularly from coal), lax environmental enforcement in earlier decades, and a willingness to accept low margins in mid-stream processing as a strategy for capturing downstream manufacturing value. Key factors include:

• Industrial policy: Beginning in the 1990s, China identified mineral processing as a strategic priority and invested heavily in building capacity while simultaneously restricting raw mineral exports to force domestic processing.
• Scale economies: Chinese processing facilities benefit from enormous scale, with individual plants often larger than the entire processing capacity of other countries. This scale drives down unit costs and makes it difficult for new entrants to compete on price.
• Integrated supply chains: Chinese mineral processors benefit from proximity to the world's largest battery, EV, and electronics manufacturing ecosystems, reducing logistics costs and enabling just-in-time supply relationships.
• Environmental arbitrage: Mineral processing generates significant waste, including tailings, wastewater, and air emissions. In the past, Chinese facilities operated under less stringent environmental regulations than Western counterparts, creating a cost advantage. While Chinese environmental enforcement has tightened substantially, the legacy capacity advantage persists.
• Western disinvestment: As China scaled up, Western processing facilities closed due to inability to compete on cost, environmental regulation costs, and a general trend toward outsourcing heavy industry. This created a self-reinforcing cycle of concentration.

The Strategic Implications

Processing concentration creates several distinct strategic risks:

Single-point-of-failure risk: If Chinese processing capacity is disrupted, whether by natural disaster, policy change, energy crisis, or geopolitical conflict, there is insufficient alternative capacity worldwide to maintain supply. The 2023 gallium and germanium export controls demonstrated that China can and will use its processing dominance as a tool of trade policy.

Information asymmetry: China's processing dominance gives it unparalleled visibility into global mineral flows, demand patterns, and downstream manufacturing activities. This information advantage can be leveraged for commercial and strategic purposes.

Technology lock-in: Decades of concentrated processing have allowed Chinese companies to develop proprietary processing technologies and expertise. Building alternative capacity requires not just capital but also technical knowledge that may not be readily available outside of China, particularly for complex rare earth separation and specialty chemical production.

Vertical integration leverage: Chinese companies increasingly control both processing and downstream manufacturing. This vertical integration means that even if alternative processing capacity is built, it may lack access to customers, who are themselves located in or controlled by Chinese companies.

Efforts to Diversify Processing

Governments worldwide are investing heavily in building non-Chinese processing capacity. Notable initiatives include:

• United States: The Department of Energy has allocated billions of dollars through the Bipartisan Infrastructure Law and Inflation Reduction Act for domestic mineral processing facilities. Lithium hydroxide, rare earth separation, and battery material plants are under construction or in development in multiple states.
• European Union: The Critical Raw Materials Act sets targets for domestic processing to meet at least 40% of the EU's annual consumption by 2030. Investment in lithium refining, rare earth magnet production, and cobalt chemical processing is being supported through EU and member-state funding.
• Australia: Leveraging its position as a major miner, Australia is investing in downstream processing to capture more value domestically. Rare earth processing by Lynas Rare Earths, lithium hydroxide production by Albemarle and Tianqi (despite Chinese ownership of the latter), and nickel refining are key focus areas.
• Canada, Japan, and South Korea: Each has developed bilateral agreements and investment programs targeting mineral processing capacity diversification, often in partnership with mining companies and allied-nation governments.

However, building competitive processing capacity outside China faces enormous challenges: higher capital costs, longer permitting timelines, smaller scale, less integrated supply chains, and the need to develop or license complex processing technologies. Most analysts estimate that meaningful diversification of processing will take a decade or more, leaving the bottleneck in place for the critical near-term period of the energy transition.