AI emerges as new driver of rare earth demand, Sprott says

Artificial intelligence is emerging as an unexpected new source of demand for rare earth elements, adding to military and clean-energy consumption just as Western governments pour billions of dollars into rebuilding supply chains outside China, according to Sprott Asset Management.

AI has joined defence and electrification as a third structural driver of rare earth demand, with the world’s five largest hyperscale data-centre operators committing about $400 billion (C$562 billion) in spending during 2025 alone, the Toronto-based investment manager says.

Rare earth magnets are increasingly used in data-centre cooling systems, storage infrastructure, semiconductors and communications equipment, while cooling accounts for roughly 20% of a facility’s electricity costs. Al data centers are expected to consume 3% of magnet rare earths by 2030, according to an International Energy Agency forecast.

“I would say AI is probably one that investors don’t easily draw the conclusion that there’s a lot of rare earths used in that application,” Steve Schoffstall, Sprott’s managing partner and head of ETFs, said Thursday during a webcast on rare earth markets. “Really understanding how they’re used and what the implications are, not only from national security but economic security as well, is becoming increasingly important from an investor point of view.”

The shift broadens the investment case for rare earths beyond the electric vehicle market that has dominated discussion over the past decade. Demand is now increasingly tied to strategic government priorities, making the market less dependent on traditional economic cycles and more closely linked to national security, artificial intelligence and energy infrastructure, Schoffstall argues.

Defence demand

Rare earths are a group of 17 chemically similar elements used in permanent magnets that power electric vehicles, wind turbines, guided missiles, fighter aircraft, robotics and a growing range of advanced electronics. While the elements themselves are relatively abundant, economically viable deposits are uncommon and separating individual elements is technically difficult, making processing capacity as strategically important as mining.

Defence remains one of the strongest demand drivers. Global military spending has climbed to about $2.6 trillion annually, while NATO member countries have agreed to raise defence spending targets to 5% of gross domestic product. The United States is also considering expanding production of missiles and missile-defence systems under the Defense Production Act, both of which require high-performance rare earth magnets.

At the same time, electrification continues to underpin long-term consumption. Rare earth magnets remain essential components in electric vehicle (EV) motors and wind turbines, with Sprott citing forecasts that demand for magnets used in clean-energy technologies could double by 2050. Europe, China and other Asian markets continue to drive EV sales even as growth has moderated in North America.

China’s dominance

Underlying all three demand themes is China’s dominance of the supply chain. China now accounts for about 94% of global permanent magnet production, while the United States produces about 13% of mined rare earths and still depends on China for roughly two-thirds of its requirements, Sprott says. Recent Chinese export controls on rare earth products destined for military applications have intensified concerns among Western governments over supply security.

China has been “very successful in taking over that supply chain and really keeping other countries out,” Schofstall said.

That concern is reshaping industrial policy. Washington has taken an ownership stake in rare-earth miner MP Materials (NYSE: MP), offered long-term price guarantees for neodymium-praseodymium production and backed new processing facilities with loans. MP is the only producer of rare earths in the U.S.

Similar initiatives are under way in Australia and Japan, while private-sector investors including Apple, JPMorgan Chase and Goldman Sachs have committed capital to expanding non-Chinese production.

Mine delays

That widespread government support reflects a recognition that market forces alone are unlikely to rebuild supply chains after decades of Chinese dominance, Schoffstall said. Meaningful diversification will take time because mining projects require long development schedules, he cautioned.

“When you look at mining of new metals, it takes about 16 years on average to go from a new discovery to production,” he said. “It’s going to be a multi-year move and shift that we have to see.”

That lengthy timeline means Western governments may need to continue supporting projects financially through loans, equity investments or guaranteed pricing while new mines and processing plants are developed.

China has also tightened restrictions on exporting not only rare-earth products but technical expertise related to separating the elements. This creates another hurdle for countries trying to establish domestic refining capacity.

“We expected to see Western nations finally realize and wake up to the fact that they can’t rely on any one country, particularly a country that could be adversarial at times, to supply these critical materials,” Schoffstall said. “We’re seeing that play out now, particularly as it relates to rare earths.”