Washington paid billions to break China's grip on rare earths. The output is flowing to Tokyo and Seoul.

Phoenix Tailings is shipping rare-earth metals from its US facility to customers in Japan and South Korea. The startup, which won $1.6 million in federal funding to pull critical minerals out of mine wastewater, says its first big buyers are overseas. US defense contractors have not placed the orders the company's US backers expected.

The bottleneck is no longer Chinese supply. It is American demand.

Myers says Japanese buyers are "clamoring" and that his customers are "primarily in Korea and Japan." Unless US defense contractors "move quickly," he said in an interview with Ars Technica, "I will sell out. Other companies are paying top dollar faster."

Phoenix Tailings is one of three US-backed rare-earth producers whose material is now flowing east rather than west. The other two are MP Materials, which mines and refines rare-earth oxides at Mountain Pass, California, and Energy Fuels, a US processor that has moved into rare-earth refining. Together, the three companies have collected billions of dollars in US government support, on the premise that domestic supply would seed a domestic magnet industry and reduce US dependence on China.

Rare-earth metals are the raw input for neodymium-iron-boron permanent magnets, which sit inside fighter-jet guidance systems, electric-vehicle motors, wind turbines, and the lithography equipment used to make advanced semiconductors. China spent two decades building the only industrial-scale magnet supply chain outside Japan. At the volumes that matter, Thomas Kruemmer argues, "neodymium-iron-boron magnet production today is really only Japan and China."

MP Materials ships its neodymium-praseodymium oxide and metal through Sumitomo Corporation of Americas, a long-standing distribution channel into Japan's magnet industry. Phoenix Tailings sells finished metals to Korean and Japanese refiners. Neither company has a US magnet customer big enough to anchor offtake at the volumes they can produce.

China's export curbs sharpen the situation. Beijing has tightened licensing and quotas on several critical minerals this year, Ars Technica reports, a category that includes but is broader than rare earths. The restrictions are part of why the US industrial-base push exists. The intended beneficiaries were US defense and clean-energy supply chains. The first paying customers have been the Asian magnet industry that already exists.

Phoenix's federal footprint is small in dollars and large in signaling. The $1.6 million Small Business Innovation Research award, documented on SBIR.gov, paid for early work on extracting critical minerals from wastewater, per a Phoenix Tailings press release. The Department of Energy issued a categorical exclusion, NEPA CX-023797, for a novel oxide-separation technique at the company's facility. The company's broader refining approach drew a profile in MIT News in 2024, when it was still a startup turning mining waste into critical metals. Phoenix is also backed by IQT. ARPA-E's $25 million critical-minerals-from-wastewater program sits in the same federal pipeline.

A trade-press piece from Rare Earth Exchanges describes a planned $500 million federal commitment to a "Freedom facility," a figure that has not been confirmed in company filings or federal announcements and should be treated as unverified.

Taxpayer-funded oxides and metals are leaving the country because the downstream magnet plants, and the defense contracts that would feed them, have not arrived on the schedule the subsidies implied. The next test is procurement pace. The Pentagon's National Defense Stockpile and Defense Production Act buys are the policy levers that could convert Phoenix's Korean and Japanese purchase orders into US ones. Until defense contractors move from letters of interest to multi-year offtake contracts, the startup's metals will keep heading to Tokyo and Seoul, and the rare-earth supply chain the US paid to build will keep running on someone else's customers.