Malaysia has become a strategically important node in rare earth supply chains as the United States and its closest allies seek to diversify production away from China, according to a new report by Meredith Schwartz, adjunct fellow (non-resident) of the Critical Minerals Security Program at the Center for Strategic and International Studies (CSIS). The report, published on October 20, 2026, notes that in 2025 Malaysia became the first country outside China to produce dysprosium oxide, a key heavy rare earth for the defense industry. The country's processing capacity is set to expand significantly.
According to the CSIS report, citing Mining.com and Bloomberg, a new facility will increase capacity from 1,500 metric tons to 5,000 metric tons of heavy rare earth feedstock per year. The effort is led by Lynas Rare Earths, an Australian company that first received its license to operate in Gebeng, Malaysia, in 2012. The report argues that Malaysia's rise was not the work of one company or one country, but the result of decades of contributions: Malaysia's regulatory reforms, China's infrastructure investment, Japan's patient capital, Australian technological expertise, and the recent United States offtake agreement and price support.
The report cites U.S. Geological Survey data estimating Malaysia's rare earth deposits at 16.1 million metric tons, the third-largest reserves in the world after China (44 million) and Brazil (21 million). The report highlights that ionic clay deposits are nonradioactive, which avoids the social challenges often associated with hard-rock deposits containing radioactive materials.
The rare earth industry was expected to contribute as much as 9.5 billion MYR ($2 billion) to Malaysia's GDP in 2025 and to create nearly 7,000 job opportunities, according to figures cited in the report. Malaysia's policy stance has been central to its position. The country announced in September 2023 a nationwide moratorium on exports of unprocessed rare earths, effective January 1, 2024.
Trade Minister Tengku Zafrul Aziz was quoted in the report as saying: “Our policy is not to prevent trade forever. Our policy is to prevent the export of cheap unprocessed raw materials so that value is added to Malaysia.” Malaysia has nonetheless negotiated exemptions, including one granted to MCRE to ship ore to China for processing. In 2025, the United States and Malaysia signed a critical minerals MOU and a reciprocal trade agreement under which Malaysia committed to refrain from imposing rare earth export bans or quotas on the United States.
The U.S. government has also committed to purchasing rare earth oxides from Lynas at a price floor of $110 per kilogram. China has a considerable head start. The report describes how MCRE Resources, a joint venture between Chinese and Malaysian stakeholders, began developing the Gerik ionic clay deposit in the state of Perak in 2022, using Chinese in situ leaching technology.
MCRE exported nearly $11 million worth of rare earth ore to China from January to September 2025 for refining. The report also notes that China has made large-scale investments in Malaysia, with Belt and Road Initiative investments rising from $16.1 billion between 2005 and 2013 to $42.27 billion between 2013 and 2025. The $13 billion East Coast Rail Link is the largest announced project.
The report flags the Kuantan deep-sea port, jointly operated by Malaysia and China, as a key logistics hub for regional mineral trade, and warns that growing Chinese infrastructure presence creates risks of foreign acquisition of strategic assets and logistics disruptions. Social license to operate remains a significant challenge. In 2023, the Malaysian government imposed a ban on the cracking and leaching stage at Lynas's facility over radiation concerns, and Lynas launched legal action in July 2023.
A compromise in October 2023 allowed cracking and leaching to resume, with Lynas committing to remove radioactive waste and to invest 1 percent of gross sales in R&D within Malaysia. In July 2026, a Malaysian parliamentary committee announced a hearing on the Pentagon's $96 million supply agreement with Lynas, following protests from Greenpeace and the Boycott, Divestment, Sanctions movement. The report also states that CCP-backed networks have been found actively undermining Western rare earth projects through disinformation about Lynas, a point it draws from an analysis by the Australian Strategic Policy Institute.
Allied engagement is deepening. The report describes Australia's long defense and industrial relationship with Malaysia, including the Five Power Defence Arrangements, and Lynas's MOU with the Kelantan state government to jointly develop the state's rare earth deposits. Japan is described as Malaysia's fourth-largest trading partner and third-largest foreign investor.
In 2026, Japan Australia Rare Earths signed a purchasing agreement for a minimum of 5,000 metric tons of neodymium-praseodymium from Malaysia annually at a floor price of $110 per kilogram. The report also notes that in February 2026 Japan announced technological support for Malaysia's rare earth industry. The United States, historically a top-three foreign investor in Malaysia, is building on its semiconductor investment track record.
In July 2026, South Korea's JS Link signed an agreement with Lynas to build a rare earth magnet facility in Malaysia. The report offers four recommendations: building a plurilateral Indo-Pacific critical minerals framework to coordinate investment, offtake and price support; using financing from the U.S. International Development Finance Corporation or the Export-Import Bank of the United States, and Japan's Official Development Assistance, to build non-PRC logistics infrastructure; coordinating R&D and establishing technology transfer mechanisms, with Vietnam's 2017 Law on Technology Transfer cited as a reference; and launching sustained public education campaigns to counter PRC disinformation.
The report concludes that Malaysia's progress remains fragile and that the United States must move beyond dialogue toward patient, strategic capital, technology transfer and sustained public engagement.
Source: csis.org