Risks and Challenges of Rare Earth Metal Procurement
Starting this August, Bejing will begin to levy export controls on two critical minerals: gallium and geranium.
This marks an escalation in the global competition for rare earth metals + critical elements, and serves as a reflection of rising geopolitical, technological, and security risks in our global infrastructure.
These elements are the backbone for large chunks of modern technology: from smartphones and semiconductors to MRI machines and missile guidance systems. In order to maintain sovereignty and independence in this world, specifically as an institution, it is critical to have the means to procure these materials reliably. Assembling such infrastructure comes with a unique set of risks and challenges.
Risks of Rare Earth Metal Procurement
Geopolitical Factors
Procurement of critical elements is constantly exposed to geopolitical risks because of the geographic distribution of materials and the political interests of resource-dense countries.
Compared to fossil fuels, the supply chains for clean energy technologies, in particular, tend to be more geographically concentrated. “In 2021, Australia accounted for about 50 percent of global lithium mining, the Democratic Republic of Congo (DRC) for 70 percent of cobalt, and Indonesia for almost 40 percent of nickel”. In addition, “Sixty-eight percent of metals market participants polled by the law firm White & Case earlier this year concluded that resource nationalism is on the rise, creating market uncertainty for traders and project developers.” (CSIS)
Specific examples include:
- Zimbabwe, which extended its 2022 ban on the export of raw lithium to all raw mineral ores, forced new projects to process minerals locally.
- Indonesia banned exports of Nickle in 2020, as one of the world’s largest producers, such that foreign buyers must invest in smelters in Indonesia to process materials locally before export. Indonesia doubled with a similar ban announced around the country’s bauxite exports in June of 2023.
- Chile announced plans to nationalize the country’s lithium reserves and passed a bill for new royalties on copper and lithium sales during April and May of 2023.
Such export limitations increase uncertainty for private mining and processing companies seeking to develop their activities abroad and increase friction for downstream consumers of related products.
In the West, specifically, this poses a problem.
The United States has become increasingly import-dependent on minerals used in electric vehicle (EV) batteries, solar panels, wind turbines, and defense technologies, while U.S. firms have largely exited the mineral supply chain stages.
The Western world lacks the same level of integrated REEs supply chain as a country like China, because it did not consider it important until the post-Covid era. The temporary trade resrestrictions and shortages of pharmaceuticals, critical medical supplies, and other products, during the pandemic, highlighted the significance of localized supply chains.
The complanceny of the Western world broke free from the shadows: we live in a world with very little control over these metals, leaving us open, exposed, and vulnerable to the soft power of economic sanctions from countries who contorl the production and processing of these elements.
Chinese Dominance
Our reliance on adversarial countries is highlighted by analyzing China’s control of global REE markets. China, in particular, poses a risk to the Western world in our ability to reliable procure materials and build infrastructure.
According to the US Geological Survey, in 2021, Chinese mines produced 168,000t of REEs, almost 60% of total global mining output. According to Roskill, in 2020, the country also produced 85% of the world’s rare earth refined products.
This graphic does a fair job of highlighting the level of influence they have.
China dominates mineral supply chains, being the largest source of U.S. imports for 26 of 50 critical minerals.
The most recent restrictions on Gallium and Germanium products highlight how they are willing to use this power as a means of political will.
“China is imposing further limits on exports of critical metals used in chipmaking. The move has led to emergency meetings involving trade ministers, and to the EU stepping up talks on building its own production base.
Beijing will restrict shipments of some gallium and germanium products from 1 August. They are used to make high-speed computer chips, as well as in defence and renewable energy applications, including electric vehicles. China produces 80% of the world’s gallium and 60% of the world’s germanium, according to European industry group the Critical Raw Materials Alliance.
…
Japan is investigating the potential impact the trade measures could have on domestic companies, while South Korea’s government convened an emergency meeting. Germany is urging companies in the country to reduce their dependence on Beijing, as it sets out its first strategy on China.”
— World Economic Forum (July 19, 2023)
China also has a precedent of weilding their dominance as a means of exerting control:
“In 2010, China restricted export quotas of rare earths to Japan following a territorial dispute between the countries, sending prices of rare earths soaring and Japan scrambling to find other sources of supply. Beijing said at the time the curbs were based on environmental concerns.”
— Reuters (July 7, 2023)
Concentrated supply chains are vulnerable to disruption, and China has and continues to use export controls as means of economic coercion.
Counter Force
US Policy
The U.S. government has established initiatives and partnerships to improve supply chains, and Congress created spending programs and subsidies for domestic production. Examples include:
Defense Production Act (DPA)
Supports capacity and supply expansion of goods to meet U.S. requirements through incentives such as loans and loan guarantees, purchases and purchase commitments, and grants and subsidies. This can include Canadian entities and the White House presently wants Congress to include Australia as DPA eligible, given Australia’s vast deposits of critical minerals and their extensive mining and processing capacity.
DOE Loan Program Office (LPO)
Makes public investments in the commercialization of key technologies that reduce mineral requirements or increase the domestic supply of critical minerals and downstream products.
Infrastructure Investments and Jobs Act (IIJA)
Congress passed IIJA in November of 2021, providing $7.9 billion for battery manufacturing, recucling, and critical mineral initiatives including $320 million toward the modernization of the nation’s mapping of critical mineral resources.
U.S. Development Finance Corporation (DFC)
DFC can provide funding for energy projects abroad as part of its wider mission to promote economic development in low and middle-income countries. Its specific means include issuing loans, loan guarantees, equity investment, political risk finance, and technical assistance to select projects.
Partnership for Global Infrastructure and Investment (PGII)
PGII was officially launched at G7 2022, mobilizing $600 billion in loans and grants, both public and private, from member countries to projects in developing countries. One of the four pillars of the initiative is “mining metals and critical minerals” and developing “new global refining, processing, and battery manufacturing sites.”
Bilaterial Trade Agreements
Sectoral trade agreements are also emerging as international arrangements to safeguard markets for minerals. Ex. Under the IRA Clean Vehicle Tax Credit (30D), half of a $7,500 tax credit is available if battery minerals are extracted or processed in a country that has a free trade agreement with the United States.
Many of these initiatives along with others on an international level have played a role in increasing the production of Rare Earth’s outside of China. While subject to high levels of risk, the western world is not completely exposed in most markets and appears to be on a path to de-risking.
Africa
Another potential source of reprieving security risk is Africa offers trade, investment, and sourcing opportunities across 50 markets, with a young and rapidly growing population. The continenet is rich in raw materials
Nigeria, Ghana, South Africa, Morocco, and Kenya, in particular, are currently reliable investment destinations, while countries like Cote D’Ivoire, Tanzania, and Zambia are making reforms to attract foreign investment.
Africa presents unique risks such as political instability, trade barriers, corruption, and logistical challenges, but still holds promise for forward-thinking entrepreneurs.
The US Recognizes the potential for secure supply chains in markets poised for growth, and has initiated efforts to engage with the continent as a partner through initiatives like Prosper Africa and Power Africa, and import provisions through the Africa Growth and Opportunity Act.
Next Steps for Institutions
Public
Recommendations for next steps include improving data collection for risk analysis, empowering a federal entity to coordinate strategic priorities, adding flexibility to prospecting tools (ex. opening grant programs to Australia), and safeguarding key markets for growth.
Diplomatic instruments should also focus on contributing to the global supply of minerals for decarbonization and improving transparency and quality of markets.
Private
For private institutions, especially those in Defense tech, it is important maintain supply chain transparency and to have relationships with a diversity of sourcing agents.
Maintaining sovereignty from other institutions can pose a meaningful threat to the security and overall effectiveness of a supply chain.
It would be wise to think critically about ensuring independent sourcing and develop plans for extenuating circumstances, when the primary sourcing system fails.
Conclusion
The risks and challenges of rare earth metal procurement present a complex landscape of geopolitical, technological, and security concerns. These challenges are unique to rare earth metal markets. The concentration of supply chains in certain resource-dense countries, coupled with the dominant role of China in global REE markets, especially, leaves the Western world vulnerable to economic coercion and supply disruptions.
To mitigate these risks, the United States has taken steps to bolster its domestic production and engage in partnerships with other countries, including African nations with promising potential. However, achieving secure supply chains requires continuous efforts, such as improving data analysis, strategic coordination, and fostering diverse sourcing relationships.
For institutions and private entities alike, maintaining sovereignty and independence in rare earth metal procurement remains crucial for ensuring long-term stability and resilience in critical industries and technologies.
Sources:
https://www.fpri.org/article/2021/06/americas-critical-strategic-vulnerability-rare-earth-elements/
