Europe shifting supply chain with proposed Raw Materials Act

Amidst the soaring prices of oil, gas and various metals that are slowly crushing Europe’s economy, European Commission President von der Leyen recently announced the legislative proposal of the Critical Raw Material Act, aimed at ensuring more resilient supply chains, whilst also reducing its dependency on China for the production of raw materials.

This act is especially focused on the raw materials of rare earths and lithium, which will be instrumental in the move toward cleaner and renewable energy.

And by securing the supply chains of these raw materials, Europe will be a global leader in the renewable energy movement.

According to the EU, the demand for rare earths will increase by 500% by 2030.

Currently, rare earths are in the make-up of many essential items, including LCD screens, smartphones, microphones, satellites and even in some modern cancer drugs.

“Rare-earth” metals consist of the 15 of the elements in the periodic table known as the Lanthanide series, plus Yttrium, and range from light to heavy elements. However, the heavy rare earths are less common and consequently more expensive.

Ms. von der Leyen believes that rare earths, as well as lithium, will “soon be more important than oil and gas.”

This promising outlook is due to the fact that they can be light in weight and highly magnetic, which means they can quickly turn movement into energy.

This is especially important for the use of electric vehicle batteries and wind turbines, as their movements can be lighter and more efficient with the use of such rare earths.

Currently, “there is about 750g of magnet rare earths in every EV motor,” Ionic Rare Earths (ASX: IXR) managing director Tim Harrison stated. And with BloombergNEF reporting that automakers are targeting an uptake of 40 million electric vehicles per year by 2030, their future value will be immense.

Some of the wind turbines now, “have 6 tonnes of magnets in them, or about 2 tonnes of rare earth metals,” Harrisons says, with a significantly larger amount of wind turbines set to be installed over the next 30 years.

Lithium, of course, is the key ingredient in the make-up of lithium-ion batteries, which have become the gold standard of electric vehicle batteries. This is due to its higher energy density, increased charged times and longevity.

With the global market for EV batteries expected to grow to US$250b by 2030, the demand for the batteries key ingredient will also continue to grow exponentially.

As such, by securing these raw materials, Europe no longer has to rely on China, allowing them to create their own secure supply chain, and enhance their digital technology capabilities, whilst promoting their ambition to become the first climate neutral continent.

In addition, there can be drastic consequences when a nation becomes overly dependent on sourcing raw materials from another nation.

For example, Russia’s invasion of Ukraine has resulted in the EU imposing multiple sanctions on Russia’s Energy Sector. As a result, Russia has used its supply chain power to shut off its major gas pipelines, including the Yamal gas pipeline and Nord Stream 1, crippling the supply of gas, leading to the price soaring to record highs.

China have also used their large supply of raw materials as a geopolitical tool before.

In 2010, China slashed rare earth exports worldwide and cut off Japan entirely to pressure them to release a detained Chinese fishing trawler captain.

To tilt the current balance of power, the EU outlined a set of further details.

  1. A European network of raw materials agencies can be built, helping to develop certain synergies whilst avoiding certain Member States having stronger capabilities than others.
  2. Strategic storage facilities can be built, preventing supply chain disruptions or imbalances, and serving as an insurance against future market turbulence.
  3. The act should provide understanding of which critical raw materials can be considered as particularly strategic. This requires setting a criterial for identifying raw materials which are of strategic relevance for their twin transition and defence needs, including economic importance, supply concentration, strategic applications and forecasted supply gaps.

In order for this act to be successful, the EU would also need to renew its relationship with key partners.

Ms. von der Leyen mentioned that the EU would submit agreements with Chile, Mexico and New Zealand for ratification and would seek advancing negotiations with major partners such as Australia and India.

EU has also had success with similar concepts before.

“We know this approach can work. Five years ago, Europe launched the Battery Alliance. And soon, two-thirds of the batteries we need will be produced in Europe,” Ms. von der Leyen mentioned.

In addition, the EU last year announced the European Chips Act, and in the next few months, the first chips Gigafactory will be ready for production.

The announcement of this proposal makes Europe’s intention to move away from China clear, and other countries have already joined the race.

The U.S., Japan, and South Korea have all deployed “sizable support and investments to lessen their dependence on the extraction, processing and recycling of critical raw materials,” Ms. von der Leyen states.

These actions are the latest step taken toward moving from Chinese supply chains, as more countries are looking to do due to various political tensions, strict COVID-19 lockdowns, and a crumbling housing market.

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