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4: Unprecedented weaponization of critical raw materials expected

Critical raw materials are likely to emerge as major drivers of geopolitical conflict in 2023. With many economies transitioning towards ‘greener’, less resource-intensive models, the world continues to rely on finite resources located in certain countries. Demand for minerals such as lithium, cobalt, and rare earth elements has increased significantly, and is expected to grow over the next years as figures 5 and 6 show. (For lithium, the mean annual growth rate is 21% between 2019 and 2030, thus roughly doubling worldwide demand between now and 2025, and again between then and 2030.) This is largely due to the emergence of new technologies such as green energy, electric vehicles, and 5G networks. As these commodities become increasingly valuable to any country with industrial production, it also heightens interdepen­dence along the value chain. In the end, geopolitical tensions are likely to erupt, because industry needs are set to outpace efforts to access mineral deposits.

Figure 5: Actual (2019-21) and projected (2022-2030) global lithium demand (in 1,000 metric tons of lithium carbonate equivalent)

Reliable access to critical raw materials is becoming a major global concern as their deposits and/or their extraction and refinement capacities are located in only a few countries. China holds the largest share of rare earth elements, the 17 metallic elements that are essential for products like cell phones, wind turbines, and electric vehicles, followed by the US, Canada, and Zimbabwe. Chile, Australia, and Argentina, in turn, lead in lithium reserves. Cobalt is overwhel­mingly held by the Democratic Republic of Congo, with Russia, Canada, Australia, and Zambia trailing. Nickel is mainly found in Russia, Indonesia, Canada, and Australia. Often also the refining process, which takes place in specialized plants located near the raw materials‘ source, is highly concentrated in a few countries. China, for instance, is the major player in rare earths refining, producing more than 80% of the world’s supply, followed by Japan and the US.

Figure 6: Demand for rare earth oxides worldwide in 2019 (actual) and 2025 (forecast) by end use (in metric tons)

The enormous local concentration of reserves and refining, coupled with export restrictions and limited access for foreign investment, puts global markets at risk of supply disruptions. China, for one, introduced export constraints on rare earths in 2010, further tightening them in 2014 and 2019. Indonesia imposed new controls for nickel and other critical raw materials in 2019, limiting exports and requiring raw nickel to be refined in the country. If the demand for critical raw materials continues to outstrip available supply, there is a risk of additional countries – such as Russia for Palladium – introducing export restrictions or bans by 2023.

For companies facing significant price and supply chain risks, active resource management policies by governments are a key to success. These can lead to more stable prices, managed diversification, and reduced dependence on a few supplier countries. In recent years, the EU has taken a number of measures to secure access to key raw materials. These include the establishment of the European Commodity Observatory monitoring global commodity flows, new legislation on the recycling of raw materials, innovation partnerships to promote new technologies, strategic partnerships with like-minded countries, and the inclusion of a raw materials chapter in new trade agreements. In early 2023, the EU is expected to present the Critical Raw Materials Act, which will include a European raw materials security strategy based on self-sufficiency targets and measures such as an early warning system to identify raw materials becoming critical. Similarly, Brussels seeks to improve the supply of critical raw materials and mitigate the risk of disruption from geopolitical conflicts by pushing for the ratification of trade agreements with Chile, Mexico, and New Zealand, and seeking to advance negotiations with partners such as Australia and India.

Diversifying supply can help in the short-term, but Europe needs more than that to guarantee long-term supply security. With no mining or refining capacity for rare earth elements and very little capacity for lithium, it is difficult to bring the value chain back home. EU regulations and lengthy approval processes for new mines make it tough, and recycling efforts are unlikely to yield quick results. Also, the Critical Raw Materials Act may come with additional costs for companies, via quotas, taxes, and higher environmental standards.

The US is likewise expected to ramp up efforts to secure critical raw materials. Already in April 2021, President Joe Biden used the Defense Production Act of 1950 to increase the production of several critical raw materials. He directed the Secretary of Commerce to identify, prioritize, and expand the production of these resources as well as to secure their supply through procurement. In addition, there is legislation pending in the US House of Representatives that would codify the president’s executive order. The Critical Mineral Exploration and Develop­ment Act would create a support program for domestic production as well as research and development of innovative technologies to reduce reliance on foreign suppliers. Should the global supply of critical raw materials face a crunch in 2023, bipartisan agreement on this legislation in the Republican-controlled House and the Democrat-led Senate can be expected.

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