The Rise of a new geopolitical risk (2/3): China’s dominance over REE is jeopardizing the EU’s green energy transition

Maxime Sommerfeld Antoniou is a master student in Geopolitics, Territory, and Security at King’s College London. His academic interests range from the geopolitics of rare earths to green industrial policies.

Abstract: The EU wants to achieve carbon neutrality by 2050. Its plan aims at been quick and bold. However, China’s dominance over REE and the EU’s total dependence on foreign exports jeopardizes such objectives. This article ill argue that a three-fold set of risks are currently striking the EU. Firstly, the growing possibility of REE shortage due to the discontinuity between an increasing demand and stagnating supplies might lead the EU’s imports to dry up. Secondly, by trying to reduce its dependence on REE and substitute them for other materials, European industry has put itself at a competitive disadvantage vis-à-vis its Chinese rivals. Thirdly, the neo-mercantilist policies of China are siphoning the EU’s green jobs creation which has the potential, in the near future, to make Europe’s place in the world order increasingly vulnerable.

Introduction

Over the last few years, the European Union (EU) has intensified its efforts to decarbonize the European economy. To do so, it has framed a new paradigm, that of the “green economy”, which aims at being a win-win scenario reconciling economic growth in the EU with carbon neutrality. Central to this plan, as explained in the 2019 European Green Deal, is to transform environmental challenges into opportunities by developing innovative sectors ranging from renewable energies to ‘zero-emissions’ transports.

Nevertheless, to do so, the EU has been increasingly relying on Chine supplies of rare earth elements (REE), exposing itself to great geopolitical risks and dependence. Such fears were implicitly confirmed by Maroš Šefčovič, the vice-president of the European Commission, who stated, in 2018, that “when it comes to the issue of dependency, we could end up in a situation where raw materials become the new oil”. These were confirmed by the publication of a recent report (2017) by the European Commission which stressed out that 95% of REE extracted worldwide originate from China and that the EU imports 99% of its REE.

This assessment of the current situation raises a whole set of new questions concerning the geopolitics of REE. This article proposes to investigate the following question. What are the geopolitical and security implications of the Chinese dominance on REE for the EU?        

This article will argue that the implications are vast for the EU. Indeed, two key objectives of the EU’s ongoing green energy transitions are its quickness – to be carbon neutral by 2050 – and its boldness – to transform climate change into an economic opportunity. However, as it will be demonstrated, these two objectives are at great risk of failure due to China’s dominance over REE for three key reasons.

  1. The growing prospect of REE shortage

Firstly, the EU risks to face an imminent supply shortage of REE. The consequences would be dire, leading the EU to fall into a dependency trap vis-à-vis China’s green technology industry.

Estimates indicate that worldwide consumption of metals is expected to grow at a rhythm of 3-5% per annum.  In other words, to satisfy humanity’s needs between now and 2050, we will need to extract more metals from the Earth’s crust than the amount humanity has extracted since its dawn. At the current rhythm, profitable reserves of more than fifteen metals might be exhausted by mid-century, while in the short- to medium- term, we move towards the exhaustion of different REE such as dysprosium, europium, terbium, or neodymium. Neodymium being, for example, the basic material for the neodymium-iron-boron magnet used in wind turbines. While some believe that the principles of supply and demand will rapidly find permit the global economic to create new equilibriums in the case of growing shortages of REE, one should be wary of the temporal problem. Indeed, the speed at which high-tech industries’ demand for raw materials grows far exceeds that at which suppliers can provide the resources in question”.

Faced with the growing possibility of REE shortage over the next years and decades, China might simply conserve its reserves for itself. While it is already consuming 75% of its extracted REE, this proportion is likely to increase to 100% by the horizon 2025-2030. When asked about what would remain for the rest of the world, an American specialist answered plainly: “nothing, absolutely nothing”. The possibility that China cuts off its already maigre exports of REE is not a mirage, it has precedents. Following a boat collision incident off the coasts of the Senkaku/Diaoyu Islands, China suspended its exports of REE to Japan. This geopolitical move was “widely perceived as China using its control over crucial minerals as a tool of its foreign policy”. 

Against the prospects of REE shortage or being geopolitically exposed, the EU might well look for REE supplies outside China. However, again, the latter has a head start on the former. Because China manipulates the prices of REE downwards, it is very difficult for mining projects outside the Middle Kingdom to emerge. In the words of Christopher Ecclestone, “The Chinese clearly do whatever they want on the rare earths market”. More accurately, he emphasizes that China does not necessarily want to prevent the development of foreign mining projects but rather let them stagnate to later buy them for a pittance. In China and the Geopolitics of Rare Earths, Sophia Kalantzakos gives very interesting and detailed examples of this strategy. Another one consists in China’s diplomatic offensive in Africa. For example, the former Angolese president, José Eduardo dos Santos, made a priority to develop rare earths mining projects to satisfy Beijing’s needs. Another instance resides in the massive infrastructure projects to link the resource-rich Katanga Province to the rest of the Democratic Republic of Congo to ease its mineral exploitation.

  1. Substitution, second-best technologies, and competitive disadvantage

Secondly, the growing trade tensions and the rising fears about supply disruptions have led certain European industrials to develop new green technologies free from REE. However, this strategy of substitution has two main inconveniences which might lead to the EU to be at a competitive disadvantage vis-à-vis Chinese green tech industry.

On the one hand, substitution is highly difficult for green technologies. In its critical raw material report, the “substitution index” of the European Commission highlights that heavy rare earths scored 0,96 on a scale ranging from 0 to 1 in which 1 being the least substitutable. Light rare earths are a little bit better with a score of 0,90. Electric vehicles are a great example of this substitution problem. Indeed, dysprosium continues to be crucial for heat resistance in their motors. Some, such as Bill McCallum, a senior scientist at Ames Laboratory, try to replace dysprosium with cerium which is more abundant and cheaper. However, the conclusions seem to be that they would need “one miracle” to find a working substitute.

On the other hand, by using substitutes, European green industries often decide to sacrifice performance and possible competitive advantages by developing second-best technologies. A good example of this situation is the wind turbines industry. For a decade, European industrial have focused on substituting  REE magnets for other types of technologies within their wind turbines. For example, Siemens phased out dysprosium (an REE) in its turbines, while Vestas restarted developing their old REE-free gearbox technologies. These decisions are purely geopolitical rather than geological or economic. Such a view was iterated by Michael Silver, CEO of American Elements, who explained that many companies were shying away from certain minor metals because of geopolitics. The consequences are easily deductible: while European industries develop second-best technologies due to a fear of REE supply shortage, Chinese green industries develop better products and enter international markets with a decisive competitive advantage because they do not have the same constraints on REE supplies.

  1. Siphoning green jobs out of the EU

Thirdly, and finally, the EU’s current limited response to the geopolitical threat posed by the Chinese quasi-monopoly on REE might affect its place as a key player in the international system. As explained by Chad Damro, a specialist in European politics at Edinburgh University, the EU is first and foremost an economic power. That is, its power in the international system resides in its “material existence”, being the “largest advanced industrialized market in the world”. This “economic giant,” as Mark Eyskens (a former Belgian foreign minister) metaphorically noted, is currently capitalizing on this green transition to foster sustainable and inclusive growth and create millions of jobs on the Old Continent after years of economic stagnation.

However, this objective might be substantially jeopardized by China’s aggressive neo-mercantilists policies. A crude example is the German solar panel industry. Thanks to feed-in tariff policies put in place as early as 1991, the German solar panel sector grew exponentially during the mid-2000s. The country became the global leader in installed photovoltaic cell capacity during that period. This trend was amplified in 2011 by German’s pivotal energy transition to phase out nuclear energy: the Energiewende. During the same period (2008-2013), China’s massive investments in its solar industry enabled world solar panel prices to drop by 80%. Taking advantage of overwhelmed German solar manufacturers, they flooded the market with cheap panels. China’s aggressive subsidy structure increased internal demand, ultimately becoming since 2015 the largest solar market worldwide. This subsidy trend continued from 2010 onwards while Germany stopped subsidizing its solar industry. Resultantly, by 2017, SolarWorld, the last German solar cell maker “surrendered to Chinese competition”. As Frank Asbeck, the Chief Executive of the company, explained, “SolarWorld has led the fight against illegal [Chinese] price dumping”. Aside from the dire consequences for Germany, it is the whole of Europe which is affected by this surrender of European green industries. For instance, while the German solar sector was collapsing, China increased its investment – more than 2.5 billion euros – in this very sector in Italy and Spain. The solar industry is just one example demonstrating how China might siphon jobs in European green technology markets if the latter does not come up with a robust and offensive strategy.

Conclusion:

The EU wants to quickly and boldly reach carbon neutrality by 2050. However, this objective risks to be jeopardized by its REE supply chain fragility and China strengthening grip over the resource’s markets and technological know-how. This article advanced three arguments to support such a claim. Firstly, the likely on-coming shortage of REE might lead China to stop exporting REE to the EU. Besides, China is already present in many REE mines outside its territory while the EU is conspicuous by its absence. Secondly, the growing fear of supply disruption has led many European green companies to develop technologies without REE. However, this substitution strategy is counter-productive to the extent that it leads to innovation distortion and the creation of second-best technologies which will be at a competitive disadvantage vis-à-vis the Chinese REE-powered green industry. Thirdly and deriving from the first two points, China is siphoning green jobs from the EU thanks to its neo-mercantilist policies and strategy.

Still, one ought to be wary of falling into a deterministic trap. As such, the next and final article of this series will propose a set of solutions to offer new options to the EU and counter China’s geopolitical dominance over the REE industry.

N.B. The Risk-O-Meter for this article is available in the first article of this series.

Featured Image source: https://www.ft.com/content/3cbd2893-ee4b-47b7-a4e5-2cd1b95b5a31

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