Rare Earths Market Update: Q1 2026 in Review

Magnet demand drives structural growth

As demand accelerates across EVs, defense platforms and data infrastructure, the market is confronting a structural imbalance: surging consumption against a supply chain still overwhelmingly controlled by China.

At the heart of the rare earths story is the rapid expansion in permanent magnet demand, a segment that is quickly reshaping the entire outlook for the market.

“The largest industrial use of rare earth minerals is the production of permanent magnets, which account for over 80 percent of global demand by value,” wrote Jacob White, director, exchange-traded fund (ETF) product management at Sprott Asset Management, in a mid-April article. “Rare earth magnets can be up to 2 to 7 times stronger than standard ferrite or ceramic magnets, making them the strongest permanent magnets available.”

In 2025, roughly 40 percent of rare earths demand was tied to magnets. By 2035, that figure is expected to exceed 50 percent, according to Webb. This shift reflects not only the growing use of high-performance magnets, but also their increasing centrality to next-generation technologies.

The primary engine behind this growth is electric mobility.

Rare earth magnets, particularly those made from neodymium-praseodymium (NdPr), are essential components in EV motors, enabling efficiency, durability and compact design. “That is a real growth area for these materials,” Webb emphasized, pointing to the accelerating adoption curve for EVs globally.

Currently, about 36 percent of magnet demand is linked to e-mobility. Over the next decade, that share is projected to rise above 50 percent, underscoring how the electrification of transport is reshaping the demand profile for rare earths.

Beyond EVs, a new and less obvious driver is emerging: AI infrastructure. The rapid buildout of hyperscale data centers is creating incremental demand for rare earths-based cooling and efficiency systems.

During a mid-April webinar, Steve Schoffstall, managing partner and head of ETFs at Sprott Asset Management, explained that the five largest hyperscalers increased capital expenditures by 72 percent in 2025 to roughly US$400 billion. Rare earths, he noted, are critical to managing the thermodynamics of these facilities.

“They are very essential in helping everything run much cooler,” Schoffstall said, adding that cooling alone accounts for about 20 percent of a data center’s energy consumption.

Taken together, EVs, AI and broader electrification trends are creating what Schoffstall described as a “new level of resilient demand,” one less sensitive to traditional economic cycles and more anchored in structural transformation.

Defense demand adds strategic urgency

While commercial applications are driving volume growth, defense is injecting urgency — and geopolitical weight — to the rare earths narrative. Permanent magnets are critical to advanced military systems, including guidance, navigation and propulsion technologies, and the scale of usage is striking.

Webb noted that an F-35 fighter jet requires approximately 418 kilograms of rare earth magnets, while a naval destroyer uses 2.6 metric tons and a Virginia-class submarine roughly 4.6 metric tons.

Schoffstall offered a comparable perspective, noting that modern missile systems rely on samarium-cobalt magnets for precision and maneuverability.

“Modern defense really can’t function without the use of rare earths,” he said.

Although defense currently accounts for a relatively small portion of total rare earths demand — about 8,500 metric tons last year — it is expanding rapidly. “Over the last 10 years, defense demand … increased threefold,” Webb said, highlighting strong growth across the US and Europe.

This trend is being reinforced by a structural shift in defense spending.

NATO allies are moving toward raising expenditures from 2.5 percent of GDP to as much as 5 percent, while the US is pursuing a significant budget increase aimed in part at replenishing depleted stockpiles. For rare earths, this represents a durable and politically supported demand floor.

Supply concentration still a core risk

If rare earths demand is a story of expansion, supply is a story of constraint.

Despite relatively modest global volumes, the rare earths market remains acutely vulnerable due to extreme supply concentration, particularly in processing and refining. While mining is somewhat diversified geographically, China’s dominance becomes overwhelming further down the value chain.

According to Webb, China controls approximately 92 percent of refined NdPr supply. For heavier rare earths such as dysprosium and terbium, that figure rises to between 98 and 99 percent. This leaves western economies heavily dependent on Chinese processing for materials critical to both industrial production and national security.

“You might ask … it’s a pretty small volume of material — why is this a problem?” Webb said. The answer lies in the asymmetry: even limited demand becomes highly sensitive when supply is so tightly controlled.

Schoffstall traced this imbalance back decades, arguing that China’s dominance was not accidental, but the result of a deliberate long-term strategy. Beginning in the early 1990s, Beijing classified rare earths as strategic and systematically built out its processing capabilities, in part by acquiring foreign assets and expertise.

“They would learn the technology, take that back to China and then close down the assets they bought,” he said.

Today, that dominance is increasingly being leveraged as a geopolitical tool.

Recent export controls extend beyond domestically sourced material to include any processing facility globally that contains even trace amounts of Chinese-origin inputs.

The result is a supply chain that is not only concentrated, but also highly exposed to policy risk.

Efforts to diversify supply chains are gaining traction, particularly in North America, where governments are deploying a range of policy tools to support domestic production.

Webb pointed to mechanisms such as loans, equity stakes and price guarantees as critical to overcoming the structural cost disadvantages faced by western producers. MP Materials (NYSE:MP), for example, has benefited from government-backed initiatives aimed at establishing a fully integrated mine-to-magnet supply chain.

These policies are beginning to shift the landscape. By 2035, North America could account for roughly 9 to 10 percent of refined supply for key rare earth oxides — a meaningful increase, but still far short of displacing China’s dominance.

The challenge remains economic. Production costs outside China are significantly higher, reflecting stricter environmental standards, higher labor costs and less established infrastructure.

“Without that government support,” Webb suggested, “prices would likely be insufficient to incentivize western supply.”

Permitting timelines further complicate the picture.

Schoffstall warned that bringing new rare earths mines into production can take 15 years or more, significantly longer than the timeline for more conventional commodities like gold or silver. While downstream processing facilities may come online within a few years, upstream supply remains the bottleneck.

Price divergence highlights market fragmentation

One of the clearest indicators of a shifting market structure is the growing divergence in regional pricing.

Webb described an emerging “bifurcation” between China and ex-China markets, particularly for heavy rare earths such as dysprosium and terbium. In some cases, prices outside China are as much as five times higher.

“If you need that material outside of China, you’re having to pay five times the price,” he said.

Schoffstall echoed this view, noting that rare earths processed outside China are now commanding premiums of four to six times domestic Chinese prices. This spread is not merely a market anomaly — it is a direct consequence of policy-driven fragmentation and supply chain realignment.

For NdPr, the gap remains narrower, though prices have been supported in recent months by Chinese mining quotas and seasonal demand strength. Even so, the broader trend points toward a more segmented global market, with pricing increasingly reflecting geopolitical boundaries as much as supply/demand fundamentals.

Investment flows and the rise of thematic vehicles

The structural shift in rare earths is also being reflected in capital markets.

The first quarter of 2026 saw the launch of a new exchange-traded fund designed to capture the ex-China supply chain opportunity. The Sprott Rare Earths Ex-China ETF (NASDAQ:REXC) offers investors targeted exposure to companies involved in rare earths production and processing outside mainland China.

“It’s a differentiated product,” Schoffstall said, highlighting the fund’s focus on “the western supply chain renaissance.”

Built on a customized index, the ETF uses an “intensity score” to ensure that constituent companies derive a meaningful portion of their revenue from rare earth activities.

This approach reflects a broader shift in investor sentiment.

What was once a niche segment of the materials sector is increasingly being viewed as a strategic theme — one tied not just to commodity prices, but to national policy, technological transformation and geopolitical competition.

Strategic value and ongoing market friction

Looking ahead, the rare earths market appears set to remain structurally tight.

Demand for the critical minerals is rising across multiple high-growth sectors, from EVs and renewable energy to defense and AI. At the same time, supply of rare earths remains constrained by long development timelines, high costs and continued reliance on Chinese processing.

Governments are responding with unprecedented levels of intervention, from price floors to direct investment.

“This is a change in how governments operate,” Schoffstall observed, pointing to long-term pricing agreements as a new tool to de-risk projects and incentivize production.

Yet the path forward is unlikely to be smooth. The market remains vulnerable to policy shocks, price volatility and the enduring influence of China’s supply strategy.

As Webb noted, even small volumes can carry outsized importance in such a concentrated system.

That dynamic ensures that rare earths will remain firmly in the spotlight, not just as an industrial input, but also as a strategic commodity shaping the next phase of global economic and geopolitical competition.