China leaves EU playing catchup in race for raw materials – POLITICO

There aren’t many places on Earth as far from the political scheming of the European Union’s rain-soaked headquarters in Brussels as Chile’s Salar de Atacama.

Its rugged and otherworldly landscape west of the Andes mountains encompasses 1,200 square miles of salt flats, marked by rocky outcrops and dotted with volcanoes. But this desert, 11,000 kilometers away from the Belgian capital, now holds the treasures that EU leaders love.

Mining companies, operating in the Salar, extract salt water from underground lakes and evaporate it in giant basins, then process the resulting solution to extract its bounty: lithium.

The soft, silvery metal is classified by the EU as a “critical raw material” – one of a group considered essential to the transition from fossil fuels to cleaner energy. Often called “white gold” because it is in such high global demand, lithium is a key component of the rechargeable batteries required for electric vehicles and the power grid storage facilities that will be essential as Europe has switched to wind and solar power.

By 2050, the EU estimates its demand for lithium will be 57 times that of today and the raw materials will soon become as important as oil and gas. There’s just one problem: Europe doesn’t have much; China does.

Europe’s lack of a reliable supply of fossil fuels at home left it vulnerable last year, as Russia cut off gas supplies in retaliation for sanctions over the Ukraine war.

The fear in Brussels now is that China could use its dominant role in raw materials supply chains to exert similar pressure in the future.

“We need to start the transition immediately to avoid replacing one dependency with another,” EU Industry Commissioner Thierry Breton told POLITICO. “We had a [geopolitical] dependency for fossil fuels, and if we don’t act now, we will have dependency for critical raw materials.”

This time, the Europeans are not leaving it to chance.

In December, EU trade negotiators got a new agreement including Chile, which analysts say has the largest supply of high-quality lithium in the world. The following month, German Chancellor Olaf Scholz stopped in Santiago as part of a four-day tour of South America, returning with a new “German-Chilean partnership in mining, raw materials and the circular economy.”

This month, Brussels is set to set out a strategy for securing supply lines of lithium, rare earths and other precious minerals. The Critical Raw Materials Act will include a plan for increasing the EU’s own extraction and refining capacity. It also aims to give EU countries a roadmap for navigating the new international power struggle over minerals.

A new cast of nations is playing an outsized role in clean power politics. Chile and Australia are major players in lithium, while the Democratic Republic of Congo produces 70 percent of the world’s cobalt. But above all, when it comes to raw material supply chains, China dominates.

It is the export destination for 85 percent of Australia’s lithium, the place where the raw material is refined into useful components. Number of 2020Chinese companies own or finance 15 of the 19 cobalt mines in the DRC.

Even in Chile, where lithium production is dominated by US mining firm Albemarle and Chilean firm SQM, you can’t escape Beijing. Chinese mining firm Tianqi holds more than a fifth of SQM’s shares. “They already have their foot in the door,” said Daniel Jimenez, a market analyst and former vice president of Chilean chemicals and mining firm SQM. “They now have a definite advantage.”

Catching up in China

China’s dominance has been a long time in the making. The strategic importance of the rare earths — a group of metallic elements needed for permanent magnets in everything from wind turbines to electric car motors — is met of Beijing in the 1980s. Europe and the US are now trying to catch up, said Jane Nakano, a former adviser to the US energy department and now a senior fellow at the Center for Strategic and International Studies. “But everyone is behind China.”

Beijing controls 60 percent of the world’s rare earth production, but its strong position is not just a blessing of geography. China also dominates in terms of battery and solar panel manufacturing and, critically, is the global leader in refining key raw materials. This is the industrial process by which minerals are refined into useful components for use not only in China, but in export destinations around the world, including Europe.

“Right now, China has about an 80 to 90 percent monopoly on lithium refining,” Breton said. “And of course, it creates very strong expectations.” The same goes for rare earths. To account for 60 percent of the world’s reserves, China holds an even greater 90 percent share of global processing capacity for rare earths, and produces almost all – 98 percent — of EU permanent magnets.

The EU’s experience with Russian gas blackmail in 2022 has brought risks for its clean energy supply chain. What if, for example, China invades Taiwan? Could Beijing threaten to cut off Europe’s rare earth supplies? What will that do to Europe’s emerging green industry, its electric car manufacturers, its energy security and even its net zero climate goals?

The idea is not so far-fetched. In 2010, China in a nutshell cut off rare earths exports to Japan amid tensions over the disputed islands – a warning that analysts often cite as a sign that raw materials supply chains could be used as a geopolitical weapon

But despite the red flag, the EU’s reliance on China for raw materials remains “much higher than its reliance on oil and gas in the Gulf region,” said Frank Umbach, a former adviser. in the German government and a director of research at King’s College’s European Center for Energy and Resource Security. “We have, in my view, lost a lot of time.”

Supply diversification

Brussels’ Critical Raw Materials Act is designed to help Europe make up lost ground.

Along with its measures to boost domestic EU mining, refining and recycling, the law also aims to prepare European countries for disruptions in their critical supply of raw materials, according to a draft version of the Act obtained by POLITICO.

That may have something to do with it storage, for example. More than that, it would put international alliances front and center of efforts to reduce dependence on China. The law will provide formal EU support for “strategic partnerships” with resource-rich third countries to “diversify [EU’s] supply of strategic raw materials,” the draft document said.

Monitoring raw materials supply chains to create an early warning system for possible shortages will also be key, said a Commission official familiar with preparations for its publication.

“Surveillance is not something we have done proactively and that is one of the key elements,” the official said, adding that the action will likely also contain an action plan for EU-wide responses when detected the potential drawbacks.

“If we see that we are too dependent on a certain component or a certain raw material from only one or two suppliers, then from within the EU or from other trading partners we can start filling in those gaps,” the official said.

But Europe cannot be self-sufficient. While Portugal has significant lithium reserves and Sweden recently expressed potential of a vast deposit of rare earth metals, Europe only has about 30 percent of its critical raw material needs available within its own borders, according to Breton.

With mining operations having a 10 to 15-year lead time, the importance of international partnerships to counter China is clear. “Obviously we need to start creating alliances,” Breton said.

The EU is already in talks with Washington regarding the development of a critical raw material “club” and the new law is set to increase efforts to secure European security through a wider international supply chain. The Commission regularly talks with the US, Japan and Canada on this issue, according to the official cited above.

Joe Biden and European Commission President Ursula von der Leyen held talks before the publication of the Law on a critical mineral agreement which will help the two sides build resilient supply chains for electric vehicle batteries.

“Geology is the trump card when it comes to many of these things, but strategy should not be underestimated,” said Anna-Michelle Asimakopoulou, a centre-right lawmaker on the European Parliament’s trade committee.

In Africa, China has already made the acquisition of raw materials a key pillar of its “Belt and Road” investment strategy. The EU may find it harder to compete with that with its own newly emerging “Global Gateway” investment program.

“Hopefully, the US and Europe can play a bigger role in being a credible alternative” for investing in mining projects “so that countries don’t go to China,” said Jacob Gunter from the German-based Mercator Institute. for China Studies.

Because now, he said, China is “the only option.”

Barbara Moens contributed reporting.