Rare earths elements and other critical raw materials: a geopolitical headache for the EU

Rare earth elements play a critical role in the manufacture of electric batteries, solar panels and wind turbines – products that are all necessary for the EU’s drive toward sustainability. Yet although rare earth deposits can be found in sufficient quantities in EU soil, these industries still rely almost entirely on Chinese suppliers. This creates a security and sustainability risk, says Valentina Vengust.

The EU possesses enough rare earth deposits in countries such as Sweden, Finland, Greece or Spain to reduce critical dependencies in its supply chains, according to the findings of the EU-funded EURARE project. Yet China still provides 98 percent of the EU´s rare earth elements (REEs).

The harsh reality is that China controls the majority of the world’s mined REE supply with 57.6 percent of global REE production and approximately 80 percent of REE processing in 2020. China is therefore the de facto global leader in extraction, processing and component manufacturing of products that utilize REEs.

Recently, the stakes were raised when China’s Ministry of Industry and Information Technology proposed draft controls on the production and export of the 17 rare earth minerals. This is not the first time China has threatened to cut rare earth supplies. However, the EU has once more become aware that disruptive Chinese activities could induce tangible economic consequences. But finding a solution to this problem will require more than market incentives for home producers – the solution will need to take into account the supply of all critical raw materials (CRM).

Chinese influence over the REE and other CRM supply chains

REEs play a crucial role in the production of electrical batteries, solar panels, and wind turbines, as well as energy-efficient lighting, among other products of critical value. They play a vital role in assuring the EU´s industrial competitiveness. If China disrupts the global supply chain, the EU´s economy will suffer.

The EU´s problems do not end here. It relies on China for the other CRMs needed for the transformation to a sustainable economy. Out of 30 elements on the EU´s list of CRMs (2020), China is the majority supplier for six, and one of the main suppliers for four others. Although many of the others are imported from African and Latin American countries, China has recently increased its investments in mining in these regions and could potentially exert its influence to control the global supply.

The EU has recently adopted a more proactive approach to eliminating uncertainty in its supply chains. For example, the European Raw Materials Alliance, a collaboration of industry players, investors, the European Investment Bank, and EU member states aims to diversify and increase European CRM output. The EU has also unveiled an overarching CRM strategy primarily concentrating on boosting EU-based mining, but also on diversifying supply chains and promoting sustainable recycling.

However, compared to the United States, whose concerns about supply chain dependencies encompass geopolitical aspects, the EU’s approach concentrates solely on the geoeconomic outlook. Moreover, the EU´s efforts to increase CRM extraction within its borders are disappointing at best and disastrous at worst.

The strategy overlooks a problem that European businesses have been dealing with for the last decade, namely, that the minerals are usually not found in sufficiently concentrated quantities to make extraction and processing economically viable. And even when mining is possible, the environmental degradation and societal side effects caused by extraction and processing cause an increase in price.

Increasing supply capacity in the EU is therefore an uphill battle, because societal and environmental consciousness is better developed than in China. The main problem remains that businesses do not see it a profitable endeavor to compete with a China-controlled supply chain that exerts dominance over REEs and some other CRM processing technologies while benefiting from laxer environmental standards and a distorted state-controlled market.

An example of these shortcomings is Germany´s unsuccessful attempt to engage its companies in CRM production. After several years, it has failed to bring forward any substantial investments. The most telling is the fate of the industry-driven German Raw Material Alliance, which included German industry giants such as Bayer, Daimler and Thyssenkrupp. It ceased to exist in 2015 without achieving any tangible results. European industry has shown itself unwilling to take the risks associated with entering a market so heavily dominated by China.

Best future options

It seems that developing an economically sustainable local supply chain is a pipe dream. If the EU is to solve this issue, it will require political and not just economic will. The solution could lie in government backed investments and tax incentives, as well as in ensuring participation by the EU and national actors from different industries in devising a long-term plan. There could also be advantages in the idea of establishing an EU-level organization that would be involved in every stage of CRM utilization, from upfront financing to exploration, processing and stockpiling.

One of the EU´s hopes for the CRM industry lies in recycling. However, although such initiatives have grown in number over the years, to date less than one percent of products contain recovered components. To boost this figure, the EU should support national-level regulatory incentives to recover and recycle while investing in research and development.

In the short term, the only viable solution for the EU is diversification of its supply and enhancement of its raw materials diplomacy. The EU´s plan mentions pursuing CRM partnerships with Canada, various African countries and EU neighbors, but it should think more strategically and further afield, including renewing political partnership with other resource-rich countries such as Australia, Kazakhstan or Mongolia, and forming new free trade agreements.

High-level political talks with other like-minded countries are also essential in solving this issue. An alliance with the United States, Japan and Australia would help mitigate risk and secure reliable supply of CRMs independently of China.
The EU’s prolonged absence on the worldwide CRM stage cannot go on, and the risk China represents should not be underestimated. The EU must exert more political will to establish secure alternatives for its core dependencies and transform itself from a passive consumer to a proactive geopolitical player.

About the author:

Valentina Vengust was an intern in the Foreign Relations Program at MERICS from October 2020 until April 2021. She holds an MA in International Political Economy from the London School of Economics and Political Science and a BA in International Economics and Trade from the University of International Business and Economics. She also holds a BA in Sinology from the University of Ljubljana.

The views expressed in this article are those of the author and not necessarily reflect those of the Mercator Institute for China Studies.