By: Andreas Kuehn
The following article originally appeared on April 25, 2022 in the Raisina Files 2022.
Advanced technology will have profound effects on the global economy and chart a way for inclusive and sustainable growth. While digital technologies—ranging from artificial intelligence, semiconductors, and cloud computing to the Internet of Things (IoT)—are at the heart of the Fourth Industrial Revolution (4IR), it is electric vehicles, solar panels, wind turbines, and energy storage that drive the green energy transition and power the low carbon economy of the future. Against the backdrop of a global climate crisis and an estimated 47 percent increase in global energy demand over the next 30 years, clear and feasible pathways to sustainable, renewable energy sources are integral to the technologies of the future.
As we are approaching this new era—challenges and uncertainties abound—it becomes evident that a set of metals and minerals, especially the family of 17 elements in the periodic table known as rare earth elements and other critical materials, are key input factors for many industries manufacturing digital and sustainable energy technologies. These critical materials are equivalent to what coal and iron were to the Industrial Revolution in the eighteenth century, which kicked off a ground-breaking transformation in human history. As a source of energy, coal-powered steam engines and turned iron ore into iron and later, steel. This was only the start. Industrialisation led to mass-production, turned towns into cities, changed social structures, and gave rise to new geopolitical powers, particularly Europe and the United States (US). Changes of equal magnitude are afoot that will shape the global order. Amidst foreign supply dependencies and high concentration of deposits and production, the ability to secure supplies, manage the value chain—from extraction, processing, use to recycling—and harvest the unique chemical and physical properties of critical materials for high tech will determine the economic, diplomatic, and military leaders of the future.
Reflecting differing state priorities and industrial needs, the European Union (EU) designates 30 elements as “critical and raw materials”; its Japanese counterpart identifies 34 “rare materials”; and the US lists 35 “critical materials” as strategic for its national interest, but only half of the entries are identical on all three lists. Cobalt, copper, nickel, lithium, and rare earth elements—notably neodymium and dysprosium—are commonly cited as critical to a low-carbon future due to their use in electric vehicles, wind turbines, and solar panels. Integral to the production of information and communication technology (ICT), robotics, drones, and 3D printing, rare earths—magnesium, niobium, germanium, borates, and scandium—exhibit the highest supply risk of critical materials in the EU’s digital transformation.
What drives the increase in demand for critical materials are a mix of international agreements between states to fight climate change—such as the Paris Climate Accords, the UN Sustainable Development Goals—and national economy, sustainability, and industrial development plans. Germany’s Industry 4.0 strategy future-proofs its mighty industrial and engineering sectors; and India’s ambitions to electrify significant numbers of private and commercial vehicles by 2030 exemplify key drivers behind the steep upward trend in demand due to the anticipated rapid deployment of advanced clean energy and digital technologies.
Whether supply can meet demand has become a major economic and geopolitical concern. It is projected that by 2040, the future supply of clean energy technology materials has to increase by four times the current demand at the minimum and at even six times by 2050 to limit global warming to 1.5˚C under a net-zero scenario. It is uncertain whether near and mid-term supply growth will suffice to meet those demands. The shortage is especially pronounced in the case of minerals used in electric vehicles. Lithium—widely used in batteries for electric cars and mobile devices—is the 33rd most abundant element but exists only in very low concentrations and thus, is expensive to extract. Copper is another example for the increase, not the reduction of materials, used in green technologies. Electric vehicles require four times the amount or 80 kg of copper per car; it is expected, though, that 90 percent of known deposits will be extracted by 2050.
Concentration and Dependence as the Drivers Behind the New Geopolitics of Critical Materials
The global surge in demand for critical materials has given rise to new geopolitics. The natural limitation of mineral deposits, high concentration of production, and dependence on foreign suppliers—particularly those subject to states with weak institutions, high political uncertainty, or authoritarian rule—are the main determinants of these still emerging dynamics. Benefitting from the earth’s geological compositions, some countries endowed with rich and accessible mineral deposits have turned into powerful suppliers of single or groups of critical materials. But concentration does not stop with the geological occurrence and the mining of critical materials, it extends into downstream processing and refining as well. Thus, concentration along the global value chain warrants attention.
The reliance on critical materials for economic and strategic purposes puts states—some more than others—in a vulnerable position. Calls to reduce dependence and strengthen supply chains coincide with growing geopolitical tensions over recent years and the recognition that critical materials are essential for the economic health and security of states and their industries. The concentration in China—which alone produces 60 percent and refines 90 percent of the world’s rare earths—has led to an awakening and realisation that China could leverage its position to deny or delay benefits to others, but also that processing, not mining is the real bottleneck. In fact, today, the US is sending its rare earths ores to China for processing before it gets reimported for downstream manufacturing. Building up domestic smelting and processing capacities is costly, and the environmental and health hazards remain alarmingly high.
The Democratic Republic of the Congo, which produces close to 70 percent of mined cobalt globally—an important component for electric car, computer, and cell phone batteries—is another often-cited example of concentration and unreliable supplier due to political instability. A Chinese conglomerate bought one of the world’s largest and purest cobalt reserves in Congo in 2016, ironically from a US mining group, adding further to the perception of China as a threat. As for China, it seeks to secure cobalt for its fast-growing electric vehicle industry.
China is the top producer of a long list of critical materials, including bismuth (85 percent of global market share), gallium (80 percent), germanium (80 percent), indium (48 percent), scandium (66 percent), silicon metal (66 percent), titanium (45 percent), tungsten (69 percent), vanadium (55 percent), and rare earth elements (86 percent). Other resource-rich nations dominate the production of other critical materials, such as Brazil (niobium, 92 percent of global market share); Chile (lithium, 44 percent); Congo (cobalt, 59 percent; tantalum, 33 percent); France (hafnium, 49 percent); Spain (strontium, 31 percent); South Africa (platinum metals, 84 percent); Turkey (borate, 42 percent); and the US (beryllium, 88 percent). Argentina, Australia, Austria, Canada, Finland, France, Germany, India, Indonesia, Iran, Japan, Kazakhstan, Korea, Laos, Madagascar, Mexico, Mongolia, Morocco, Norway, Russia, Rwanda, Tajikistan, Thailand, Ukraine, and Vietnam are among the largest producers of critical materials at times, though at a much lower quantity. Congo’s output dwarfs Australia’s 4 percent stake as the third-largest cobalt producer by far.
A look at history shows that dominance is not a given. There was a time when the US, not China, was the leading producer of rare earths. Through a combination of industrial policy, state-backed financing, and loose environmental protection, China rose to become the top producer in the 1980s and early 1990s. Unable to compete with Chinese low-price exports, leading mines closed their operations. The world’s reliance on China for rare earths became painfully clear when it introduced quotas to manage resources and reduce pollution, resulting in soaring prices. China’s dominance peaked in 2010 when it accounted for an astounding 97 percent market share. Since then, the number has dropped to around 70-80 percent. Today, China is the biggest consumer of rare earths due to its burgeoning high-tech manufacturing. As a net importer, it now relies on Myanmar and others to satisfy its demand and has grown sensitive to potential price hikes and supply disruptions to its own industry.
The exploitation of foreign dependencies is a staple in the geopolitical powerplay handbook. The geopolitics of energy—as in squeezing a nation’s energy supply—is the primary example. The bigger the gap and the more difficult to find substitutes, the bigger the pressure point. Heightened geopolitical tensions and war amplify those dynamics. Even before the Russia-Ukraine crisis turned into a full-blown conflict, Europe’s heavy reliance on Russian gas (45 percent) and oil (27 percent) has left many wondering how the West could effectively respond to the Russian threat. The uncertainty let the oil prices soar. In response, over 30 countries planned to release 60 million barrels of their strategic oil reserves, to temporarily ease the dependence.
Many critical materials are geographically more concentrated than oil or natural gas. As such, it was perhaps not a surprise that a market research group highlighted the chip industry’s dependence on Russian and Ukrainian-sourced neon and palladium. It is plausible that critical material supply chains will become more frequently the target of geopolitical tensions. In anticipation, governments conducted extensive supply chain reviews of critical and emerging technologies. Amidst the crisis, the White House, thus, asked the US semiconductor industry to diversify its suppliers. Beyond that, the case of the Ukrainian-Russian war illustrates that dependencies can not only be weaponised to target other economies in retaliation but also erode political tools of statecraft by undermining the effects sanctions could have.
Seeing this through the lenses of an international relations realist’s perspective, it needs to be expected that states will exploit vulnerabilities in critical material supply chains. They are the two sides of the same coin—the buyer nation’s dependency and economic risk is the supplier state’s geopolitical gain. Examples of those are few thus far. Yet, China was not shy in leveraging its rare earths muscles against Japan during a diplomatic standoff following the 2010 Senkaku boat collision in which a Chinese fishing trawler collided with two Japanese coast guard vessels in disputed waters in the East China Sea. China moved to block rare earths exports to Japan over the incident, which is seen as an early example of economic coercion under China’s foreign policy. A 2014 World Trade Organisation ruling later rejected China’s export ban. China also reminded the US about its rare earths reliance. A well-publicised visit by Chinese President Xi Jinping to a rare earths magnet maker, in which he called the minerals “an important strategic resource,” followed just a few days after Washington blacklisted Chinese telecom equipment manufacturer, Huawei.
Hedging Geopolitics Through Innovation, Diversification and Structural Changes
Scarcity is a tenet of economic theory and explains the dynamics around competition for critical materials. “There is never enough of anything to fully satisfy all those who want it” is the economist’s Thomas Sowell blunt but succinct explanation of scarcity. Through a market mechanism, scarce resources are allocated dynamically based on price. An increase in price leads to higher production but lower consumption. Through the interaction of supply and demand, producers will invest in mining operations when they can expect a return on their investments. Higher prices, though, also motivate buyers to innovate and find cheaper material substitutes or more efficient designs.
Scarcity is also a political concept with different motivating logics underpinned by national security and economic interests. States will seek to secure access to critical materials—or deny others the access—to maintain or expand their economic and military powers. To that end, states have been monitoring and tracking domestic critical material needs and global supply through dedicated agencies and developed plans to ensure industrial competitiveness and national security.
The soaring demand for critical materials has put the economic and political dynamics in full swing. With demand up, prices are rising and are triggering investments in new and existing mining operations. These investments come with high uncertainties. It can take years and hundreds of millions of US dollars to develop new mines or processing plants, while the risk of unexpected delays, regulatory changes, low extraction yields, and price fluctuations can eat away returns.
One of the most powerful forces to reduce scarcity and lower concentration is innovation through technological and structural changes along the global value chain. The discovery of new reserves—aided by new technology and more efficient extraction and processing methods—adds to the global supply. Japan’s researchers have discovered rich supplies of rare earths, 6,000 metres below the surface, in sea mud within their exclusive economic zone of the Pacific Ocean. Meanwhile, the US is developing biotech to extract rare earths in an environmentally responsible way. Both efforts were started to cut down on foreign supply dependence. While not yet in commercial operation, private companies are developing technologies for deep-sea mining of cobalt, nickel, and manganese. And even the mining of the moon and celestial objects has been given some thought, which some hope could become a breakthrough solution one day. In the short term, competing design choices and substitution lower scarcity and may come with acceptable trade-offs. A switch away from nickel-cobalt-aluminium to lithium-iron-phosphate chemistry in electric car batteries—while reducing the demand for nickel and cobalt—decreases performance and increases weight but has a longer lifespan and is safer. A Japanese conglomerate has developed a motor that does not use rare earths at all. Last but not least, recycling is expected to become a viable source for critical materials supplies. First, though, a sufficient stockpile of materials for recycling needs to develop.
Supply shortages of critical materials are likely to persist in the short term, and possibly become worse before they get better. This presents real geopolitical and geoeconomic risks for the short and intermediate future. It seems though that the economic and political dynamics of scarcity will ease those challenges in the long run as innovation and economic incentives will produce design alternatives and efficient, low-cost material substitutes as well as promote recycling of critical materials. Together, with other forces already underway—such as efforts to reshore manufacturing and critical parts of supply chains in response to the COVID-19 pandemic—it is likely that geopolitical vulnerabilities from critical materials will decrease. Japan’s response to China’s quota led to a significant reduction of rare earths imports from over 90 percent to less than 60 percent within a decade and a projected further decrease below 50 percent by 2025.
Changes and innovation can gradually mount to a restructuring of the value chain, by slashing dependencies on unreliable suppliers, enhancing supply resilience and diversification, and investing strategically to lower concentration along the supply chain. Multilateral actions among like-minded states can aid this development. To that end, states should develop policies for securing sufficient supplies, developing stockpiles, reducing or substituting materials, ensuring sustainable production, and supporting a level playing field in the global trade of critical materials. There remains, however, as the painful conflict in Ukraine shows, the potential for significant, unexpected disruptions from human-made conflicts and natural disasters. Careful long- and short-term planning and monitoring help to lessen unforeseen calamities and ensure that the momentous transformation empowered by critical materials-based digital and sustainable energy technologies keeps going steady.