Private Capital Financing Failures in Critical Minerals Supply Chain Realignment Policy and Korean Firms' Response Strategies

Executive Summary

The critical minerals supply chain realignment policies of the United States and Europe have proceeded by injecting subsidies and loans without resolving the structural factors that private capital avoids. As a result, China's comparative advantage in the refining and processing stages is likely to persist for a considerable period, and the base-case scenario (55% probability) of continued partial and uneven realignment is likely to prevail over the next 3-5 years. However, in defense- and aerospace-linked materials sectors where the United States is pushing forward driven by defense demand, the principle of prioritizing domestic firms is in operation, creating a real risk that Korean firms could be excluded. Korean firms need a dual strategy that maintains reliance on Chinese refining networks for the time being while simultaneously pursuing entry into US security-linked supply chains, and equity stakes should be limited to a level that can absorb policy volatility. The government must take on the role of designing fiscal support to bridge cost gaps that private capital cannot bear, while securing exceptions to domestic-firm-priority clauses through Korea-US supply chain consultation channels.

I. Situation Analysis of the Issue

Critical Minerals Supply Chain Realignment Policy Faces Effectiveness Controversy Due to Private Capital Financing Failure: Situation Analysis

1. Background and Development

The US and European critical minerals supply chain diversification policies gained momentum with the COVID-19 pandemic in 2020. Early pandemic disruptions in mask and pharmaceutical supplies led to concerns over dependence on China. The scope of securitization subsequently expanded to semiconductors, batteries, and rare earths [10]. The Biden administration chose to inject domestic production subsidies through the CHIPS Act and the Inflation Reduction Act (IRA) [10]. The logic behind this policy was simple: counter China's dominance in the refining and processing stages with subsidies to build up production capacity within the West.

However, a different problem emerged during actual implementation. Tom Moerenhout and Tomasz Nadrowski of Columbia University's Center on Global Energy Policy (CGEP) pointed out a flaw in the very design of this policy. They diagnosed that "the problem we are experiencing now is that public funds are being injected without first identifying and resolving the binding constraints on why private capital is not flowing in" [4]. Nadrowski put it more bluntly: "Private capital has failed us. It has failed us because it has been drawn to an ultimate point of gravity through labor arbitrage and arbitrage over negative externalities" [4]. In other words, no matter how much subsidy the government injects, the structural limitation remains unresolved—private capital continues to flow toward countries with low wages and lax environmental regulations.

2. Current Situation

Under the second Trump administration, this policy stance appears to be shifting from subsidies toward more direct government intervention. In August 2026, the Department of Energy (DOE) announced the $100 million PROSPECT program to train workers for critical minerals. The program set the goal of "supporting the training of the next generation of American workers needed to secure America's energy and mineral independence" [8]. The Department of Defense provided a $500 million loan to Phoenix Tailings, a small refining company based in New Hampshire. This company, which extracts critical minerals from mining waste through electrolysis, has set the goal of domestically sourcing minerals needed for key weapons systems, including missiles used in the Iran war. However, construction of new plants alone is expected to take up to a year and a half [12].

The case of the Democratic Republic of the Congo (DRC) illustrates the gap between diplomatic achievements and actual investment. The US-DRC critical minerals partnership has reached an important stage, but large-scale inflows of US capital have not actually occurred. The Africa Report assessed this as "not a failure of diplomacy but a case that reveals the limits of diplomacy" [1]. This is a sober diagnosis that government-to-government agreements do not automatically translate into private investment.

Similar frustrations are being repeated in Australia. Australia holds the world's second-largest lithium reserves (7 million tons, according to the 2024 US Geological Survey). The Australian government is seeking to retain more of the battery value chain's added value domestically, but the commercial success of its domestic mining companies remains limited in the face of Chinese competitiveness. ABC News reported that Australian lithium mining companies are "seeking to capture more value from a battery supply chain dominated by China" but that tangible results remain insufficient [5]. In rare items such as scandium, some partial success has emerged—for instance, shares of Australian mine developer Sunrise Energy Metals, which received US government support, surged 20%—but this is closer to an exceptional case [15].

Meanwhile, China is strengthening its strategy of keeping the supply of heavy rare earths—critical for defense and high-performance motors—confined within its own borders. Taiwan's DigiTimes Asia assessed the performance of US-based MP Materials as a "status report on industrial competition," analyzing that China is tightening its grip even further on the critical segments of the rare earth supply chain that are essential for defense and high-performance motors [9].

3. Key Actors and Positions

The US Government (Department of Energy · Department of Defense)has framed supply chain self-sufficiency as a security issue and continues direct intervention through subsidies and loans. However, its policy tools have taken fragmented forms such as workforce training programs and individual company loans, falling short of a fundamental remedy for the structural incentive problems facing private capital [8][12].

Private Investors and Mining Companieshave yet to escape the path dependency of chasing returns toward low-wage, low-regulation countries. The core problem is that the "labor arbitrage" structure identified by CGEP analysts operates regardless of the scale of government subsidies [4].

Resource-Rich Countries such as the DRC and Australiaare seeking to secure domestically the added value of processing and refining stages beyond raw material exports through partnerships with the US and the West, but they face a gap between diplomatic agreements and actual investment attraction [1][5].

Chinais responding to the West's diversification efforts by leveraging its overwhelming market dominance in the refining and processing stages, in particular by reinforcing its strategy of retaining strategic items such as heavy rare earths—essential for defense and high-performance industries—within its own borders [9].

4. Key Issues

The first issue is a design flaw in subsidy policy. It has been pointed out that Western governments have injected public funds without first "identifying the binding constraints" [4]. The argument is that simply adding subsidies without addressing the fundamental problems—low profitability in the refining and processing stages, environmental regulatory costs, and the cost gap with China—makes it difficult to change the behavior of private capital.

The second issue is the time lag between diplomatic achievements and commercial realization. As shown in the DRC case, a pattern is repeating in which the conclusion of government-to-government partnerships does not immediately translate into inflows of private capital [1]. This is likely to appear identically in future cooperation with similar resource-rich countries.

The third issue is the time gap. As with the Phoenix Tailings case, even with Department of Defense funding, it still takes more than a year and a half for new refining facilities to become operational [12]. During this period, the battery and automotive industries have no choice but to maintain a China-dependent procurement structure. The time lag between policy announcements and actual supply chain realignment functions as a substantive variable in corporate risk management.

II. In-Depth Analysis of the Issue

Critical Minerals Supply Chain Realignment Policy Faces Effectiveness Controversy Due to Private Capital Financing Failure: In-Depth Analysis

1. Root Cause: Sequencing Error in Policy Design

The failure of Western critical minerals policy stems from a reversal in policy sequencing. Moerenhout of Columbia's CGEP identified this problem clearly, pointing out that "the problem we are experiencing now is that public funds are being injected without first identifying and resolving the binding constraints on why private capital is not flowing in" [4]. Governments responded by increasing the amount of subsidies. But they did not address the fundamental reason capital was not moving.

Nadrowski's diagnosis is more direct. He said, "Private capital has failed us. It has failed us because it has been drawn to an ultimate point of gravity through labor arbitrage and arbitrage over negative externalities" [4]. The core of this statement lies in the expression "point of gravity." Countries with low wages and lax environmental regulations structurally possess a force that pulls capital toward them. Indonesian nickel smelters and Congolese cobalt mines are representative examples. Subsidies are not large enough to offset this gravitational pull.

The low profitability of the refining and processing stages is also a structural cause. Lithium and nickel refining is capital-intensive and carries high environmental regulatory costs. In contrast, the added value is lower than in the downstream battery cell and electric vehicle production stages. The case of Australian lithium mining companies attempting to expand domestic refining capacity but failing to achieve commercial success in the face of Chinese competitiveness illustrates this [5]. From the perspective of private capital, there is little incentive for long-term investment in the low-margin refining stage.

2. Structural Context: Three Divergent Time Horizons

This problem is compounded by the mismatch among the timetables of politics, capital markets, and resource development projects. Politicians want visible results within their term. This context also explains why the DOE's PROSPECT program set the goal of "supporting the training of the next generation of American workers needed to secure America's energy and mineral independence" [8]. However, constructing new refining facilities takes at least a year and a half. Even though Phoenix Tailings received a $500 million loan from the Department of Defense, a considerable time lag before actual operation is unavoidable [12].

Capital markets demand an even shorter payback cycle. Private equity funds and institutional investors expect returns to materialize within 5-7 years. In contrast, it typically takes 10 years or more from mine development to refining facility operation. Government subsidies were supposed to bridge this gap, but subsidies only partially offset initial capital expenditure (capex) and do not solve the price competitiveness problem at the operational stage. With Chinese nickel and lithium still being supplied at low prices, new Western producers find it difficult to break even without subsidies.

The gap between diplomacy and investment is also structural. The US-DRC partnership, despite a government-level agreement, has not led to substantive capital inflows. The Africa Report assessed this as "not a failure of diplomacy but a case that reveals the limits of diplomacy" [1]. Government-to-government agreements can lower political risk, but they cannot resolve commercial risks such as the DRC's governance risk, infrastructure deficiencies, and exchange rate volatility. Private capital trusts on-the-ground profitability indicators more than frameworks promised by governments.

The mismatch between security logic and industrial logic also compounds the problem. The reason the Department of Defense provided a loan to Phoenix Tailings was for the security purpose of securing minerals for weapons systems, including missiles used in the Iran war [12]. However, while minerals procured in this way may be cost-effective for military use, they lack price competitiveness for the electric vehicle and battery industries, which represent large-scale demand. This means that the small-volume, high-cost procurement system for security purposes and the large-volume, low-cost procurement system for industrial purposes are separate. This separation is the reason such efforts do not fundamentally resolve raw material risk for the battery and automotive industries.

3. Historical Precedents: A Recurring Dilemma in Industrial Policy

This pattern is not new. Following China's rare earth export restrictions in the early 2010s, the United States and Japan attempted to secure alternative supply sources. At the time, subsidies were also injected into US rare earth companies such as Molycorp, but when China lowered prices, many projects went bankrupt. MP Materials' current attempt to build up domestic US rare earth supply against China's "controlled scarcity" strategy is exposed to a similarly structural risk. As long as China continues to control the supply of critical rare earths for defense and high-performance motors, the business foundation of US firms will remain dependent on political support [9].

The contrast with China's approach to fostering its solar industry in the 2000s is stark. China combined near-unlimited low-interest loans through state banks, land and power subsidies from local governments, and export incentives to build the entire solar value chain under state leadership. Rather than waiting for voluntary inflows of private capital, the state itself acted directly as the allocator of capital. In contrast, the United States and Europe continue to adhere to an approach that expects private capital to move on its own according to market logic while merely providing incentives through subsidies. EY's geopolitical analysis characterizes this approach as "sovereign industrial policy" while noting that the tension between government intervention and market distortion remains unresolved [3].

Japan's case is also worth referencing. Following the 2010 rare earth crisis, Japan adopted a strategy of combining equity investment in overseas mines with stockpiling through JOGMEC (Japan Organization for Metals and Energy Security, formerly the Japan Oil, Gas and Metals National Corporation). This was a way for the state to absorb part of the risk of private companies investing alone. Unlike the current US approach, which is limited to individual project support such as Department of Defense loans or Department of Energy subsidies, Japan differs in that its state institution directly holds equity stakes and shares long-term risk.

4. Key Variables in the Development of the Issue

The first variable is whether China responds by adjusting prices. If China lowers prices to coincide with the timing when new Western production capacity comes online, Western projects sustained by subsidies are highly likely to founder again. The rare earth case of the 2010s already demonstrated this pattern.

The second variable is whether the US government shifts its mode of intervention. If direct loans and equity investments using security budgets, as with the Department of Defense's loan to Phoenix Tailings, expand, the controversy itself over policy effectiveness stemming from the failure to attract private capital could shift into a different phase. This would represent a shift in policy instruments from subsidies to direct injection of state capital.

The third variable is a change in the bargaining power of resource-rich countries. Resource-rich countries such as the DRC and Indonesia have growing incentives to demand more favorable terms between the West and China. In this case, entry costs for Western firms could actually rise, making it even more difficult to attract private capital.

The fourth variable is whether end-demand industries, particularly the battery and automotive industries, expand off-take agreements. If automakers and battery manufacturers directly participate in upstream mineral projects through equity investment or long-term contracts, this could partially offset the risk-averse tendencies of purely financial investors. This is nearly the only market-based pathway that could mitigate the current structural problem of private capital financing failure.