The demand for rare earths and other raw materials of high economic importance is expected to increase exponentially in the coming years. To prepare for this, the European Council and Parliament reached a provisional agreement on the Critical Raw Materials Act (CRMA) in November 2023. The regulation will have wide-ranging impact on business, including the mining and processing industries, manufacturing companies, non-EU actors and investors.
The CRMA has the following goals:
Increasing and diversifying the EU’s critical raw materials supply
Strengthening circularity, including recycling
Supporting research and innovation on resource efficiency and the development of substitutes
The new rules also aim at strengthening Europe’s strategic autonomy.
The CRMA is part of the broader Green Industrial Plan and is aligned with the Net-Zero Industry Act (NZIA). The CRMA strives to position the EU as a leading hub for clean tech industries. The NZIA and CRMA packages are a response to international trends of protecting clean energy technology and resources, akin to the US Inflation Reduction Act.
Why the need for the CRMA?
Rare earths play a crucial role in the modern world and as the EU divests from fossil fuels and turns to clean energy systems, the demand for base metals, battery materials, rare earths and more are set to increase exponentially.
The EU green transition will require a build-up of local production of batteries, solar panels, permanent magnets, and other clean tech. Abundant access to a range of critical raw materials (CRMs) will be needed to address the corresponding demand.
In addition, CRMs are important to the EU for:
Industrial value chains (non-energy raw materials are linked to all industries across all stages of the supply chain)
Strategic technologies, such as space and defense
Climate, energy, and environment
Local production is key for the EU’s energy and mobility systems overhaul, which is in part driven by the REPowerEU plan and the 2035 internal combustion engine ban.
The CMRA is therefore an essential piece of the puzzle in this generational societal transition.
In addition, the act aims to strengthen all stages of the European critical raw materials value chain by diversifying EU imports to reduce strategic dependencies and improving the EU’s capacity to monitor and mitigate risks of disruptions to the supply of critical raw materials (CRMs).
The CRMA consists of several documents, with the main elements being a communication (European Commission 2023c), a regulation and annexes to the regulation (European Commission 2023b). Additional delegated acts will have to be added later to specify some of the as yet undefined terms and procedures introduced in the regulation.
34 critical raw materials
A list of 34 CRMs, including 17 strategic raw materials (SRMs) has been created. These are materials expected to grow exponentially in terms of demand. They have complex production requirements and thus face a higher risk of supply issues. The provisional agreement reached by the Council and Parliament added aluminum to the list of minerals and metals covered by the CRMA.
The last-minute inclusion of this metal, together with its upstream feeds of bauxite and alumina, attests both to the importance of aluminum to the green revolution and to Europe’s increasingly precarious security of supply.
Aluminum is set to play a critical role in Europe’s transition to a sustainable future; it is a key component in nearly all clean energy technologies prioritized in the net-zero industry act — including solar PV systems, wind turbines, grid technologies, and batteries. Demand for aluminum is expected to increase by 543 percent from 2020 to 2050.
Geopolitical background
CRMs are mostly sourced outside the EU. The EU will never be self-sufficient but aims to diversify its supply.
Currently, for certain critical raw materials, the EU is solely dependent on one country:
China provides 100 percent of the EU’s supply of heavy rare earth elements
Turkey provides 98 percent of the EU’s supply of boron
South Africa provides 71 percent of the EU’s needs for platinum
To reduce dependence on third countries to access critical raw materials, the EU set the following objectives for 2030:
EU extraction:
at least 10 percent of the EU’s annual consumption from EU extraction
EU processing:
at least 40 percent of the EU’s annual consumption from EU processing
EU recycling:
at least 25 percent of the EU’s annual consumption from domestic recycling
External sources:
not more than 65 percent of the Union’s annual consumption of each strategic raw material at any relevant
stage of processing from a single third country
To achieve this, the EU will step up trading activities, which will include:
A Critical Raw Materials Club for all like-minded countries willing to strengthen global supply chains
Strengthening the World Trade Organization
Expanding its network of Sustainable Investment Facilitation Agreements and Free Trade Agreements
Pushing harder on enforcement to combat unfair trade practices
Impact on stakeholders
New benchmarks for domestic extraction, processing and recycling of SRMs
The regulation sets benchmarks for minimum shares of EU demand to be covered by domestically sourced, processed and recycled raw materials.
This requirement places increased pressure on the mining and processing industry to ramp up their domestic production capabilities.
While this presents an opportunity for job creation and economic development in these sectors, it also brings challenges in meeting the benchmarks, securing investment, finding a skilled workforce and ensuring compliance with the new regulations.
How the benchmarks are defined
Will there be single targets per raw material or for a certain aggregate of SRMs?
If the latter, how will this aggregate be composed: as the mean of the 17 strategic raw materials, with each having the same impact, as an average based on weight, value-added or other factors?
Will member states have differing benchmarks for different raw materials, accounting for their reserves or mining capacities, therefore impacting mining companies differently according to the location of their operations?
The answers to these questions will unfold in the upcoming legislative procedure and implementation process. While they are quite technical, they will significantly impact the involved stakeholder groups, and especially the mining industry.
The CRMA regulation emphasizes the importance of circularity and sets targets for domestic recycling of SRMs
It drives the need for increased investments in recycling facilities and technologies and also creates incentives for developing more efficient and effective recycling processes.
However, the industry may face challenges in meeting the recycling targets, particularly for certain materials with complex recycling requirements. Additionally, opposition to establishing new recycling facilities and potential conflicts over extractive waste management may arise in local communities.
Here, the final version of the regulation and its implementation can also significantly influence impacts. The current proposal does not specify whether recycled raw materials must come from end-of-life products or could also be manufacturing waste; it is not said whether they must originate from the EU (or, possibly, strategic partners). Furthermore, it is not specified whether raw materials recycled in the EU can also count as “mined in Europe” and thus can contribute to meeting the mining benchmark.
Depending on how the regulation develops, incentives, opportunities, and challenges to develop and report mining and recycling projects can differ substantially.
The manufacturing industry and final producers will face the impact of increased demand for domestically sourced and recycled raw materials
They will need to adapt their supply chains and sourcing strategies to align with the CRMA’s requirements.
The increased monitoring and reporting requirements could lead to increased costs and potential disruptions in the supply chain, particularly for those companies relying heavily on imported raw materials and may raise issues of company confidentiality.
Fortunately, the CRMA also presents opportunities for market advantages by rewarding compliance with sustainability standards, thus allowing companies to tap into the growing demand for sustainably sourced materials and products.
The CRMA will also affect potential changes in the availability and pricing of products
The CRMA’s focus on sustainable sourcing and circularity may lead to increased transparency and labeling of products, enabling consumers to make more informed choices. However, it may also force manufacturers to increase prices for certain products due to the higher costs associated with complying with the CRMA’s provisions.
Non-EU actors and countries supplying raw materials to the EU are impacted by the CRMA through requirements for diversification and reduced dependencies on single third-country suppliers
It may lead to changes in trade dynamics and potential tensions between the EU and non-EU actors. Strategic partnerships with like-minded countries could open up opportunities for collaboration but may also result in potential disadvantages for non-partner countries.
Lastly, the CRMA has far-reaching implications for both EU and non-EU investors
On the one hand, investment opportunities in projects related to raw material extraction, processing and recycling will likely increase.
On the other hand, investors must navigate potential market volatility and manage risks associated with regulatory compliance and sustainability considerations.
ESG factors will play a significant role in investment decisions, aligning with the CRMA’s focus on sustainable resource management. Increased compliance and reporting costs will likely weigh on investment decisions in the EU. Clarity on supply chain transparency and reporting requirements are especially challenging for the complex and relatively opaque supply chains in the raw materials sector.
In addition, for industry, investors, and governments to execute timely CRMA certification requirements on sustainable extraction, processing, and supply needs which must be simplified and harmonized.
Access to financing will be crucial for companies to meet the CRMA’s requirements and for strategic projects to be realized.
Market competition will intensify, driving companies to differentiate themselves based on compliance and sustainability practices.
The CRMA drives an enormous economic and industrial shift for the EU Single Market. As such, partnerships between investors, companies, governments, and local authorities will be vital to advancing responsible investment practices and ensuring a resilient raw materials supply chain.
Conclusion
The CRMA represents an important step by the European Union to address the challenges of secure and sustainable access to critical raw materials (CRMs), aiming at significantly reducing the EU’s dependence on single third-country suppliers and promoting circularity and sustainable sourcing practices. The CRMA’s provisions are transformative — by utilizing industrial policy instruments — and they can be seen as a result of two decades of EU efforts and policy dialogue to actively mitigate supply risks.
Source: Dentons
