The Covid-19 pandemic coupled with the war in Ukraine have led to major structural changes and shifts in the global economy, leading to debates about the possible end of globalisation. These major changes in geoeconomics have shaken the international liberal order, enhancing pre existing challenges such as dependencies with strategic rivals for critical raw materials and rare earth elements. This article highlights the geopolitical risks of supply chain dependencies for rare earth elements in three steps. It will investigate which elements and materials are considered to be strategic and why. It will then analyse the interdependencies between extraction and mining countries, with a specific focus on China. It will conclude with a reflection on the main risks and trade-offs of these geopolitical supply chain dependencies. 

Critical Raw Materials (CRMs), Rare Earth elements (REEs) – a group of seventeen metallic elements – and critical minerals – non-fuel mineral or mineral material –  are considered crucial for strategic industries, such as technologies used in the digitisation process, the energy transition and the defence industry. They are used in the construction of wind turbines and solar panels, advanced electronics, batteries for electric storage, cars, the development of technologies and components of fighter jets. Geopolitical shifts, such as the acceleration in the digitisation process, the energy transition, coupled with the war in Ukraine may cause supply shortages or additional vulnerabilities to supply chains. These shifts pose challenges such as finding alternative suppliers and alleviating dangerous dependencies.

To better understand the importance of these supply chains, it is worth investigating two examples of strategic sectors that require critical raw materials: the energy sector and the defence industry. 

The energy transition 

Climate change is at the top of the agenda for several international organisations and countries around the world. The dangers we face due to increasing temperatures and the consequences of this phenomenon for the environment, human beings, and the cascade social, political and economic effects, has increased the urgency for alternatives. Population growth over the past decades has led to the increase in the demand for energy and consequently to the rise of oil, natural gas and electricity prices, together with a further depletion of natural resources and raw materials. Higher energy prices, exacerbated even more by the current war in Ukraine and the politicisation of natural resources by Russia, urges new alternatives such as renewables and an acceleration in the transition towards the so-called green sources of energy. However, in order to produce renewables such as wind turbines, solar panels, or electric batteries for cars, CRM’s such as lithium, cobalt, tungsten, nickel or platinum are needed. These critical raw materials are scarce in supply, unevenly distributed, expensive to extract, and paradoxically even toxic for the environment. Moreover, in most cases the majority of these sources are located in countries whose political situation may be defined as unstable, characterised by autocratic governments or both: 50% of the world’s supply of cobalt, for example, is located in the Democratic Republic of Congo and 40% of manganese in South Africa. China, moreover, will be analysed deeper in the subsequent section and is by far the country that controls most of the world’s extraction and processing capacities for raw materials. 

Defence Industry 

In the defence industry there are multiple critical raw and rare earth materials used in the production of satellites communications, aeronautics, military surveillance systems and fighter jets’ components, such as lithium for batteries. Due to their significant roles for national security, they are listed among the 50 critical and strategic materials and minerals for the United States. As for the energy transition, the risk for the defence industry lies in the dependency of the supply chain from countries that are either unstable or strategic rivals: countries that because of their domestic political and social situations may increase the market volatility, soar prices, or simply use their leverage for supply cut-offs or hybrid attacks on domestic production lines. Niger, for example, is an important exporter of uranium, however, its domestic and neighbouring unstable political context makes it an unreliable partner. A disruption in the supply chain of a critical raw or mineral material may, indeed, undermine the production, reparation or modernisation of military equipment, as it already happened with the interruption of F-35 fighter jets deliveries due to cobalt sourcing problems. Fighter jets, like the F-35, require around 417 kg of rare earth materials for critical components such as electrical power systems and magnets. F-35s deliveries were suspended as the company’s producer, Lockheed Martin, realised the magnet used in the Honeywell-made turbomachine — an engine component that provides power to its engine-mounted generator — was made with cobalt and samarium alloy coming from China.

China

Critical rare earth, minerals and raw materials are unevenly distributed, which makes powers such as the United States and Europe obliged to rely on foreign and overseas countries — China, Australia, Canada, Russia, Africa or Central Asia. Yet, there is one country above all others, that has the most power and control over extraction, processing, export and with an almost monopoly of the refining process of CRM (90%), this is China. One of the biggest Chinese rare earth extraction, mining and refining companies, for example, is the China Northern Rare Earth Group High-Tech Co Ltd (Northern Rare Earth), whose headquarter is in Inner Mongolia Baotou, and is specialised in rare oxide and magnetic materials. The almost Chinese monopoly over the refining capacities of rare earth materials is of crucial strategic importance. The bottleneck on rare earths is, in fact, the concentration and purity of natural deposits and the need to refine mined minerals with energy-intensive processes. A recent study by Benchmark Mineral Intelligence shows, indeed, how China’s power and control over the production of lithium ion batteries for electric vehicles, for example, relies for 80% just on the refining process (Figure 1).  

Figure 1: “Where does China’s dominance lie in the lithium ion battery to EV supply chain?”

Source: Benchmark Mineral Intelligence

In 2010 a European Commission sponsored study group identified 41 critical raw materials, of which 14 were considered of high supply risk and high economic importance, among which there were antimony, beryllium, cobalt, fluorspar, gallium, germanium, graphite, indium, magnesium, niobium, Platinum Group Metals (PGMs), Rare Earth Elements (REs), tantalum, and tungsten. 

To assess the concentration in commodity markets the index used is the one developed by the economists O. C. Herfindahl and Albert O. Hirschman. The Herfindahl-Hirschman Index (HHI) is defined as the sum of the squares of the fraction of market share controlled by the 50 largest entities producing a particular product. The maximum value of this index is unity, and the US department of Justice established that between 0.15 and 0.25 the concentration is considered as moderate; above 0.25 it is, instead, highly concentrated. China’s global market position with regards to these critical materials is of particular importance as it produces more than 12 of the 41 critical materials identified by the European Commission, 9 of which of high supply risk. 

China’s rise in market share of critical materials’ global production has sharply increased in the past few decades, leading the country to acquire a dominant strategic position. This outcome is the result  of three main factors: the country’s large resource base; the Chinese government's long-term emphasis on strategic raw materials, rare earth, minerals and magnets for the “Made in China 2025” strategy; and finally, China’s ability to produce raw materials at a lower cost. China is the largest battery producer: dominating battery material separation and processing, component manufacturing, and controlling the downstream end of mineral processing and rare earth magnets, all critical elements necessary for the energy transition. This is a part of the global strategy adopted by China and best exemplified in the Belt and Road Initiative (BRI): gaining control of material production outside of China, imposing production quotas or restrictions to exports, leading to higher prices and volatility. To further consolidate its dominant role and power in the CRM’s domain, China has, moreover, recently established the China Rare Earth Group Co. Ltd: merging three state-owned rare earths entities. This megafirm, based in South China, accounts for around 62% of the country’s heavy rare earths supplies and it will enable the country to increase its competitiveness and pricing power, triggering dangerous consequences for the world supply chain.  

The geopolitical risk of this dependency is twofold. On one hand, there is the confrontational nature of China, who as a power, could potentially restrict exports during a dispute or simply due to domestic production needs, thus causing a spike in prices. On the other hand, the risk is determined by the deep interdependence between Western powers and China for scarce, rare and critical materials. Indeed, between 2017 and 2020 the USA has imported around 76% of rare elements from China (Figure 1), whereas Europe 98%. 

Figure 2: Major import sources of nonfuel mineral commodities for which the United States was greater than 50% net import reliant in 2021

Source: US Department of the Interior, US Geological Survey, Mineral Commodities Summary 2022

Furthermore, a report presented by the Government Accountability Office in 2010 shed light on the dominant role of China at all levels of the supply chain for Rare Earth Elements (REE). China produces 95% of raw materials, 97% of oxides, and 90% of metal alloys, and holds 37% of REE world reserves. From a military perspective, the high concentration of raw materials production by a strategic rival is incredibly threatening in case of a military confrontation due to the potential disruption to weapons systems production. 

Risks and trade-offs

It is noticeable from the previous analysis how the concentration of CRM’s supply in the hands of just one global actor immediately increases the risks of interdependence. Countries with large market shares in the supply of one critical material can distort its production, increase market vulnerability and the volatility of prices, causing strategic disruptions. 

Two possible solutions could limit the supply chain risks for critical raw materials and rare earth resources: on one hand finding new suppliers, on the other increasing controls of market shares. The first one is diversification: many resource-rich countries have been neglected in the recent multinational Minerals Security Partnership in June 2022 agreement, such as Vietnam, Chile, Argentina, Indonesia, the Philippines, Brazil, Cuba, Papua New Guinea, Madagascar and Mozambique could all be candidates for critical mineral production. However, despite trying to diversify and finding possible alternative suppliers, some rare earth materials are scarce and finite in nature. The second alternative, therefore, may be to increase partnerships and international cooperation, rather than isolationism, through multinational systems and controls over excessive market shares of a single commodity by one country. The United States, for example, has already released joint statements and signed agreements with multiple countries on critical material supply chains, security of dual-use technology, and mutual supply of defence goods and services. In this direction goes also the recent establishment of a transatlantic supply chain for rare earth metals spanning from Canada to Norway and Sweden. The mining will be performed in Canada’s Northwest territory, by the company Vital Metals, the only one in North America not selling to China. The long-term and strategic goal, therefore, is to avoid China or any dependence on it for the supply chain.

In conclusion, there is a double trade-off for policymakers. On one hand, the pervasiveness of Chinese presence and control of so many critical raw materials, rare earth, mineral and magnet sources, makes it difficult to tackle a politically strategic and rising rival power, while depending on it for critical supply chains. On the other hand, but also interconnected, the trade-off is between China and climate change. The energy transition, necessary to defeat climate change, requires technology and CRM that comes from China’s production. Therefore, is it possible for Western countries, such as the United States and the European Union, to counter the Chinese rise while having such risky supply chain dependencies?