What do tungsten, bismuth and gallium have in common? All three mineral resources have been classified by the European Commission as “strategic critical raw materials” under the Critical Raw Materials Act (CRMA). The categorisation is a result of German and European dependence on mineral resources from third countries, especially China. This dependency is already greater than it was for Russian crude oil and natural gas. Europe is caught in a commodity trap in the event of an unexpected supply disruption.

The roots of dependency

Germany’s and the EU’s strategic dependencies on mineral resources has long since reached critical proportions. These dependencies can be traced back to two developments. On one hand, Beijing has historically pursued a targeted strategy of state intervention in pricing and settlement policies. This has made extraction and processing operations in other countries almost unattractive. Additionally, China benefits from lower labour costs and fewer environmental regulations.

On the other hand, the EU’s domestic mining, smelting and refining sectors are disappearing. This is partly because of Europe’s strict environmental and regulatory standards. But what role has China played in the meantime?

China’s triple role: Consumer, supplier, power player

China has a monopoly on mineral resources. As a consumer, China is one of the largest net importers of mineral commodities on the world market. This means it can influence international price trends. Moreover, to meet its domestic needs, Chinese state-owned enterprises are investing in global resource extraction in third countries.

“The Middle East has oil, China has rare earths,” declared then-Chinese leader Deng Xiaoping in 1992. Source: 邓小平南巡时指出：“中东有石油，中国有稀土”

As an important producer of mineral resources, China remains one of the world’s leading mining countries and is the world’s leading producer of refined products. China accounts for 41% of the world’s refined production by value.

China deliberately uses its market power as a geopolitical trade weapon. Between 2009 and 2020, the country increased export restrictions on key mineral resources ninefold. An example from 2010 illustrates the dangers. After an incident involving a fishing vessel near the Japanese Senkaku Islands, which China claims as its own, China stopped exporting rare earths to Japan. This demonstrates China’s willingness to engage in power plays.

A European rethink has begun

These power games are being noticed in Brussels. Although the European Commission has been assessing the criticality of mineral resources since 2011 – and updating this list every three years – it has taken a further 13 years for a strategic policy framework, the Critical Raw Materials Act, to be adopted at European level. The CRMA is a pivotal building block for making Europe’s mineral resources supply more resilient, supporting the transition to a green and digital economy, and achieving strategic independence in global markets. In addition to distinguishing between critical and strategic raw materials (see figure below), the regulation set four key benchmarks for 2030:

  • At least 10% of the EU’s annual consumption for extraction
  • At least 40% of the EU’s annual consumption for processing
  • At least 25% of the EU’s annual consumption for recycling
  • No more than 65% of the EU’s annual consumption from a single third country

 

The above benchmarks are to be achieved primarily through strategic projects. According to the CRMA, all projects that make a significant contribution to the union’s security of supply of strategic raw materials – and use sustainable production processes – are eligible for strategic project status. These projects will benefit from shorter, standardised authorisation procedures and easier access to funding.

The CRMA makes no mention of China, but it is the proverbial elephant in the room. Reducing dependence on China to 65% by 2030 seems unrealistic for some mineral resources. In many respects, the CRMA is on the right track. However, implementation will be a major challenge. Without access to gallium, for example, there is the risk of a shortage in chip production, which has a direct impact on e-mobility and digitalisation. Europe risks taking a geopolitical step backwards in terms of resource sovereignty if it does not act quickly.

Challenges and opportunities of the CRMA

All in all, the CRMA Regulation of 11 April 2024, agreed by the European Parliament and the Council, presents challenges and opportunities. Six points of the regulation are examined below. Legislative action is still needed on these points to escape the looming commodity trap.

  • De-risking and diversification along the entire supply chain

Diversification is a key objective for the CRMA. This is the right place to start. In line with the de-risking strategy, Germany and Europe urgently need to become more independent along the entire commodity value chain. Diversification strategies can only be implemented in the long term, which is why a quick start is essential. This includes not only the import of raw materials, but the manufacture of products from them too, for a holistic approach to European independence at all stages of the supply chain.

  • Promotion of primary raw material extraction in Europe and other partner countries

The CRMA envisages – in light of under-utilised domestic potential – the reactivation and expansion of environmentally and socially responsible mining in Europe. The intensification of mining in Europe brings opportunities and challenges. On one hand, there is potential for economic growth and job creation. But on the other hand, there is potential for environmental damage, possible relocation of communities and the destruction of natural habitats.

A complete rollback and relocation, such as homeshoring, is unrealistic. However, some projects and sites can certainly be reactivated. Targeted investment in European mining and innovative technologies for sustainable raw material extraction can reduce dependency in the long term. In addition to promoting primary raw material extraction, the consistent promotion of domestic and European smelting and refining capacities can make a decisive contribution.

The EU should provide additional funding for the construction of smelters and refineries outside China to reduce dependence through programs such as Global Gateway. Projects in third countries would maintain high social and environmental standards and focus on socio-economic development in partner countries. Only in this way can the promised mutually beneficial partnerships work.

  • Building up strategic reserves

The CRMA refers to the reporting and coordination of strategic stocks. It explicitly emphasises that member states cannot be obliged to hold or release strategic stocks. Against the background of the question of competence, this seems clear. But the best way forward is for member states to build up a strategic reserve of commodities for crisis situations, such as energy commodity shortages. This is a short-term lever that can be activated quickly.

  • Promoting research and circular economies

There needs to be a stronger focus on efficiency and the creation of functioning circular economies. This is the only way to sustainably reduce the impact of demand and optimise the use of existing resources. Interestingly, the CRMA did not set specific benchmarks for absolute reductions in raw material requirements in terms of sustainability.

Companies face the challenge of meeting recycling targets, especially for materials with complex recycling requirements. The EU and member states should support research and development in this area through public funding programmes.

  • International strategic commodity partnership with China?

In the short term, a complete break with China is unrealistic and economically counterproductive. Instead, Germany and the EU have to strengthen their commodity partnerships. Such a strategic partnership is mentioned in the CRMA, as well as the German government’s China strategy. However, the CRMA does not explain in any more detail how a commodity partnership of this kind can be set up. Experts believe that such a partnership with China is unlikely at this stage. Consequently, other countries should be targeted to build strategic commodity partnerships, further reducing dependence on China.

  • The question of money

The CRMA does not involve new sources of funding, taking insteps a budget-neutral approach. But a funding offensive is urgently needed. It is not enough to rely on existing EU programmes and member states. For example, new investment incentives are needed for recycling strategic raw materials. Additional EU funding could be made available for this purpose. If the EU wants to reduce its dependence on China, it has to recognise the costs associated with achieving resilience.

Only a joint European effort with clear responsibilities, new financing instruments and strategic partnerships can secure Europe’s resource sovereignty. Political courage is needed now.

About the author

Nico Zillekens is an intern in the Bertelsmann Stiftung’s Europe’s Future programme.

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