Russia’s war of aggression against Ukraine has exposed the geopolitical risks in key supply chains for the European Union (EU). Critical Raw Materials (CRMs) are essential in modern-day economy and particularly for Europe, for a wide array of technologies required for strategic sectors such as net-zero industry -including the electric vehicle’s market- digitalisation, health, defence, and space exploration.
Although the European Commission has been assessing the issue of raw materials access in the EU since 2008 through the European Raw Materials Initiative, the energy crisis that unfolded after 24th February 2022 led to swift action from policymakers in Brussels in terms of a proposed legal framework to address the substantial dependency on the import of these materials, often times from a single country. The Critical Raw Materials Act (March 2023) is intended to ensure EU access to a secure and sustainable supply of critical raw materials, enabling Europe to meet its 2030 climate and digital objectives.
These CRMs are labelled critical not due to their scarcity. Their criticality is rather associated with the strategic economic importance for key sectors of the EU economy, the high import-dependence and high level of concentration in particular countries, in some cases configuring quasi-monopoly, the lack of alternatives to these materials given their unique characteristics.
Globally, there is an unprecedented demand for CRM, as countries are increasingly in need of such materials to achieve decarbonisation and digitalisation. As consumption is expected to grow even further, with EU demand for rare earth metals expected to increase six-fold by 2030 and seven-fold by 2050, its reliance on the import of certain CRMs from a single or very few sources has not only become evident but undesirable.
The EU Critical Raw Materials Act aims to diversify the Union’s imports of raw materials by expanding its network of strategic partnerships and establishing secure and robust supply chains. This effort is geared towards reducing the risks associated with excessive dependence and enhancing economic resilience.
There are clear geopolitical risks from import concentration of CRMs that the EU most certainly must have taken into account when drafting the Critical Raw Materials Act. China in particular has demonstrated that it is willing to use its leverage in terms of critical minerals dominance to exert political and economic pressure on another state amid tensions. This was the case in 2010, when Beijing halted exports of rare earths to Japan, in retaliation to the detention of Chinese fishermen operating in disputed waters.
Moreover, in recent times, the US-China strategic competition again illustrated how CRMs can easily become a coercive geopolitical tool, with the latter reportedly looking to explore rare earth export curbing to target U.S. defence industry.
The idea of mitigating the exposure and reducing the probability of being targeted with such CRMs bans from China or other major exporter of such minerals seems appropriate, and necessary at this point in time. The EU has identified a list of 34 CRMs in 2023, 8 of which result problematic due to the fact that they currently exceed the maximum level of 65% in import concentration proposed by the EU CRMs Act: China exceeds the threshold for bismuth, cobalt ore, magnesium, manganese and strontium, Turkey does similarly for borates and feldspar, and the United States for beryllium.
Interestingly, the difficulty is not only found in raw material extraction but at the refining and processing stages of CRMs, with evidence also suggesting a Chinese supremacy in these cases, followed to a lesser extent by countries such as Chile, Democratic Republic of Congo (DRC) and other BRICS nations.
The Critical Raw Materials Act of the European Union places a high degree of attention to the mining and refining of raw materials in Europe. Yet, it fails to consider that there are externalities which will make this target more challenging to attain. For instance, geostrategic alliances may arise, multiply or become even more relevant in a fragmented and polarised international scenario, with additional supply risks that simply will not disappear given the EU’s assertion of domestic production and refining of CRMs. Similarly, an Organisation of Mineral Exporting Countries or “OMEC” could even come to existence in the form of a cartel, opening the possibility for price-manipulation, supply-disruption and international trade restrictions, once more, posing risks to countries highly dependent on imports such as the EU.
Recognising the need for action in the field of raw materials and proposing the EU Critical Raw Materials Act is a good first step. Nonetheless, instead of an inward-oriented approach, the EU should also focus on establishing international measures to tackle the indirect exposure to CRMs constrictions in the whole supple chain (from extraction to processing to refining to finished goods such as the magnets used in electric cars). Bringing new sources of supply from trusted countries will be crucial. In this context, the main policy instrument the EU can potentially take advantage from is foreign investment, the so-called Global Gateway, to promote investment in infrastructure and projects that diversify mining. In any case, the EU should prioritise international cooperation with like-minded countries as well, given that the CRMs issue is also a global challenge.
Source: MEIG
