Pentagon Price Floors and G7 Strategy Reshape Rare Earths Market

The rare earths sector is undergoing its most significant structural shift in decades, as Western governments move beyond rhetoric and into direct market intervention. Within the span of 48 hours, a series of policy moves and corporate transactions have redrawn the landscape for critical minerals, sending the VanEck Rare Earth and Strategic Metals ETF on a tear even as some analysts warn of technological headwinds ahead.

Heavy Rare Earths Take Center Stage

The Pentagon has formalized what industry insiders had long suspected: dysprosium and terbium are now classified as national security priorities. In a memorandum to REalloys, the U.S. Department of Defense signaled its intent to stockpile domestic supplies before a January 2027 ban on Chinese rare earths takes effect. REalloys is responding by expanding what will become the largest facility for these heavy rare earths outside China, with commercial-scale dysprosium production slated for its North American site.

The urgency is palpable. China currently controls roughly 70 percent of global mining and over 90 percent of refining capacity. France has set a 2030 target for its own heavy rare earth production, while G7 ministers from the U.S., Germany, and the EU met on May 6 to coordinate supply chain strategies ahead of the June summit.

Price Floors Replace Spot Market Volatility

Perhaps the most telling sign of the new regime came from Lynas Rare Earths, which struck a four-year deal with the Pentagon establishing a price floor of $110 per kilogram for neodymium-praseodymium (NdPr). The contract, backed by $258 million in U.S. government funding for a Texas processing plant, marks a departure from the volatile spot market that has historically deterred investment. Japan has similarly signed ten-year agreements with the Australian producer.

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This model is spreading. USA Rare Earth agreed to acquire the Serra Verde Group for an equity value of approximately $2.8 billion, including $300 million in cash. The deal, expected to close in the third quarter of 2026, gives the buyer access to the Pela Ema mine in Brazil — described by management as the Western world's only scaled producer of all four magnetic rare earths.

ETF Rally Masks Technical Warning Signs

The VanEck Rare Earth and Strategic Metals ETF has climbed 38.77 percent since January, touching €17.80 on Friday after pulling back from its 52-week high of €18.44. The fund's assets under management stand at roughly €1.3 billion. However, a relative strength index of 78.1 signals overbought conditions, and the annualized volatility of 44 percent underscores the sector's inherent instability.

NdPr oxide prices have retreated 21 percent to around $100 per kilogram, though they remain 88 percent higher than at the start of the year. David Merriman of Project Blue notes that markets outside China will stay tight as alternative suppliers slowly build capacity.

Technology Threatens to Undercut Demand

Not everyone is betting on a straight-line bull case. James Litinsky, CEO of MP Materials, warns that magnet producers are increasingly substituting alternative materials, which could permanently weaken prices for dysprosium and terbium. His company is nevertheless pressing ahead with heavy rare earth production in Texas, set to begin in mid-2026, and has already delivered initial magnets to General Motors.

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Lynas, meanwhile, became the first non-Chinese producer to separate heavy rare earths at its Malaysian facility. The company is seeking permits to expand capacity there significantly.

The structural deficit in NdPr oxide persists despite short-term profit-taking, and supply constraints for heavy rare earths are expected to extend well beyond 2026. USA Rare Earth is scheduled to report quarterly results on May 13 after the market close.

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