Inside Neo’s rare earths factory

NARVA, Estonia — Europe’s big bet to break China’s rare earths dominance starts on Russia’s doorstep.

The continent’s largest rare-earth facility, situated on the very edge of NATO’s eastern flank, is ramping up magnet production as part of a regional push to reduce its import reliance on Beijing.

Developed by Canada’s Neo Performance Materials and opened in mid-September, the magnet plant sits in the small industrial city of Narva. This little-known border city is separated from Russia by the Narva River, which is an external frontier of both NATO and the European Union.

Analysts expect the facility to play an integral role in Europe’s plan to reduce its dependence on China, while warning that the region faces a long and difficult road ahead if it is to achieve its mineral strategy goals.

Magnets made from rare earths are essential components for the function of modern technology, such as electric vehicles, wind turbines, smartphones, medical equipment, artificial intelligence applications and precision weaponry.

Speaking to CNBC by video call, Neo CEO Rahim Suleman said the facility is on track to produce 2,000 metric tons of rare earth magnets this year, before scaling up to 5,000 tons and beyond as it seeks to keep pace with “an enormously quick-growing market.”

The European region currently imports nearly all of its rare earth magnets from China, although Suleman expects Neo’s Narva facility to be capable of fulfilling around 10% of that demand.

“Having said that, our view of that number is something like 20,000 tons. So, we’d have a lot more work to do, a lot more building to do because I think the customers have a real need to diversify their supply chains,” Suleman said.

“We’re not talking about independence from any jurisdiction. We’re just talking about creating robust and diverse supply chains to reduce concentration risk,” he added.

Neo has previously announced initial contracts with Schaeffler and Bosch, major auto suppliers to the likes of German auto giants Volkswagen and BMW.

Europe’s push to deliver on its resource security goals faces several obstacles. Analysts have cited issues including a funding shortfall, burdensome regulation, a limited and fragmented made-in-EU supply chain and relatively high production costs. All of these raise questions about the viability of the EU’s ambitious supply chain targets.

“Europe needs a big increase in rare earth magnet capacity to even come close to a diversified supply chain for its carmakers,” Caroline Messecar, an analyst at Fastmarkets, told CNBC by email.

Once a previously obscure issue, rare earths have come to the fore as a key bargaining chip in the ongoing geopolitical rivalry between the U.S. and China.

In October, China agreed to delay the introduction of further export controls on rare earth minerals as part of a deal agreed between China’s Xi Jinping and U.S. President Donald Trump. China’s earlier rare earths restrictions, which upended global supply chains, remain in place, however.

“The threat is still there; the guillotine still looms. And so, I think collectively all of this has just sobered the West, end-users and governments to the risks that they face,” Ryan Castilloux, managing director of critical mineral consultancy Adamas Intelligence, told CNBC by phone.

“It is a frankly a billion-dollar problem that affects trillion-dollar downstream industries. So, it is worth solving,” he added.

Europe, in particular, has been caught in the crosshairs of tariff turbulence. In its Autumn 2025 Economic Forecast, the European Commission, the EU’s executive arm, identified Chinese export controls leading to supply chain disruptions in several sectors such as autos and green energy.

It thrusts the issue of supply diversification in the spotlight for European policymakers, especially as demand is projected to grow until 2030 and EU supply remains highly reliant on a single supplier, according to a statement from a European Commission spokesperson.

In response, European Commission President Ursula von der Leyen announced in October that plans were underway to launch a so-called “RESourceEU” plan — along the lines of its “REPowerEU” initiative, which sought to overcome another supply issue — energy.

The Narva project predates these measures but, with 18.7 million euros ($21.7 million) in EU funding, it’s an example of what the EU hopes to achieve. And although its output is modest when compared to overall demand, it demonstrates how the EU plans to boost the bloc’s magnet output capacity and reduce dependence on Chinese supply.

China is the undisputed leader of the critical minerals supply chain, responsible for nearly 60% of the world’s rare earths mining and more than 90% of magnet manufacturing. Europe, meanwhile, is the world’s biggest export market for Chinese rare earths.

The location of Neo’s new magnet facility, meanwhile, has raised some eyebrows, given the potential security challenge of being in such close proximity to Russia.

Speaking shortly after Moscow’s full-scale invasion of Ukraine in early 2022, Russian President Vladimir Putin said Narva was historically part of Russia and needed to be taken back.

Asked why the company positioned its new rare earths plant there, Neo’s Suleman said the firm already had an existing infrastructure presence in the country, “and the right place was to be in Europe.”

“And then you go one step deeper, which is to get into Estonia. We have a long history in Estonia. We already have a rare separation facility that can do both light rare earths, and we’re developing heavy rare earths there,” Suleman said.

“We’ve been extremely impressed by the quality of the people in Estonia, their education level, their commitment to hard work … So, you put all that together, along with the support that we received both in Estonia and in the EU, and it was a great choice for us,” he added.

Estonian lawmakers have welcomed the potential of Neo’s magnet plant, saying the facility will benefit the development of both the country and broader region.

Jaanus Uiga, deputy secretary general for Energy and Mineral Resources of Estonia, said Neo’s magnet plant opened “very on time.”

Speaking to CNBC on Oct. 30, Uiga acknowledged economic tensions between the U.S. and China over rare earths, saying Estonia and the EU needed to adapt to an evolving situation.

“It is a very unique processing capability that was built in Estonia and also we are very happy for that because it happened in a region that is transitioning away from fossil fuels,” Uiga told CNBC’s “Squawk Box Asia.”