Arthur Leichthammer, Geoeconomics Policy Fellow at the Jacques Delors Centre, argues that the EU needs a strategic rethink to safeguard its critical raw materials supply as global competition intensifies.
European Commission President von der Leyen assumed office in 2019 with the European Green Deal as her flagship policy, setting out the path for the EU’s clean energy transition.
Within it, she stressed the strategic importance of achieving resilient and diversified supply chains for sustainable raw materials that form the basis of any industrial process.
As the name suggests, critical raw materials (CRMs) – those resources judged to be of high economic importance and exposed to high supply risk – are of special importance. CRMs are key for strategic sectors of clean technologies, digital, space, and defence utilisation and, as such, fundamental to delivering the ambitions of the Green Deal’s net-zero targets.
They make electronics, motors, generators, and batteries. For instance, rare earth elements are essential for the manufacturing of wind turbines, solar panels, and electronic devices.
At the same time, lithium and cobalt are crucial for battery production, powering electric vehicles and energy storage systems.
CRM and the green transition
As the green transition progresses, the demand for CRMs will radically increase. For instance, the EU’s lithium demand is expected to increase twelve-fold by 2030.
As it stands, the EU’s current CRM supply will not suffice to cover this surge. The EU is not alone in its decarbonisation efforts, as economies worldwide have committed to net-zero targets.
The International Energy Agency (IEA) estimates that the global energy sector’s need for critical minerals could quadruple by 2040. To satisfy this increased demand, the IEA estimates that by 2030, 388 new mining sites will have to be opened.
As demand is projected to outgrow supply growth, global competition is becoming increasingly fierce, and reliable CRM supply chains are emerging as cornerstones of the new renewable industrial ecosystem.
The European Union does not produce or refine nearly the volume of CRMs it requires for its industrial production. As such, the EU heavily relies on imports. More problematically, it relies on a handful of countries for key CRMs, both in production and refinement. This exposes it to supply disruptions and price volatility, amplifying vulnerabilities in critical sectors.
First and foremost, the dependency on China has emerged as a key concern for the EU. Not only is China a key producer in a range of CRMs, but perhaps more importantly, it has established itself as the primary centre for the refinement of most key minerals, processing 40% copper, 60% lithium, 70% cobalt, and close to 100% of the graphite used worldwide. The EU, for instance, imports close to 100% of its rare earths.
The great power competition between the US and China and the ensuing trade war is likely to accelerate the politicisation of critical raw materials.
As the West attempts to decrease China’s strategic stranglehold on CRM value chains, China is becoming increasingly assertive in both defending and utilising its strategic position in the CRM value chain.
In 2020, China became the country with the most restrictions on mineral exports.
In 2023 alone, China introduced rare-earth export restrictions for several types of graphite and doubled down with a new trade ban on rare-earth production equipment. Both restrictions were implemented, citing national economic security interests.
This follows the earlier export permit requirement for gallium and germanium, which were required to make chips last August, in a retaliatory move following the Dutch trade restrictions on advanced semiconductor equipment.
The EU’s first stab at reducing its dependencies
While the EU has long tried to secure reliable CRM supplies, adopting its ‘raw materials initiative’ in 2008, the described geopolitical developments, the supply chain disruptions of the Covid pandemic, and Russia’s invasion of Ukraine have propelled the issue of energy and supply chain resilience forward with force.
Aiming to diversify and foster new supply chains and reduce critical chokeholds of CRMs, the EU put forward its Critical Raw Materials Act (CRMA), finalising the legislative process in March 2024. The legislative framework aims to enhance the EU’s CRM supply via increased domestic capacities and international agreements, seeks to improve the EU’s supply chain monitoring, and improve the sustainability of CRM sourcing.
The CRMA sets out three key milestones for the EU’s domestic capacities by 2030:
- 10% of annual consumption derived from locally extracted materials
- 40% processed in the EU
- 25% derived from recycled materials.
Key to enhancing the EU’s domestic production, processing, and recycling capacities is a Strategic Projects framework that grants accelerated permitting procedures and is supposed to ease access to financial support.
Under the framework, firms apply for Strategic Project designation from a Critical Raw Material Board, which is hosted and funded by the Commission.
Once granted, projects receive European public interest status and streamlined planning and development processes. Authorities must decide on resource extraction projects within 24 months and processing or recycling projects within 12 months, with limited contingency time for complex applications.
It further foresees that financial risks are shared between project promoters, member states, and public financial institutions, involving partners like the European Investment Bank Group to provide recommendations on project preparation and financial assistance.
Furthermore, the Act empowers the EU to set environmental standards and screening criteria for raw materials mined, refined, and recycled within the European Union.
The CRMA also posits that a maximum of 65% of a strategic raw material at any relevant stage of processing should originate from a single third country. To enhance such reshoring efforts and reduce overly concentrated dependencies on single states, DG GROW is setting up a panel which, in co-ordination with the member states, will attempt to build on current raw materials partnerships and facilitate infrastructure projects.
Already having exempted the vast majority of CRMs from tariffs via its expansive network of free trade agreements and WTO provisions, strategic partnerships are becoming crucial for the EU to secure additional CRM supplies from trading partners.
Big ambitions – wrong tools
The new legislation provides a much-needed move to up the ante for the EU to address its dependencies.
However, it is likely to fall short of its ambitions for two reasons.
First, the predominant focus on accelerating permitting processes is unlikely to increase the speed of mining investments significantly. The exploration and construction phases of mining projects take several years, with the average mine taking around 15 years from exploration to completion.
So, even if the Act succeeds in chipping off a couple of months in the process by cutting bureaucratic red tape, it will take a long time for European mining projects to reduce European dependencies in a meaningful way.
Second, the Act lacks the financial power of comparable programmes, such as the US Inflation Reduction Act, which allocated over $8.5bn for CRM projects, or the significant financial means available to Chinese state-owned enterprises.
CRM projects are characterised by their need for hefty investments over extended periods and large downside risks regarding permitting and social and environmental risks. On the other hand, CRMs are subject to high price volatility, as seen in the collapse in lithium prices over the last ten months, increasing investment uncertainty.
While the CRMA foresees provisions for firms to lock in prices at which they can sell their resources, it is unclear how this would look in detail and how it would be financed. Without greater financial reassurances, firms are likely to continue their reluctance to make the required investments.
Further, the Act misses out on generating new incentives for additional incentives to crowd in private risk capital, for example, via tax credits.
Amidst the inability to pledge significant funds on a European level, it is left to national capitals to generate investments towards the long-term supply of the needed materials.
Germany, France, and Italy all pledged national financial resources via dedicated funds, Germany and Italy committing one billion each and France two billion euros. In the summer of 2023, they also created a working group to co-ordinate better future possibilities to source critical raw materials collectively. This has the potential to foster projects akin to the Important Projects of Common European Interest (IPCEIs), which allows multiple member states to channel state aid into technology projects of common European interest.
A national approach, however, risks underinvestment for member states with limited fiscal headspace. The production of CRMs is a European public good, supporting the EU’s economy and its resilience.
To achieve the ambitious targets set out in the CRMA and to generate sufficient production capacities, the development of CRM value chains across the EU must be strengthened.
The next Commission needs a strategic rethink on critical raw materials
To turn the ambitious political ambitions of the CRMA into actionable policy, the EU must step up financing. Having made European Investment Bank financing eligible for all steps of the CRM value chain in July 2023 is an important first step. The EU taxonomy, as of now, only includes the recycling of critical raw materials.
Adding mining and refining under the condition of high environmental standards could help generate private investment.
However, without additional public financial support in the form of equity and guarantee support that could underwrite greater investment, it is unlikely to channel greater financial resources to CRM projects.
More importantly, even if significant financial resources could be leveraged to support domestic extraction, it will realistically only make a small contribution to enhanced resilience.
A reliable import strategy from a diversified pool of international partners will continue to be critical in satisfying European demand. As such, the next Commission should focus on four things.
First, it will be essential to pursue strategies according to specific prioritisation according to individual CRMs. What is needed is a detailed analysis of what materials should be domestically sourced, for which CRMs international partnerships can be developed, and for which the EU can build a diversified supply network.
Indiscriminately pursuing the EU’s significant involvement in all parts of the value chain for all CRMs will not be possible due to capacity restrictions, long lead times, and insufficient financial backing.
Second, in the next legislative cycle, EU instruments should be equipped with enough financial prowess to accelerate research and development in processing and recycling facilities with a focus on sustainable practices. To that end, the EU should develop available funding instruments.
Horizon Europe, for example, facilitates early-stage financing to develop sustainable mining and CRM substitution. Leveraging additional financial means should be used to support the development of low-carbon technological efforts beyond those initial investment needs and allow such ventures to scale.
Third, pursuing more diversified CRM partnerships and co-operation agreements will be crucial. The EU has been busy signing agreements with Canada, the DRC, and Zambia and committed to establishing future ones, as last seen in the joint statement with Australia on energy cooperation in early April 2024.
Following up on initial ideas of forming an international ‘Critical Raw Materials Club’, the EU joined the Minerals Security Partnership (MSP), initiated by the US and which includes partners such as South Korea and the UK. In April 2024, the MSP members alongside Kazakhstan, Namibia, Ukraine, and Uzbekistan announced the launch of the MSP Forum, pledging greater co-operation regarding CRMs.
The Forum sets out a project group aimed at supporting the implementation of CRM projects and policy dialogue to enhance the regulatory framework for sustainable sourcing projects.
However, the EU is playing catch-up. China has been developing its CRM network with significant investments for the past two decades, firmly establishing Chinese companies throughout supply and value chains. This has led to substantial control over upstream activities, including mining and primary smelting and refining processes.
The EU can make up for lost time by offering more attractive partnership conditions. Mineral-rich countries have increasingly been affirmative about gaining a larger share of the value chain within their economies.
Since 2022, more than a dozen African countries have imposed export restrictions or bans on CRMs, while over the last decade global export restrictions have quintupled.
The EU should thus convince third states of increased co-operation via expansive co-investment with a focus on increasing upstream activities and supporting third states with advanced mineral processing technologies, developed via concerted R&D efforts, and targeting those CRMs the EU has limited potential to develop domestically.
The extraction and processing of CRMs often entail significant environmental and social impacts. There have been widespread reports of mines across the globe in which both human rights and environmental standards have been disregarded. With the newly agreed Corporate Sustainability Due Diligence Directive (CSDDD) that introduces comprehensive human rights and environmental due diligence obligations throughout value chains or the Carbon Border Adjustment Mechanism (CBAM), facilitating sustainable technology and practices will not only underline the EU’s global climate agenda and offer third states additional incentives to pursue partnerships with the EU.
It will be legally imperative and costly to ignore.
Fourth, the next Commission should attempt to influence corporate supply behaviour, something the CRMA omits. Private European firms currently underinvest in supply chain resilience and do not yet see diversification as a priority. The EU should build on the mechanism introduced in its Net-Zero Industry Act, which incentivised member states to recognise non-price considerations, making subsidies reliant on diversification or placing a larger emphasis on resilience criteria for public procurement scoring for CRM projects.
Securing reliable and secure critical raw material supply chains will be a decisive factor in determining Europe’s industrial future. As European capitals increasingly recognise the importance of CRMs, the Critical Raw Materials Act constitutes an important step towards remedying the unfolding supply challenges.
However, as it stands, it is insufficient. Following June’s European election, the newly constituted Commission will have to overcome the member states current reluctance to pool greater financial means on a European level, which is fundamental to achieving greater domestic production and offering attractive and sustainable international partnerships.
Please note, this article will also appear in the 18th edition of our quarterly publication.
