China leaves EU playing catchup in race for raw materials

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

Its rugged, otherworldly landscape to the west of the Andes Mountains spans 1,200 square miles of salt flats, pockmarked by rocky outcrops and overshadowed by volcanoes. But this desert, 11,000 kilometers away from the Belgian capital, now holds the riches EU leaders desperately want. 

Mining companies operating in the Salar bring saltwater up 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 vital to the transition away from fossil fuels to cleaner energy. Often called “white gold” because it is in so much global demand, lithium is a key component of the rechargeable batteries required for electric cars and the electricity grid storage facilities that will be essential as Europe shifts to wind and solar power.

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

Europe’s lack of a reliable home-grown supply of fossil fuels left it dangerously vulnerable in the past year, as Russia shut off gas supplies in retaliation for sanctions over the war in Ukraine.

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

“We have to start moving right away 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’ll have a dependency for critical raw materials.”

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

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

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

A new cast of countries is taking on 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 of 85 percent of Australia’s lithium, the place where the raw material gets refined into useful components. As of 2020, Chinese companies own or finance 15 of the 19 cobalt mines in the DRC. 

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

Catching China

China’s dominance has been a long time in the making. The strategic importance of rare earths — a group of metallic elements which are needed for the permanent magnets in everything from wind turbines to electric car motors — was identified by Beijing as far back as the 1980s. Europe and the U.S. are now trying to catch up, said Jane Nakano, a former U.S. energy department adviser and now senior fellow at the Center for Strategic and International Studies. “But all are 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 whereby minerals are purified into usable components for use not just in China, but in export destinations the world over, including Europe.

“For the moment, China has about an 80 to 90 percent monopoly on refining lithium,” said Breton. “And of course, this creates a very strong dependence.” The same goes for rare earths. To go with its 60 percent share of global reserves, China holds an even bigger, 90 percent, share of global processing capacity for rare earths, and produces virtually all — 98 percent — of the EU’s permanent magnets. 

The EU’s experience of Russian gas blackmail in 2022 has brought the dangers for its clean energy supply chain sharply into focus. What if, for instance, China were to invade Taiwan? Might Beijing threaten to cut off rare earth supplies to Europe? What would that do to Europe’s emergent green industries, its electric car manufacturers, its energy security and even its net-zero climate goals?

The idea is not so far-fetched. In 2010, China briefly cut off rare earths exports to Japan amid tensions over disputed islands — a warning shot often cited by analysts as a sign raw material supply chains could be used as a geopolitical weapon.

But despite the red flag, EU dependence on China for raw materials remains “even higher than the oil and gas dependence on the Gulf region had ever been,” said Frank Umbach, a former adviser to the German government and a research director at King’s College’s European Centre for Energy and Resource Security. “We already, in my view, lost a lot of time.”

Diversifying supply

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

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

That could involve stockpiling, for example. More than that, it will put international alliances front and center of efforts to cut dependence on China. The act will give formal EU backing for “strategic partnerships” with resource-rich third countries to “diversify the [EU’s] supply of strategic raw materials,” the draft document says. 

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. 

“Monitoring is not something that we’ve done proactively and that’s one of the key elements,” the official said, adding that the act will likely also contain an action plan for EU-wide responses when potential shortages are identified.

“If we see that we are relying too much on a particular part or a particular raw material from just one or two suppliers, then either from within the EU or from other trade partners we can start filling those gaps,” the official said.

But Europe cannot be self-sufficient. While Portugal has significant lithium reserves and Sweden recently heralded the potential of a vast deposit of rare earth metals, Europe has only around 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. “We obviously have to start creating alliances,” Breton said.

The EU is already in talks with Washington over the formation of a critical raw materials “club” and the new act is set to scale up efforts to secure Europe’s security through a broader international supply chain. The Commission is speaking regularly with the U.S., Japan and Canada on this issue, according to the official cited above. 

Joe Biden and European Commission President Ursula von der Leyen held talks ahead of the act’s publication on a critical minerals agreement that will help the two sides build resilient supply chains for electric vehicle batteries.

“Geology is the trump card when it comes to a lot of this, but strategy should not be downplayed,” said Anna-Michelle Asimakopoulou, a center-right lawmaker in the European Parliament’s trade committee. 

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

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

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

Barbara Moens contributed reporting.