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Re-calibrating interdependence: The geopolitical rivalry for critical raw materials

Executive Summary

  • Critical raw materials (CRM) are indispensable inputs for a wide set of strategic industries, including the energy, digital, space, and defence sectors.

  • As the geopolitical rivalry between the US and China crosses into the global economy, CRM are in the early stages of becoming strategically ‘weaponized’.

  • The EU and US approaches to secure CRM are not yet fully aligned, and future transatlantic frictions over their supply and value chains are likely.

Implications for International Business

  • A loomingglobal metals crisis poses a serious challenge to companies present in the lead markets of the future like renewables, digitization, or e-mobility.

  • As control over CRM supply chains is increasingly used as tool to harm one’s geopolitical opponent, firms must prepare for short-term supply disruptions.

  • Increased diversification and better monitoring of supply chains as well as stockpiling therefore are necessary risk mitigation strategies for firms.

State of Play Raw materials needed for high tech

CRM play a central role in most key industries of the future. They are needed for clean energy technologies powering the green transition. Lithium, nickel, cobalt, manga­nese, and graphite are crucial to battery performance, longevity, and energy density. Rare Earth Elements (REE), in turn, are essential for the permanent magnets at the core of wind turbines. Also, the digital transition cannot be pursued without semi­conductors, which play an indispensable role in powering computers, smart grids, or fighter jets. Their production relies on palladium, cobalt, gallium, and REE. Currently, the EU lists over 30 and the US over 50 CRM. Their number is going to rise, not shrink, as the global green and digital transformation picks up speed. For example, a typical electric vehicle (EV) requires six times the mineral inputs of a conventional car. An onshore wind plant requires nine times more mineral resources than a gas-fired plant. Yet, global investment to increase availability of CRM mining and refining facilities is falling short. As CRM demand outpaces supply, a metal crunch is expected soon.

In addition to their economic relevance, CRM are ‘critical’ due to significant supply risks. The extraction, production, and processing of CRM are highly concentrated in a small number of countries, often within challenging political-economic contexts. The Democratic Republic of Congo is responsible for 70% of global cobalt production. China has emerged as a major force in global supply chains for CRM and the above-mentioned technologies. It dominates the entire downstream EV supply chain, owns most of the world´s solar panel supply chain, and is the source for the mining and refining of key materials in chip production. In the short term it is impossible to divert supply chains away from these countries, and there is a high chance of significant supply disruptions with minimal capacity to contain their effects. Consequently, access to and control over CRM becomes an instrument of geopolitical competition, and Europe’s reliance on a rival like China seriously undermines its economic security.

Key Issues Technological dependence creates geopolitical risk

If the physical location of oil reserves determined global politics in the past, the whereabouts of CRM and their related supply chains will define geopolitics for the foreseeable future. As the Covid-19 pandemic and Russia´s invasion of Ukraine have shown, reliance on a single provider bears the risk of severe disruptions. At the same time, classical market mechanisms have failed to work for CRM: It was China’s pricing and settlement policy that has made extraction and processing in other countries economically unattractive. As a consequence, Europe´s dependence on REE from China today is far greater than that on Russian energy exports prior to February 2022. Worse, unlike for oil and gas, there are no national strategic reserves of CRM in Europe. A supply stop would have an immediate and far-reaching impact on many industries.

With an increasing strategic value of raw materials, the risk of export restrictions also rises. In recent years, about a tenth of the global value of CRM exports faced at least one such measure. In 2010, when the dispute between Beijing and Tokyo over the Senkaku/Diaoyu islands in the East China Sea boiled over, China restricted its REE exports to Japan, immediately paralyzing parts of the industry there. More recently, Indonesia, the world´s largest nickel producer, announced a full-scale export stop of unprocessed nickel, resulting in an official trade dispute with the EU. Earlier this year, Chile and Zimbabwe, two of the world’s largest lithium producers, each announced the nationalization of their lithium reserves, with yet unknown consequences. As security of supply comes into sharper focus, potential distortions to the free trade of CRM become increasingly sensitive. Large car companies therefore entered into offtake agreements and joint ventures with mining companies, and other industries might follow suit. Small and medium-sized enterprises without the means of vertical integration require CRM efficiency and substitution strategies, and possibly state aid.

The geoeconomic effects of the US and EU raw material strategies

The US Inflation Reduction Act (IRA) passed in August 2022 and the EU’s proposed Critical Raw Materials Act are important measures to create supply security. Under the IRA, tax credits go to each new sold EV if at least 40 percent of the battery's explored, processed, or recycled CRM come from North America or a country with which the US has a free trade agreement. Also, US companies that extract CRM can apply for a subsidy of ten percent of the production costs. Lastly, companies that process, refine, or recycle CRM can claim tax credits of up to 30 percent of their energy cost. In addition, the IRA mobilizes up to $500 million to facilitate an end-to-end US supply chain for the military’s REE demand. The EU’s legislation sets ambitious targets, too. By 2030, at least ten percent of annual CRM consumption should come from domestic mining, while domestic processing should cover at least 40 percent of annual consumption. Recycling is to account for at least 15 percent of yearly use. No more than 65 percent per year of each CRM at each relevant processing stage shall come from a single third country. Finally, “strategic projects" are supported by access to finance and shorter permit periods (12 to 24 months). Overall, the IRA’s incentives appear to be better tailored and, by offering tax credits, administratively simpler to use. Moreover, the EU urgently needs a funding vehicle for domestic projects in mining, processing, or recycling.

While Brussels and Washington are both concerned about CRM supply security, their respective domestic considerations clash with the broader geostrategic outlook. Some parts of the IRA are seen critical in Europe because they put European and other foreign companies at a disadvantage. These include the criteria for tax credits for EV, but also “Buy American” or local content requirements in other areas. The fear of “unfriendly” investment diversions is real, as European firms have put their investment plans for green and digital technologies on hold because of the new US subsidies. These developments appear contradictory to Washington's push towards “friend-shoring”, i.e. the restructuring of global value chains in strategic sectors along geopolitical lines. That said, the Transatlantic Raw Materials Partnership announced by European Commission President Ursula von der Leyen and US President Joe Biden on 10 March could enhance transatlantic security of supply, as it lays the foundation for a common market for some CRM. Moreover, information sharing about potential supply bottlenecks will strengthen early warning capacities. The main challenge for both the EU and the US, however, is the growing global supply gap for CRM. It would therefore be also in the interest of companies on both sides of the Atlantic if the EU and the US joined forces in forging raw materials alliances overseas, integrated their respective strategies and partnerships, and offered streamlined support to develop new mining and refining capacities in resource rich countries.

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