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EU Critical Raw Materials Act: Goals well set; implementation open

Germany's and Europe's dependence on critical minerals - such as rare earths from China - is already greater than its dependency on Russian oil and natural gas ever was. The rising systemic competition with autocratic regimes is further increasing supply risks. With the EU Critical Raw Materials Act, the European Commission is sending an important signal to strengthen European sovereignty in the raw materials sector. However, central instruments for implementation are missing.

The outcry was great, back in October 2021, when China cut its magnesium production due to a power crisis. Germany and Europe are almost 100 per cent dependent on magnesium supplies from China. From one day to another, the entire aluminum value chain was affected and therefore also sectors such as the automotive, aircraft, construction or packaging industries, mechanical engineering as well as the iron and steel production. The Russian war of aggression against Ukraine, which violated international law, also highlighted the danger of autocratic regimes using raw materials as a weapon in the context of geopolitical conflicts.

Mineral raw materials are indispensable, but supply risks are increasing

Germany's and Europe's dependence on various critical minerals such as rare earths from China is already greater than its dependency on Russian oil and natural gas ever was. This is also the result of Beijing's state-funded price and settlement policy, which made extraction and processing in other countries economically unattractive. For years, classical market mechanisms for critical minerals have been losing importance worldwide. Several metal markets are highly concentrated and characterized by structural supply deficits. Protectionist measures by various states are hindering trade in raw materials. In contrast to oil and gas, there are hardly any national (strategic) reserves of critical minerals. A supply stop would therefore have an immediate and far-reaching impact on both German and European industry.

Yet, critical minerals are indispensable for industry and are hence needed for important future technologies transitioning into a climate-neutral future: rare earths and raw materials like lithium are used in wind turbines, batteries for electric vehicles and semiconductors. Without them, there will be no energy transition, no e-mobility, no digitization and no Industry 4.0 - but also no infrastructure expansion and no powerful defense industry. Technological development is significantly increasing the demand for critical minerals. In the global race and competition with other countries for these strategically important raw materials, Germany and Europe risk losing out when it comes to securing reliable access. The consequence: dependencies and supply risks continuously increase. 

EU Critical Raw Materials Act provides important impetus for more supply security

In mid-March, the EU Commission presented the Critical Raw Materials Act (CRM Act), a draft for a new legislative package that aims to strategically secure the supply of critical raw materials. It targets materials considered by the EU as strategic for the green and digital transformation as well as for defense and space applications. It further targets materials that are on the EU's list of critical raw materials. The CRM Act sets targets for building and expanding European production capacities: the coverage of at least ten percent of annual consumption of strategic raw materials through domestic mining by 2030. At least 40 percent of annual consumption is to be provided by domestic processing. Recycling is to account for at least 15 percent of annual consumption. In addition, no more than 65 per cent of the annual consumption of any strategic raw material at any relevant processing stage should be provided by only one third country.

Acceleration of permits and expansion of the circular economy

The EU Commission wants to support selected "strategic projects" through access to funding and shorter approval periods: mining permits shall take a maximum of 24 months, processing and recycling permits a maximum of 12 months. New free trade agreements, the establishment of a "Critical Raw Materials Club" and the "Global Gateway Strategy" aim at diversifying raw material supply chains and improve resilience. The European Commission is thus following up on the Transatlantic Raw Materials Partnership, which Commission President Ursula von der Leyen and US President Joe Biden announced in mid-March 2023. A new "buyers' club" is to be created within the G7 framework.

The EU Commission is also focusing on the circular economy. For example, the collection of waste that is rich in critical raw materials is to be improved and their recycling into critical secondary raw materials is to be ensured. The potential recovery of critical raw materials resulting from waste of ongoing mining and historical mining is part of the strategy. The CRM Act names permanent magnets as a priority for the circular economy. The EU Commission wants to increase the transparency of information on products, facilitate the removal of magnets through circular product design, and examine a minimum input quota for secondary raw materials in new magnets.

Central instruments for implementation are missing

Although the impetus of the CRM Act is rightly set, the Commission's draft in its current form does not go far enough. It is currently not sufficiently coordinated with other legislation and regulations such as taxonomy, chemicals law, the Ecodesign regulation or supply chain due diligence obligations. The EU Commission must resolve conflicting goals together with the member states in favor of greater security of supply.

The success of the CRM Act will mostly depend on the EU’s member states as it is their regions and municipalities that will implement the projects and ensure social acceptance. Therefore, the CRM Act must be closely intertwined with national legislation, such as the amendment of the Federal Mining Act. Local policy responses are needed to address the high energy and electricity costs for the extraction, processing and recycling of strategic raw materials. So far, this challenge remains completely unanswered within the draft legislation.

It further lacks an urgently needed financing offensive for the development and expansion of domestic projects for the extraction, processing or recycling of critical raw materials. In the US, mining companies and refineries of critical minerals can write off ten percent of their costs under the Inflation Reduction Act (IRA). While globally, investments in mining projects are made well before exploration begins, the CRM Act lacks a commodity investment fund. The EU therefore also needs such incentivizing instruments.

Furthermore, aspects of recycling as well as the circular economy are not sufficiently operationalized. The draft fails to address the interface with digitization. The use of quota for secondary raw materials in permanent magnets burdens companies with higher costs. Therefore, a corresponding assessment must closely examine the feasibility of this requirement, also from a business perspective. If the increased take-back of waste products with critical raw materials is organized solely at member state level, there is a risk of fragmenting the internal market.

The planned review of the list of critical and strategic raw materials within a four-year cycle is unrealistic. The raw materials race is heating up as there will in the future be a threat of supply shortages even for raw materials - such as aluminum or zinc - that are currently not on any list. Therefore, agile monitoring is needed.

To safeguard critical raw material supply chains, the Commission wants companies to conduct stress tests meanwhile member states should build up strategic commodity reserves. EU-wide results of these stress tests and findings on strategic reserves would published in aggregated form. The BDI however rejects this as the disclosure of European vulnerabilities weakens the negotiating position on raw material imports.

Close cooperation of EU Commission and member states with industry

The increasing systemic competition with autocratic regimes represents a structural challenge for Europe – both strategically and economically. Autocratic regimes are increasingly using control over supply chains as a geopolitical weapon. Commodity security must therefore become the central goal of both political and business leaders in Europe. The BDI therefore advocates for close cooperation between the EU Commission, member states and industry when it comes to the implementation of the CRM Act - also to quickly resolve existing political conflicts of interest.