The problem of critical mineral supply chains

Republished from Competition Notes

The Commission starts to implement the Critical Raw Materials Act and pursues its International Initiatives

The European Commission's proposal for a Critical Raw Materials Act ("CRMA") and its accompanying impact assessment highlighted the dangerous overreliance of the EU on insecure sources of supply for a number of critical raw materials – demand for which was destined to rise exponentially over the coming years as a result of the green and digital transitions.

For a number of raw materials such as rare earths, gallium, magnesium and Boron the EU's current dependency on supplies from China is over 90% and its Boron supply was similarly concentrated in Turkey.  In other cases, it is processing capacity that is concentrated with China controlling 56% of the global capacity for refined lithium, 60% for refined cobalt, 58% for refined manganese. In addition China was reinforcing its dominance of the global value chain by gaining control of mining assets such as  cobalt mines in the Congo.

This is a cause for concern given current geopolitical tensions and the fact that the green and digital transitions will increase demand exponentially. For example, demand for battery-related materials such as lithium is predicted to rise up to 42 times.

The recently adopted CRMA seeks to address this problem in a number of ways including by setting a series of targets for 17 strategic raw materials. The aim is that by 2030:

• at least 10 percent of the EU’s annual consumption will be extracted in the EU
• at least 40 percent of the EU’s annual consumption will be processed in the EU
• at least 25 percent of the EU’s annual consumption will derive from recycling in the EU
• no more than 65 percent of the EU’s annual consumption of each strategic raw material will derive from a single third country.

These are collective goals applying to the Union and its Member States and will require further definition.  They will be pursued through a series of policy measures provided for in the rest of the CRMA. These include the identification of strategic projects, the provision of incentives, the acceleration of permitting procedures, requiring companies to assess and report their vulnerabilities, and joint purchasing (in the form of demand aggregation as used for gas supplies).  The CRMA includes sustainability requirements (in addition to the recycling goal) and amends other EU legislation to facilitate the realisation of strategic projects.

The CRMA is to a large extent a framework and there are many implementation tasks for the Commission – for example identifying and overseeing strategic projects, selecting the raw materials for which joint purchasing is to be arranged and generally overseeing and reporting on progress.  The Commission will be advised by a Critical Raw Materials Board composed of Member State representatives with a large number of subgroups and tasks.

The impact of the CRMA on EU industry will therefore depend on the implementation actions of the Commission and the Member States over the coming years.

Even before the CRMA has entered into force or even been published in the Official Journal, the Commission is already starting to implement the joint purchasing provisions by inviting "undertakings and other stakeholders that would be interested in participating in the demand aggregation and matchmaking mechanism for strategic raw materials" to respond to a consultation by 7 May 2024. Interestingly, the consultation invites not only for expressions of interest in joint purchasing but also offers to supply strategic raw materials.

The diversification of sources of supply is likely to be a difficult goal to achieve given the current concentration of resources and processing capacity, especially since the scope for extracting more critical raw materials in the EU is in many cases limited due to their rarity and the difficulty in obtaining permits for new mining projects in the EU.

Consequently, the realisation of the goals of the CRMA will require to a large extent cooperation with third countries and Article 37 of the CRMA provides for international cooperation and strategic partnerships to this end. Indeed, Recital 12 to the CRMA provides that special consideration shall be given to cooperating third countries in implementing the 65% goal.

That is why, when proposing the CRMA in March 2023, the Commission announced the pursuit of strategic partnerships "with reliable partners to promote their own economic development in a sustainable manner through value chain creation in their own countries, while also promoting secure, resilient, affordable and sufficiently diversified value chains for the EU" and the establishment of "a Critical Raw Materials Club for all like-minded countries willing to strengthen global supply chains".  The Critical Raw Materials Club was intended to bring together both critical raw material consuming countries and resource rich countries that shared a number of market development and access objectives as well as ESG practices.

The process was already underway when the CRMA was proposed and since then the Commission has continued to sign "partnerships and policy dialogues" with various countries.  There are partnerships with Argentina, Canada, Chile, the Democratic Republic of the Congo, Greenland, Kazakhstan, Namibia, Norway, Rwanda, Ukraine and Zambia as well as similar relationships with Brazil, China, Colombia, Japan, Mexico, Peru, Uruguay, the EuroMed countries and the African Union. More are being negotiated and a forthcoming strategic partnership with Australia has already been announced. These partnerships and policy dialogues are not formally binding and typically include intended policy measures and plans to bring together companies and governments to discuss possible projects and their financing.

The Commission was authorised to open more formal negotiations with the US in 2023 with a view to concluding a proper international agreement with the US on strengthening supply chains for critical minerals, referred to as a Critical Minerals Agreement, that would have allowed the EU to benefit from the generous incentives under the US "Inflation Reduction Act". This agreement has not yet materialised.

In parallel, the Commission, along with other countries including some individual EU Member States, have joined the US-led Minerals Security Partnership, a non-binding arrangement between buyer countries to "catalyze public and private investment in responsible critical minerals supply chains globally".

In the framework of the EU-US Trade and Technology Council in Leuven on 5 April, the EU and the US launched the Minerals Security Partnership Forum to include the resource-supplying countries of Kazakhstan, Namibia, Ukraine, and Uzbekistan.  The EU stated that it thereby made its Critical Raw Materials Club part of the Forum.

All of these arrangements are non-binding, and it will remain to be seen whether they lead to real improvements in the supply and reliability of critical minerals.  Much will no doubt depend on whether funding is forthcoming from buyer countries for projects in supplier countries.  Public funding for such projects is likely to give rise to free rider issues since the any intergovernmental restriction on the supply of raw materials will conflict with WTO obligations.  Private investors are of course free to reserve their own production for their own use but that will not necessarily help the buyer countries realise their security of supply objectives.