Malaysia’s Rare Earth Ambitions: Economic Opportunity or Environmental Risk?

The Global Rare Earth Race Reaches Southeast Asia

Malaysia has positioned itself as a critical player in the global rare earth elements (REE) market, a strategic move that reflects the intensifying geopolitical competition over these essential minerals. With approximately 16.2 million tonnes of rare earth deposits worth an estimated RM747 billion ($160 billion), the Southeast Asian nation is eyeing economic transformation through the development of a full rare earth supply chain. Rare earth elements—a group of 17 metallic elements crucial for manufacturing electric vehicles, wind turbines, smartphones, defense systems, and advanced electronics—have seen global demand double between 2015 and 2023. The International Energy Agency forecasts demand will triple by 2030 and quadruple by 2040 to achieve net zero emissions targets.

Malaysia’s push to develop its rare earth industry comes as the United States and other Western nations urgently seek alternatives to China, which currently dominates global rare earth production and processing. China controls approximately 70% of rare earth processing capacity and 100% of refined heavy rare earth elements. This near-monopoly has created significant geopolitical tensions, particularly after China briefly restricted rare earth exports to Japan during a 2010 trade dispute and again imposed restrictions on seven rare earth elements in response to U.S. tariffs in 2024.

Malaysia’s strategic importance is underscored by its hosting of the Lynas Advanced Materials Plant (LAMP) in Gebeng, Pahang—the only industrial-scale rare earth separation facility outside China. This plant processes rare earths from Australian mines and produces neodymium-praseodymium (NdPr) metal alloys critical for permanent magnets used in electric vehicles and wind turbines. With China tightening export controls and Western nations scrambling to build alternative supply chains, Malaysia finds itself at the intersection of competing interests from both Chinese and American partners.

The Malaysian government has implemented significant policy measures to develop its rare earth industry, including a ban on exporting unrefined rare earth minerals to encourage domestic processing. This policy aims to create value-added economic activities within Malaysia rather than simply exporting raw materials. The country has set an ambitious target of producing 30,000 tonnes of rare earths annually by 2030 under its New Industrial Master Plan, with some industry representatives suggesting Malaysia could eventually produce up to 70,000 tonnes of rare earth carbonates per year.

Geopolitical Crossroads: Competing International Partnerships

Malaysia’s rare earth ambitions have attracted interest from both global powers seeking to diversify supply chains. In October 2025, Malaysia signed a critical minerals agreement with the United States during President Donald Trump’s visit to Kuala Lumpur for the ASEAN summit. The agreement includes commitments that Malaysia will refrain from banning or imposing quotas on exports of critical minerals or rare earths to the U.S., ensuring no restrictions on the sale of rare earth magnets to American companies. This deal represents Washington’s broader strategy to secure alternative supply chains for critical minerals essential to defense and high-tech manufacturing.

Simultaneously, Malaysia is engaged in early talks with China for a joint venture refinery project, according to sources familiar with the discussions. China’s sovereign wealth fund Khazanah Nasional is reportedly considering partnering with a Chinese state-owned firm to build a processing facility in Malaysia. This potential partnership would mark a significant policy departure for China, which has historically banned the export of its rare earth processing technology to maintain its dominance of the industry. In return for technology transfer, China would gain access to Malaysia’s untapped rare earth reserves, potentially limiting competition from Australian rival Lynas Rare Earths.

This dual engagement reflects Malaysia’s neutral geopolitical stance, which experts believe could be advantageous in the global rare earth marketplace. The Australian High Commissioner to Malaysia has highlighted the importance of diversified supply chains and noted Malaysia’s developed local supply chains and skilled workforce for rare earth production, with over 90% of heavy rare earth equipment manufactured domestically. However, navigating these competing international interests while maintaining regulatory independence presents significant diplomatic challenges for Malaysia.

The economic stakes are substantial. Rare earth elements are not only vital for clean energy technologies but also for defense applications including sonars, guidance systems, radiation detection, and signal amplification that strengthen surveillance, navigation, and threat detection capabilities. As global demand surges, securing reliable access to these minerals has become a national security priority for major powers, making Malaysia a key geopolitical pivot point in the evolving rare earth landscape.

Environmental Concerns Surface: The Perak River Incident

In November 2025, Malaysia’s rare earth ambitions faced a significant environmental setback when authorities suspended operations at a rare earth site and two tin mines in western Perak state following complaints that a stretch of the Perak River—the second-longest river on the Malaysian peninsula—had turned bright blue. Minister of Natural Resources and Environment Johari Abdul Ghani announced that initial investigations found discharges at the rare earths mining site, operated by MCRE Resources Sdn Bhd, which matched the color of the contaminated river water.

Perhaps more alarmingly, radiation readings at the site reached 13 becquerels, far exceeding the 1 becquerel limit permitted under the project’s initial environmental impact assessment report—a 1,200% exceedance above established safety limits. This violation triggered immediate regulatory intervention under Malaysia’s binary compliance approach, where specific numerical thresholds automatically result in operational suspension without requiring additional legislative processes. The incident highlighted the environmental risks associated with in-situ leaching, the mining method employed by MCRE Resources with technology shared by Chinese rare earth firms.

“The investigation is now focusing on the type of chemicals used in the mining process and whether it is consistent with the information that has been reported to the authorities,” Johari Abdul Ghani told parliament.

In-situ leaching involves injecting solutions containing ammonium sulphate or dilute sulphuric acid directly into ore-bearing formations to dissolve rare earth elements, which are then collected and processed. While this method minimizes surface disturbance compared to open-pit mining, it raises significant concerns about groundwater contamination. The incident at the Perak River demonstrated the potential for environmental contamination when proper containment and treatment systems fail or when operations do not comply with established environmental standards.

This was not an isolated case of environmental concerns related to Malaysia’s rare earth ambitions. Local fishermen in areas near rare earth operations have reported observing changes in water quality and fish behavior, suggesting pollution upstream. Environmental activists have questioned the environmental impact of in-situ leaching, particularly its potential to contaminate groundwater and impact forest reserves. The MCRE suspension was part of a broader regulatory enforcement action that also targeted two tin mining companies for effluent discharge violations, inadequate erosion and sediment control, and chemical management failures.

Forest Reserves at Risk: The Biodiversity Dilemma

A critical tension in Malaysia’s rare earth development strategy is the location of its most promising deposits. The top five states with high potential for rare earth discovery—Terengganu, Kelantan, Perak, Kedah, and Pahang—contain up to 80% of their deposits within permanent forest reserves (PFRs), where mining is currently prohibited. Terengganu holds the largest deposits at 7.19 million tonnes (44.4% of the national total), with 70% located in forest reserves. Kelantan reports that most of its 2.56 million tonnes of rare earths (15.8% of the national total) are also situated in forest reserves.

Permanent forest reserves are designated for conservation and sustainable forestry under Malaysia’s National Forestry Act 1984. However, the Act allows for excision—temporarily removing protected status from sections of forest reserves—if they contain mineral deposits deemed to be of significant national value, provided an equivalent area is designated as forest elsewhere to maintain Malaysia’s commitment to 50% forest cover. This provision has created concern among environmental advocates who argue that sensitive ecosystems cannot simply be replaced and that efforts should focus on expanding protected zones rather than reducing them.

Meenakshi Raman, president of Sahabat Alam Malaysia (Friends of the Earth Malaysia), emphasized the ecological stakes: “Environmentally sensitive areas and ecosystems cannot simply be replaced. Efforts should focus on expanding protected zones, not reducing them.” Her organization has called for a federally mandated and legally enforceable protection mechanism that explicitly prohibits rare earth mining within permanent forest reserves, environmentally sensitive areas, water catchments, watersheds, core biodiversity zones, and customary indigenous territories.

The federal government has proceeded cautiously. Acting Minister of Natural Resources and Environmental Sustainability Datuk Seri Johari Abdul Ghani stated in August that no rare earth mining would be allowed in permanent forest reserves until ongoing federal studies on environmental and safety impacts are completed. This study is planned in phases over a five-year period, covering pre-mining (2024-2025), mining (2026-2027), and post-mining (2028-2029) phases. Despite these protections, illegal mining activities have been reported, including operations in the Bintang Hijau Forest Reserve in Hulu Perak that were raided by authorities.

Historical Legacy: The Bukit Merah Experience

Malaysia’s rare earth ambitions are haunted by a painful environmental legacy. In 1994, mining of rare earths in Bukit Merah, Perak, was shut down due to illegal disposal of radioactive waste containing thorium, which has a half-life of about 14 billion years. The facility, operated by Asian Rare Earth (ARE), a joint venture between Mitsubishi Chemical and a Malaysian company, became one of Asia’s largest radioactive waste cleanup sites. Local physicians reported that thorium contamination from the plant led to increased cases of leukemia, lung cancer, pancreatic cancer, and other ailments among nearby residents.

The Bukit Merah experience left a lasting impact on Malaysian public consciousness regarding rare earth mining. The environmental and health consequences of that project, which operated from the 1980s until its closure in 1992, created deep skepticism toward new rare earth initiatives. This historical context amplifies current concerns about the safety of rare earth operations, particularly regarding radioactive waste management and its potential impacts on human health and the environment.

“We are not against rare earths processing,” said Tan Bun Teet, a retired schoolteacher who leads a citizens’ group opposed to the Lynas plant. “We’re only against the inappropriate choice of site, and the way they’re going to keep the waste.”

Tan’s organization, “Save Malaysia, Stop Lynas!”, has been vocal in opposing the Lynas Advanced Materials Plant in Gebeng, expressing concerns about toxic wastewater leaching into groundwater and the vulnerability of storage ponds to monsoon rains that slam the swampy coastline every autumn. The plant sits on an industrial zone atop reclaimed swampland just 12 miles from Kuantan, a city of 600,000 people, raising concerns about proximity to population centers.

The Fukushima nuclear power plant accident in 2011 further amplified public concern in Malaysia about activities involving radioactive materials or waste. This environmental consciousness has created significant political challenges for any rare earth projects that involve radioactive byproducts, regardless of the economic benefits they might offer. The Malaysian government must now navigate this legacy of environmental harm while seeking to develop a responsible rare earth industry that avoids past mistakes.

Technology and Method: Ion Adsorption Clay Mining

A key factor in Malaysia’s rare earth development strategy is the specific type of deposits found in the country. Malaysia possesses significant ion adsorption clay (IAC) deposits, which contain heavy rare earth elements that are particularly valuable for clean energy technologies. Unlike hard-rock mining of mineral-based rare earth deposits, which typically involves significant radioactive thorium content, ion adsorption clay deposits generally have lower radioactivity levels. This characteristic presents Malaysia with an opportunity to develop its rare earth industry with potentially lower environmental risks than other mining methods.

Ion adsorption clay extraction typically employs in-situ leaching technology, where solutions are injected into the clay-rich soil to dissolve rare earth elements, which are then collected and processed. Industry proponents argue that this method minimizes surface disturbance compared to traditional open-pit mining and eliminates the need for environmentally destructive excavation methods. In the Perak pilot project at Kenering, only 4% of the designated project area required clearing for the construction of the hydrometallurgical plant, according to state authorities.

Research conducted by Universiti Kebangsaan Malaysia and Universiti Sains Malaysia at the Kenering pilot project indicated no radiation risks under the Atomic Energy Licensing Act 1984, which governs activities involving radioactive materials. The studies also found groundwater quality within national standards and no evidence of chemical leakage. However, these findings have not eliminated concerns among environmental advocates, who point to the recent Perak River incident as evidence that proper regulatory enforcement and monitoring are essential to prevent environmental harm.

Abdul Hafidz Yusoff, an associate professor at Universiti Malaysia Kelantan who specializes in mineralogy and environmental studies, noted that researchers are developing monitoring tests to track whether injected chemicals leach beyond their intended zone. This addresses the primary environmental concern for rare earth mining using in-situ leaching—groundwater contamination where chemicals injected into the soil could potentially seep into underground water sources, posing ecological and public health risks. The effectiveness of such monitoring systems will be crucial for determining whether Malaysia can develop its rare earth industry sustainably.

Regulatory Challenges: Federal and State Tensions

Malaysia’s rare earth development faces complex regulatory challenges arising from its federal structure, where mining activities typically require approvals and licensing from both state and federal government authorities. This division of regulatory responsibility has created inconsistent implementation of environmental safeguards across different states. State governments, under pressure to generate revenue, may be less inclined to gazette land and forests for conservation purposes as totally protected areas, creating tensions with federal environmental priorities.

M.S. Anuar Mahmod, secretary-general of the Rural Consumers and Ecology of Malaysia, has called for strengthening environmental laws with explicit amendments to ban rare earth mining in protected zones and remove loopholes that allow exceptions. He advocates amendments to the Environmental Quality Act 1974, National Forestry Act, and Town and Country Planning Act 1976 to formally codify a nationwide prohibition on rare earth mining and prospecting in protected areas. Additionally, he recommends establishing a national “no-go zone” registry coordinated at the federal level with an integrated, publicly accessible digital map.

The inconsistent implementation of regulations is reflected in the varied approaches across different states. While some states have embraced pilot projects and development plans, others have maintained stricter environmental protections. This regulatory patchwork creates uncertainty for investors and operators while potentially allowing environmental degradation to continue in jurisdictions with weaker enforcement. The Perak River incident demonstrated both the environmental risks of inadequate regulatory oversight and the federal government’s willingness to intervene when violations occur.

Adding to the regulatory complexity is Malaysia’s policy of banning the export of raw rare earths while simultaneously maintaining exceptions for pilot projects aimed at establishing national operating and licensing guidelines. This creates a delicate balance between resource conservation and industry development. Minister of Investment, Trade and Industry Datuk Seri Tengku Zafrul Abdul Aziz has stated that Malaysia will maintain this export ban to protect domestic resources, even after signing a critical minerals agreement with the United States. However, the country has committed to refrain from banning exports of critical minerals or rare earths to the U.S. specifically, creating a nuanced approach to international trade relationships.

Industry Perspectives: Sustainable Mining Possibilities

Despite environmental concerns, industry players argue that mining within forest reserves can be conducted safely and sustainably with proper technology and regulatory oversight. They contend that prolonged indecision will stall progress and lead to significant economic losses. Teoh Lay Hock, a professional geologist and technical adviser at the Malaysian Chamber of Mines, emphasized that not all forested areas have equal ecological sensitivity, suggesting that responsible, well-regulated mining using in-situ leaching and strict standard operating procedures could coexist with conservation in areas with lower ecological value.

According to industry calculations, a typical in-situ leaching mine producing 7,000 tonnes of rare earth carbonates annually occupies approximately 2,000 hectares of land but leaves minimal physical disturbance on the landscape. Only small patches of land require clearing for settling tanks and related infrastructure. If Malaysia achieves its target of producing 70,000 tonnes of rare earth carbonates annually by 2030, this would require approximately 10 such mines nationwide. Industry representatives suggest that even after 20 years of production at this rate, only 0.003% of permanent forest reserves would be affected, assuming operations are properly contained and rehabilitated.

Datuk Sia Hok Kiang, executive chairman of Malaco Mining Sdn Bhd, which is working with the Perak government on a pilot sustainable mining technology, highlighted environmental factors that must be rigorously assessed before any activity proceeds. These include disturbance to local commodities and economic uses of land, slope stability, soil quality, groundwater quality, as well as flora and fauna. Malaco is developing a mining technology designed to minimize disturbance to forest ecosystems by avoiding tree removal, limiting surface clearing, and using more environmentally friendly leaching agents other than ammonium sulphate.

Industry proponents also emphasize the importance of progressive rehabilitation—restoring vegetation and ecological function during or after operations—and continuous monitoring through a monitoring, reporting, and verification system to track water quality, soil condition, and biodiversity in real time. They argue that if data reveal emerging issues, operators must adjust immediately, including pausing operations if needed, to prevent harm. This approach, they contend, demonstrates that mining activities need not compromise vital areas such as water catchment forests if proper mitigation safeguards are implemented.

International Comparisons: Lessons from Global Experience

Malaysia’s approach to rare earth development can benefit from examining international experiences, both positive and negative. China’s dominance in rare earth production came at tremendous environmental cost. A 2014 report on the impacts of rare earth mining and refining on China’s water resources estimated cleanup costs of approximately $314 million for just a small segment (<10%) of the Dongjiang River watershed where southern China's rare earth refining industry is concentrated. In 2019, China's Ministry of Industry and Information Technology estimated a cost of $5.5 billion to clean up illegal mining sites nationwide.

The environmental devastation at Bayan Obo, China’s largest rare earth project, offers a cautionary tale. After more than four decades of operation, the site now has an 11-square-kilometer waste pond—about three times the size of New York City’s Central Park—containing toxic sludge with elevated concentrations of thorium. China’s State Council reported that rare earths operations have caused “increasingly significant” environmental problems, including severe damage to surface vegetation, soil erosion, pollution, acidification, and reduced or eliminated food crop output.

Australia’s experience offers a contrasting model of environmental regulation. Lynas Rare Earths chose to process its rare earths in Malaysia rather than Australia, where they are mined, because it received tax incentives. However, Australian environmental standards are considerably stricter, and the country is now developing its own rare earth processing capabilities with enhanced environmental protections. Iluka Resources is building Australia’s first rare earths refinery in Western Australia, which will operate as a zero liquid discharge facility that does not discharge water to the environment at any point.

The contrasting experiences highlight the importance of robust regulatory frameworks and enforcement mechanisms in ensuring sustainable rare earth development. China’s recent tightening of environmental regulations and shift of some polluting refining methods to neighboring countries like Myanmar demonstrates that environmental concerns can drive industry relocation unless proper standards are maintained. Malaysia’s challenge is to develop a regulatory approach that protects its environment while remaining competitive in the global rare earth marketplace.

The Path Forward: Balancing Economic and Environmental Priorities

As Malaysia moves forward with its rare earth ambitions, finding the right balance between economic development and environmental protection will be crucial. The country has taken steps toward creating a comprehensive rare earth business strategy that utilizes local rare earth minerals, with particular focus on ion adsorption clay deposits that have minimal radioactive waste issues compared to hard-rock mining. The government aims to establish a fully integrated “mine-to-magnet” value chain by 2030, which would position Malaysia as one of the few countries outside China with complete rare earth processing capabilities.

Key to this strategy will be addressing the concerns raised by environmental activists, local communities, and indigenous groups. In Pahang, Orang Asli families from Pos Lanai have been fighting against a rare earth mining project since 2019 due to concerns that it will pollute their main source of water. The potential displacement of indigenous communities and disruption of their traditional livelihoods represents a significant social risk that must be carefully managed through inclusive consultation and fair compensation mechanisms.

The development of a circular economy approach could mitigate some environmental concerns. Many by-products from rare earth and mineral processing can be converted for reuse in agriculture and construction materials, reducing waste and improving resource efficiency. Malaco Mining’s proof-of-concept separation plant in Perak uses an earth separation technology through a different chemical route that produces no solid residue, with the only waste being a fertilizer solution that can be used as a valuable by-product. Such innovations demonstrate the potential for more environmentally friendly processing methods.

Malaysia is also exploring traceability systems for rare earth materials from mine site to final product, verifying that extraction and processing meet legal, ethical, and environmental standards. This approach, similar to those being developed for other critical minerals, could help ensure that Malaysia’s rare earth industry meets international sustainability expectations while providing transparency to consumers and governments concerned about responsible sourcing.

The federal government’s cautious approach—maintaining the ban on mining in permanent forest reserves until comprehensive environmental studies are completed—reflects recognition of the environmental risks. The five-year study covering pre-mining, mining, and post-mining phases will provide valuable data to inform regulatory decisions. This measured pace may delay some economic benefits but could prevent irreversible environmental damage and the social conflicts that have plagued other resource extraction projects.

Global Implications and Future Outlook

Malaysia’s rare earth development carries significant implications for global supply chains. With Chinese export controls creating vulnerability in Western manufacturing supply chains for military and high-tech products, Malaysia represents one of the few viable alternative sources for processed rare earths outside China. The U.S. currently exports over 95% of its domestically mined rare earths to Asia for processing, highlighting the critical need for diversification in supply chains.

However, building a complete rare earth supply chain takes considerable time. The average time horizon for developing new mines in the U.S. is 29 years, and the average time to permit and license smelting and refining projects is 7-10 years. Even with accelerated timelines and international partnerships, it will likely take years before Malaysia can significantly alter global rare earth supply dynamics. The country’s target of producing 30,000 tonnes of rare earths by 2030 is ambitious given that it took China and Lynas decades to reach their current production levels.

The simultaneous engagement with both Chinese and American partners creates both opportunities and risks. Access to Chinese processing technology could accelerate Malaysia’s development of downstream capabilities, while partnerships with the United States could provide access to Western markets and investment capital. However, managing these competing interests without becoming caught in geopolitical tensions will require diplomatic skill and a clear strategic vision.

Environmental performance will be a critical factor in Malaysia’s success. International investors and technology partners increasingly require demonstrated environmental performance as a prerequisite for collaboration. The recent suspension of mining operations in Perak demonstrates that regulatory enforcement creates immediate operational risk regardless of project strategic importance. This regulatory rigor, while potentially slowing development, could enhance Malaysia’s credibility for ESG-focused investment strategies in the long term.

The global rare earth market is projected to continue growing as demand for clean energy technologies and advanced electronics increases. The International Energy Agency estimates that demand for critical minerals could quadruple by 2040 due to global decarbonisation efforts. This growth creates significant economic opportunities for countries that can develop sustainable rare earth industries that meet international environmental and social standards. Malaysia’s success in this endeavor will depend on its ability to balance economic ambitions with environmental protection, technological innovation with regulatory oversight, and international partnerships with national priorities.

Key Points

• Malaysia holds approximately 16.2 million tonnes of rare earth deposits worth an estimated RM747 billion, with up to 80% located in permanent forest reserves
• The country has banned exports of unrefined rare earths to encourage domestic processing and set a target of producing 30,000 tonnes annually by 2030
• Malaysia hosts the Lynas Advanced Materials Plant, the only industrial-scale rare earth separation facility outside China, making it strategically important for global supply chain diversification
• In November 2025, Malaysia suspended rare earth and tin mining operations after radiation levels exceeded safety limits by 1,200% and the Perak River turned blue from contamination
• Ion adsorption clay mining using in-situ leaching technology offers potentially lower environmental risks than hard-rock mining but raises concerns about groundwater contamination
• Malaysia is engaged in simultaneous rare earth partnerships with both China and the United States, reflecting its neutral geopolitical stance amid great power competition
• Environmental advocates oppose mining in forest reserves and sensitive ecosystems, citing Malaysia’s historical experience with radioactive contamination at the Bukit Merah site in the 1990s
• Industry proponents argue that sustainable mining is possible with proper technology, monitoring, and rehabilitation, noting minimal surface disturbance from in-situ leaching methods
• Malaysia’s federal and state regulatory framework presents implementation challenges, with inconsistent environmental safeguards across different jurisdictions
• China currently controls approximately 70% of global rare earth processing capacity, creating both market dominance and environmental vulnerabilities as Western nations seek alternative supply sources