1. Executive Summary:
- Critical raw materials (CRM), also known as critical minerals or rare earth materials/elements, play a vital role in the production of an abundance of high-end consumer goods, renewable energy technologies and military applications. As a result, they possess a highly strategic value on the geopolitical stage and in international markets.
- China is the dominant actor with regards to the CRM market, while Europe (and other regions) are highly dependent on imports to keep producing vital goods.
- China is trying to reorganize its domestic CRM industry (from mining to processing), while the EU is trying to reduce its dependence on the Chinese supply.
2. Who are the main actors influencing strategy decisions?
With approximately 97% of global production of critical raw materials in 2014 concentrated in China, it is imperative to look at which governmental actors in China have a say regarding the regulatory framework that envelops raw material extraction, processing and trade.
Foremost among these central government institutions is the Raw Materials Office, a subdivision of the Ministry of Industry and Information Technology (MIIT). As its name implies, the Office promotes the development and reorganization of China’s CRM industry through the coordination of policy efforts across the nation. The MIIT also encompasses the Association of the Rare Earth Industry, which coordinates the CRM industry and serves as a link between the central government and the industry, although it is not entirely clear what kind of authority it possesses in practice.
The industry is also regulated by the Ministry of Land Resources (MLR), which is, among other things, responsible for the development and protection of resources and has the ability to implement certain types of policies targeted towards resource conservation. In this sense the Ministry of Finance can play a part as well by imposing relevant fiscal measures. Finally, the Ministry of Environmental Protection (MEP) is responsible for the tightening (or relaxing) of environmental standards for the industry.
On the European side there is the European Commission (EC), which has devised strategies to ensure a stable and sustainable supply of raw materials. On top of this, it pays special attention to CRMs and has previously founded the European Rare Earths Competency Network (ERECON), which aimed to bring together experts on the topic to come up with new strategies regarding CRM supply and utilization, although it is now seemingly discontinued.
Certain European firms have also established a coalition of interests in the form of the CRM Alliance. This Alliance consists of a number of companies that work directly with CRMs and has issued some key recommendations for a European CRM policy in the fields of regulation and trade, among others.
3. What are the goals and sub-goals of China and European Union with respect of critical raw materials?
Chinese goals with regards to critical raw materials are fourfold. First of all, there are some issues at the present moment that arise from the fragmented state of the domestic CRM industry. China is working towards a restructuring of this industry to combat issues like low prices (caused by a high degree of competition) and inefficiency. Secondly, the Chinese government wants to implement more measures with the goal of resource conservation in mind. This is because, currently, CRM extraction sites often get depleted quickly, as evidenced by experts warning against overexploitation and proclaiming that entire regions could be mostly stripped of their CRM deposits in the matter of a decade. Thirdly, China is also acutely aware of the environmental concerns that CRM extraction brings with it and is, therefore, looking for ways to curb pollution and environmental damage. A final goal concerns the fact that CRMs get exported a lot of the time and that China wants to reduce export in favor of greater CRM utilization in domestic downstream industries, like the consumer electronics or green energy industries. As of 2018, the proportion of Chinese primary raw materials (including critical raw materials) being exported was approximately 57% of total production, while officials are targeting a reduction to 30% by 2020.
From the European perspective, there is one big objective: lowering its dependence on China in terms of CRM supply and avoiding supply bottlenecks. Green industries within the EU, like the solar or wind sectors, are particularly vulnerable to CRM supply shocks because important products like permanent magnets can (almost) exclusively be made with these materials. Thus, the EU is looking for alternatives to the abundant Chinese supply of CRMs.
4. How do China and the European Union plan to reach their goals?
First off, the Chinese government wants to reorganize and consolidate their CRM industry in such a way that just few competitors are left and only a limited number of big players remain. This would make it easier to assert central government control over the industry and, consequently, for the government to manipulateprices. Secondly, to conserve resources the Chinese governmenthas implemented exclusive licensing schemes and set production quotas. It has also imposed a tax on resource extraction. Thirdly, Environmental standards have been tightened as well in order to fight back against pollution. Lastly, international export quotas could be introduced in order to free up more resources for domestic industries.
The European Union has been part of a trilateral framework concerning CRMs between itself, the United States and Japan since 2011. This framework was founded with the express purpose of developing new technologies in the realm of CRMs, like more environmentally friendly extraction technologies, the development of substitutable materials, more effective CRM recycling practices and a more efficient usage of CRMs in the production of goods. Besides these specific strategies, several private firms across the world, including in Europe, have undertaken steps to diversify supply by opening up new mines in other parts of the world.
5. What are the opportunities and threats of these strategies?
The Chinese strategies are vulnerable to a number of threats. First off, any attempt to assert more government control and/or regulation can easily be undermined by illegal mining and processing practices, a phenomenon that is already plaguing the industry. Besides this, quotas and taxes on CRM exports can be subjected to international trade law. In fact, two cases have already been brought forth by the European Union, the United States and Japan within the last ten years through the mechanisms of the World Trade Organization, arguing that Chinese export restrictions on CRMs violated WTO rules. Both times the plaintiffs received rulings in their favor, so there is historical precedent of this happening.
The strategies of the European Union concerning international cooperation present excellent opportunities for both cutting-edge R&D and for presenting a more united front against China within the context of international organizations. However, important questions can be raised with regard to the development of new technologies and practices. It can take many years for a worthy substitute to CRMs to surface, for recycling practices to become more effective or for required CRM contents in the production of goods to be reduced.
Steps to diversify the available CRM supply chains, like opening new mines outside of China, can also potentially take decades and are constantly being jeopardized by the lower Chinese prices for CRMs on the international market. Strategies of private firms to establish a closer relationship with China or Chinese companies can solve the supply bottleneck issue in the short term. However, in the long term, there is no guarantee that these strategies will keep working if China successfully decides to become more protectionist in terms of CRMs.
6. Forecast of possible future developments and outcomes
- China may be able to better protect its CRM supplies, thereby cutting Europe and other regions off from the foremost source of critical raw materials. This would have a devastating impact on not only the production of electronic consumer goods (like smartphones), but also on the currently growing green industries. Renewable energy prices (outside of China) would reverse their current downward trend, fossil fuels would become comparably cheaper again and efforts to combat climate change would be significantly obstructed.
7. Possible strategy options for EU/local companies and decision-makers.
- Research and development is imperative to securing a better position in the long run. The EU should focus on the development of new technologies in order to reduce its demand for critical raw materials and, consequently, its dependence on Chinese resources.
- A cooperation framework between China and the EU could be established in order to achieve mutual benefit. The EU could leverage its technical know-how and technologies in the environmental protection domain to gain a better and longer-term CRM supply arrangement with China.
- Despite the difficulties faced by up-and-coming CRM supply chains outside of China (like low prices), the EU could subsidize or otherwise support newly opened mines and/or processing facilities in order to protect them from being competed away in the international markets.