China and Malaysia are in early talks for a project to process rare earths, with sovereign wealth fund Khazanah Nasional likely to partner with a Chinese state-owned firm to build a refinery in the Southeast Asian nation, people familiar with the matter said.
If the joint venture takes shape, it would represent a significant policy departure for China, the world's top supplier and refiner of rare earths, which has banned export of its processing technology to protect its dominance of the industry.
Beijing is ready to swap its technology for access to Malaysia's untapped rare earths reserves, seeking to limit competition from Australian rival Lynas Rare Earths, which has a processing plant in the central state of Pahang, said two sources in Malaysia with knowledge of the talks.
All four sources who spoke to Reuters for this report sought anonymity because the matter is a sensitive one.
Malaysia's natural resources and trade ministries did not immediately respond to requests for comment on the talks.
Khazanah's chief investment officer, Hisham Hamdan, declined to confirm the talks or plans for the proposed refinery, saying it was "way too early,” but acknowledged that rare earths were among the industries being explored by the fund.
"We do many studies on industries... it's something we're happy to explore and help the government, but it's at government level, right? So I think that's as much as we can say," he told Reuters in an interview in Singapore on Thursday.
China’s State Council Information Office, which handles media queries on behalf of the government, did not immediately respond to a Reuters request for comment due to the National Day holiday.
A Malaysian source said the plan faced several roadblocks, however, such as China's concern whether Malaysia would be able to supply enough raw material for the plant.
Two of the sources said Malaysia was also concerned by the potential environmental impact and regulatory hurdles, since mining activities typically require approvals and licensing from both state and federal government authorities.
Malaysia has said it did not support rare earths mining in sensitive locations such as permanent forest reserves and water catchment areas.
Global manufacturers are scrambling to secure alternative supplies of rare earths, after Beijing's export curbs this year led to output delays for major automakers and magnet producers.
Malaysia has some 16.1 million metric tons of rare earth deposits, the government estimates, but lacks the technology to mine and process them.
It has banned companies from exporting raw rare earths to prevent loss of resources.
The only exception was granted in 2022 to a pilot mining project aimed at helping to set national operating and licensing guidelines for extraction of the rare earths.
Australia's Lynas, the world's largest rare earths producer outside China, signed a deal in May with Malaysia's eastern state of Kelantan for a future supply of mixed rare earths carbonate, seen as an effort to develop the local industry.
The proposed refinery is expected to process both light and heavy rare earths, two Malaysian sources said. These elements are critical to the manufacture of products from cars and mobile phones to military equipment.
Heavy rare earth metals, used widely in the development of clean technology, are less common, however, and some elements face shortages amid high demand.
In August, Johari Abdul Ghani, Malaysia's minister for natural resources said China was prepared to provide technical and technological assistance in processing rare earths.
However, President Xi Jinping had asked to restrict cooperation efforts to state-linked companies so as to protect trade secrets, Johari said, adding that discussions were still preliminary and no deal had been reached.
A successful deal would make Malaysia one of the few countries with both Chinese and non-Chinese rare earths processing technology, Johari added.
