Brief: Sweden’s Rare Earth Mine Discovery: Geopolitical and Supply-Chain Implications
At the beginning of this year, the Swedish state-owned company LKAB announced the discovery of one million tonnes of rare earth elements near Kiruna, located in Sweden’s Arctic region. Rare earth elements (REE) comprise 17 materials which have unique technological applications, spanning across electronics, defense, and aerospace industries to the automobile sector. Particularly, the manufacturing of magnets is one of the most important uses of REEs. LKAB announced that it will produce neodymium and praseodymium from the discovery site, which can be used to create very strong magnets which can withstand high temperatures, which are critical for producing electric cars and wind turbines. As countries across the globe set goals to transition to green energy, demand for REEs will grow rapidly. Their critical military application also makes them particularly valuable from a geopolitical perspective. This latest discovery marks the largest known deposit in Europe, and rare earths aren’t mined anywhere else on the continent.
Context
The majority of the world’s REE reserves are located in China (36.66%), Brazil (17.50%), Vietnam (18.33%), Russia (10%), and India (5.75%), whereas the United States hosts only 1.25% REE reserves worldwide. Similarly, China (58.33%), the United States (15.83%), Burma (12.5%), and Australia (7.1%) were the world’s largest REE producers in 2020. Only one mine in the U.S. - Mountain Pass mine in southern California - produces REE. According to the company that manages the mine, MP Materials, the mine is “one of the richest deposits of rare earth elements in the world.” While the U.S. ranks second behind China in number of rare earth deposits, American production pales in comparison to China’s, with 36.66% of the world’s deposits in China and only 1.25% in the U.S. This wasn’t always the case - before the 1980s, the U.S. was the world’s main supplier of REEs, but economic globalization led the U.S. to move REE production to cheaper locations, mainly China.
Figure: Global REE Reserves (Source: https://www.visualcapitalist.com/rare-earth-elements-where-in-the-world-are-they/)
Supply Chain Resiliency
First, the pandemic and now the Russian invasion of Ukraine has highlighted the vulnerabilities of supply chains that lack diversity and are dependent on foreign inputs, especially from just one monopolist player. Rare Earth Elements are a vital commodity group that suffers from concentrated supply chains. China, which although has only one-third of the world’s rare earth reserves, accounts for 60% of global rare earth production, 85% of rare earth processing, and over 90% of high-strength rare earth permanent magnets manufacturing.
China is also the largest producer and processor of rare earth oxides (REOs) worldwide and a key producer of lithium-ion battery (LIB) materials and components. Excessive dependence on solely one country exposes the world to grave supply chain shocks, and also increases geopolitical vulnerability. For instance, according to the RAND Corporation China could effectively cut off 40 to 50 percent of global REO supply, affecting U.S. manufacturers and suppliers of DoD systems and platforms.
The increasing significance of REEs in the production of, not only critical but a variety of modern technological consumer goods is a point of global concern. For instance, as the push for minimizing and reducing the effects of climate change increases, the global EV market is expected to grow at an increasing rate. Although this is great news for all climate leaders, it comes with its own intricacies with regard to the REE supply chain. Particularly for the European Union, which envisions being the leader in clean energy and related technologies, getting the required REE supplies for doing so will be a challenge. Due to its multidimensional strategic actions primarily with regard to REE extraction and production, China is expected to lead the worldwide EV market by 2030 with a 49% market share, followed by Europe (27%) and the United States (14%).
On the other hand, efforts are being made to counter China’s monopoly in rare earths. Worldwide explorations for deposits of REEs and efforts to bring them into production have increased substantially in the past decade. Last year, LKAB, the same firm that has now discovered the rare earth mine in Sweden, invested 40 million USD in a Norwegian firm REEtec. REEtec has been developing technology to separate rare earths from impurities and refine them into high-quality, high-purity materials, known as rare earth oxides, for use in products like electric vehicle motors and wind turbines. The investment will help in financing a substantial portion of REEtec’s rare earths separation factory in Herøya, where production will begin in 2024. Raw material from this factory will be sourced from Vital Metals, a Canadian firm mining rare earth ores at its Nechalacho project. Under an offtake agreement, REEtec will buy the rare earth carbonate and bring it to the forthcoming REEtec separation plant for further refining. This Canada-Sweden-Norway supply chain is a prime, albeit the only, example of a non-China-reliant supply chain in North America. This is due to the fact that it will not be dependent on Chinese buyers. In fact, LKAB claims 80% of REEtec’s planned production of rare earth metals has already been sold. Major customers like German automotive supplier Schaeffler Group, are the ones driving this demand. Another example of a transatlantic REE supply chain also lies in the partnership between Energy Fuels, a major American uranium miner, and Canada-headquartered Neo Materials. The former processes radioactive monazite sands to produce rare earth carbonates. And the latter, separates the rare earths into individual elements for use in manufacturing high-tech products at its Estonia plant.
Figure: Locations and stages of two nascent transatlantic rare earths supply chains (Source: https://qz.com/the-west-is-rebuilding-its-rare-earths-supply-chain-but-1849815677)
Trade wars and retaliatory tariffs can prompt companies to buy these crucial materials in bulk, even if they make up just a small portion of a product. Market dynamics can escalate so quickly that, without a diversified supply chain, firms can bid aggressively, putting pressure on prices. This is what happened in 2011 when rare earth prices shot up as China restricted exports to maintain supplies for domestic industries. This was the case again during the 2019 trade war.
The strong push for developing a western supply chain for REEs, and the action around it gives hope of reduced reliance on China. Current progress has freed transatlantic supply chains from China to a certain extent. The discovery of the Swedish Rare Earth Mine is a very favourable development, in this regard. Specifically for Europe, this presents an opportunity to mine rare earths in larger quantities in the region, instead of sourcing them from abroad. Even for countries across the Atlantic, this is good news, as a new source of REE emerges in a partner country. However, this is not the full picture. REE supply chains are not even close to being free from China, yet. Particularly for downstream activities, China solely dominates various sectors. Downstream REE applications provide a higher value-added than upstream industries. Chinese firms control the majority of permanent magnet production. China also holds an 87% market share for the industry-standard neodynium-iron-boron (NdFeB) magnet, accounts for approximately half of the global supply for the high-performance NdFeB magnets, and dominates advanced-sintered NdFeB magnets that are required for certain “green” technologies like electric vehicles (EVs) and wind turbines.
Overall, the new Swedish mine is positive for rare earth mining and on the upstream activities end, but challenges still remain with regard to the downstream activities. China’s deep penetration in the REE sector at all stages, makes any new discoveries, like the mine in Sweden, vulnerable to falling into the macro level (skewed) supply chain. The risk in the context of REE is also amplified due to its geopolitical implications. China is willing to leverage its commanding presence over the supply chain for furthering its political interests.
Geo-political Implications
China’s domination of REE production and the West’s dependance on Chinese imports (99% of the EU’s REE supply is imported from China) will likely become a more salient problem for the U.S. and its allies in the near future. Several critical U.S. military technologies are reliant on REEs. For example, yttrium is used to create laser gun sights in Abrams tanks (31 of which the Biden Administration has just earmarked to be sent to Ukraine).
In recent history, China has sought REE production far more tenaciously than the U.S. or Europe. Beyond economic benefits, China has sought to dominate this industry for strategic purposes. In 2021, three major Chinese REE production companies were consolidated to form the China Rare Earth Group to maximize its production. The state-owned operation will reportedly make up 62% of China’s entire REEs production. The Chinese government has also pursued REE mining abroad, investing in mines across Africa and Latin America.
Further, China has hinted at weaponizing its exports of REEs to the West in the past. During the U.S.-China trade wars of the Trump Administration, President Xi highlighted the U.S.’s dependence on Chinese REEs through a highly publicized appearance at a Chinese REE facility. China also weaponized its REE supply to Japan during heightened tensions between the two countries due to a territorial disagreement over islands in the Pacific Ocean. This history showcases China’s readiness - and ability - to use its advantage in REE production for its own geopolitical gain at the expense of the U.S. and its allies.
The Swedish discovery also has implications for the growing geopolitical tensions in the Arctic region. In 2018, China released a white paper - “China’s Arctic Policy” - that declared itself a “near-Arctic” state, despite having no territory within the Arctic circle. The white paper outlined several areas in which China seeks to be involved in Arctic affairs, including “participating in the exploration for and exploitation of oil, gas, mineral and other non-living resources.” China, along with the rest of the world, will likely seek to take further advantage of the Arctic’s natural resources, particularly REE deposits that are suspected to exist in the region. This “gold rush” could lead to a worsening of U.S.-China relations and increased tensions among great powers in the Arctic region.
Western military leaders have been sounding alarm bells about this issue for years, but only recently have substantive steps been taken to counter the dependence on China. In 2010, a DoD official stated that “the Pentagon has been incredibly negligent” and “there are plenty of early warning signs that China will use its leverage over these materials as a weapon.” In 2022, European Commission President Ursula von der Leyen stated that “lithium and rare earths are already replacing gas and oil at the heart of [Europe’s] economy” and “by 2030, [Europe’s] demand for those rare earth metals will increase fivefold.” Further, she noted that Europe must “avoid falling into the same dependency as with oil and gas” by forming new trade partnerships with Chile, Mexico, New Zealand, Australia, and India that more closely match Europe’s values and protect its interests. Von der Leyen also put forward the European Raw Materials Act, which outlined goals for the EU to develop a more resilient REE supply chain by 2030. Similarly, in 2021 the Biden Administration launched an assessment of the U.S.’s supply chains of REEs and other critical materials and in 2022, announced massive investments in MP Materials as well as BHE Renewables and Redwood Materials - both American companies involved in materials processing - to boost the U.S.’s domestic processing and supply of REEs and critical materials.
The West should be cautiously optimistic about this recent discovery, while also recognizing that more focus should be put into diversifying its sources of REEs. Given China’s overwhelming domination of the REE market, however, it may be a while before the West can significantly reduce its dependence on the country by replacing it with Western and domestic sources.
*The views expressed in this article are solely the authors’ and do not reflect the views or beliefs of their employers.