From Promise to Peril? The Hidden Risks in Malaysia’s Mine-to-Magnet Rare Earth Push

Malaysia’s ambitious plan to develop the entire rare earth elements (REE) production spectrum, from mining to processing and manufacturing, reflects a strategic response to rising global demand for critical minerals whose supply remains limited. Rare earths underpin green technologies, electric vehicles, wind turbines, and advanced electronics, with global demand projected to grow at 8.7 per cent annually from 2025 to 2030.

But the country lacks both the technology and massive capital requirements needed to meet this mine-to-magnet ambition.  Translating the ambition into a viable industrial strategy is also fraught with trade, capacity, and governance risks across the upstream, midstream, and downstream segments of the value chain.

At the global level, the REE industry is characterised by high market concentration. China dominates nearly 60 per cent of global REE production and an over 90 per cent share in refining and magnet manufacturing. This concentration creates supply vulnerabilities and exposes downstream industries to geopolitical risks, particularly in an era of intensifying strategic competition and export controls. In these circumstances, securing supply chains for processing REEs and for the raw materials needed to do so requires alternative sources but these are limited and costly. For Malaysia, as with other countries with REE resources such as Vietnam and the Philippines, these structural conditions shape both opportunities and constraints.

The choice of a technology and investment partner is particularly important, given intense geo-economic rivalry. The Agreement on Reciprocal Trade (ART) between Malaysia and the US and their Memorandum of Understanding on Critical Minerals, both signed in 2025, could bring investments from the US and its allies to Malaysia, thereby integrating the country with Western-controlled supply chains.  However, claims that the agreements completely exclude Chinese investments or technologies are not supported by their texts or Malaysian government statements and remain subject to how the terms are interpreted and implemented in practice.

Trade risks loom large, especially in relation to export controls and local content requirements. Export restrictions/bans, often justified as tools to promote domestic value addition, can disrupt supply chains, inflate prices, provoke retaliation, and erode investor confidence. Indonesia’s nickel export ban offers a cautionary tale: while intended to stimulate domestic processing, it led to WTO disputes, environmental degradation, and heightened dependence on China for mining and providing the inputs for refining as well as for importing the refined nickel. Malaysia’s use of export restrictions or local content rules for REE must therefore be weighed carefully against the risk of trade disputes, especially under ART, policy uncertainty, and reduced attractiveness to foreign investors.

Upstream investment risks are particularly acute. Malaysia’s REE endowment remains insufficiently mapped, with reconnaissance studies lacking comprehensive data on resource location, grade, and economic viability. Without clearer geological information, investors face high uncertainty regarding project feasibility. Since mining is under the jurisdiction of the respective states, these risks are compounded by the lack of transparency on investment screening at state level, as well as environmental and regulatory challenges. Past mining controversies have heightened sensitivity to ecological, and health risks, while the negative impact of nickel mining on the environment in Indonesia demonstrates the need for strict environmental control and implementation. Recognising this problem, Malaysia has developed a dedicated Environmental, Social, and Governance (ESG) Certification scheme (Malaysia’s Sustainable Mining Initiative or (MySMI), aiming to provide a standardised framework for sustainable operations.

Equally important is the social licence to operate. Activists, driven by concerns over environmental degradation, public health, and indigenous rights, can delay projects and raise costs through their impact on public perception. Without broad local acceptance, upstream projects risk becoming politically and commercially untenable, regardless of geological potential.

Midstream processing presents an even more formidable set of challenges. Rare earth separation and refining are technologically complex, capital-intensive, and environmentally sensitive. Malaysia currently lacks advanced processing technology and economies of scale, resulting in high operating costs, low yields, and elevated financial risk. Compliance with health, safety, and environmental regulations such as radiation safety and radioactive waste management can escalate costs and reputational risks.

Upstream uncertainty, midstream technological barriers, and downstream competitive pressures together create a high-risk investment environment.

Public perception is a critical factor at this stage. Effective containment, remediation, and transparent monitoring are therefore not merely regulatory requirements but essential investment-risk mitigation tools. Without credible governance frameworks, midstream investments are likely to face sustained opposition. This is not a hypothetical concern; the past and ongoing operational and regulatory challenges faced by the Lynas Advanced Materials Plant (LAMP) in Gebeng each time its licence needs renewal, serve as a real-time case study in the complex interplay of technical viability, regulatory compliance, and sustained social licence.

Downstream integration, while offering the highest value-add prospects, is marked by intellectual property constraints and limited access to proprietary technologies, which restrict Malaysia’s ability to move quickly into high-value manufacturing segments such as magnets. Global competition further complicates downstream ambitions. Malaysia faces strong competition from established producers in China and Japan, which benefit from scale, integrated ecosystems, and entrenched technological capabilities. Talent gaps and limited domestic scale constrain Malaysia’s competitiveness, raising questions about whether downstream ambitions can be realised without sustained policy support and strategic partnerships.

Both midstream and downstream activities aim to beef up Malaysia’s technology prowess through technology transfer. Contracts with third parties need tight technology transfer conditions that can be measured and monitored over time. Concurrently, Malaysia needs to boost its technology absorption capacity as it needs two hands to clap to make such transfers possible.

Policy and governance frameworks will ultimately determine whether these risks can be managed. Strong ESG standards are essential to attract long-term investment and maintain public trust. Trade commitments, investment screening, environmental regulation, and industrial policy must be aligned to avoid sending mixed signals to investors. In sum, Malaysia’s mine-to-magnet ambition is strategically sound but operationally complex. Trade restrictions intended to promote domestic value addition may backfire if they undermine investor confidence or trigger disputes. Upstream uncertainty, midstream technological barriers, and downstream competitive pressures together create a high-risk investment environment. Successfully navigating these challenges requires a calibrated approach, one that balances strategic autonomy with openness, while prioritising governance and transparency.

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