By Adam Bouzi

As the Green Transition has moved to the top of the global political agenda, supply of critical materials has become an issue of high geopolitical importance. The demand for critical materials is projected to increase with the ramp-up of new products. However, the analysis shows that considerable leeway exists to substitute critical materials, but this often comes at a cost in economic or performance terms. Moreover, such substitution cannot happen overnight. Equipment manufacturers and governments need to consider carefully if they want to accept the risk of new supply dependencies. Finally, for many critical materials, a massive ramp-up will be needed, and it is likely that the sources of supply will change.

Rare earth elements are used in a wide range of technologies including electric vehicles, wind turbines, and electronic devices. Deposits of rare earth elements are found on all continents, but China produces more than 90% of all globally used rare earth metals. Besides its economic dominance, China has also gained unique know-how related to rare earth element processing technologies. While its share in rare earth mining has been declining in recent years, it also produces close to 90% of the world’s permanent magnet alloys, and Chinese manufacturing of permanent magnets themselves is on the rise. Based on China’s dominant position in rare earth markets, other countries such as Australia, Japan, the United States, and several across Europe are increasingly concerned about a stable rare earth supply and their increasing dependence on China. Various strategies have been deployed by importing countries to reduce this dependency, so far with limited success.

In the case of copper, a decline in resource quality in combination with a growth of demand due to energy transition means that the mining effort will have to increase. To some extent, aluminum can substitute for copper in electricity grids. The main challenge in growing copper supply in the coming years is the need to bring new mines into operation. Such mines often face considerable local opposition. At the same time, they often represent billions in investments, and mining companies are wary of the risk in the light of past copper price fluctuations. Investors expect a bonanza. Stock prices of copper and lithium miners are up, and new projects are being explored feverishly. This is much needed because development of new mines can take decades and is fraught with uncertainties.

Supply chains are being reviewed in the light of vulnerabilities that have become visible in recent years and rising geopolitical tensions. There is a role for governments in managing this process, with a clear trade-off between low-cost supply from abroad on the one hand and geopolitical concerns on the other. Governments operate their own agencies that assess critical materials supply, but an international body is lacking. The establishment of such a body could be considered.

The European Commission has announced the launch of an industrial alliance dedicated to securing a sustainable supply of raw materials in Europe. By bringing together all relevant stakeholders along strategic value chains and industrial ecosystems, the alliance will initially focus on the most pressing needs, namely to increase the European Union’s resilience in the rare earth element and permanent magnet value chains. A rare earth strategy document was released in 2021. Also, the Joint Research Centre of the European Commission has a well-established program to track critical raw materials. Japan also has an active policy to ensure supply of critical materials such as rare earth metals.

In addition to the supply chain risks posed by geopolitical factors and competition among countries, critical minerals also face environmental risks. As demand for these materials continues to rise, there is a risk of increased mining activity leading to environmental degradation and damage to local communities. This risk is especially prevalent in countries with lax environmental regulations and weak enforcement, where mining companies can operate with little oversight and minimal environmental protections.

For example, in the Democratic Republic of Congo, where a significant portion of the world's cobalt is produced, mining has been linked to deforestation, pollution, and human rights abuses. To mitigate these risks, companies and governments must ensure that critical mineral mining is conducted in a sustainable and responsible manner. This includes implementing strong environmental regulations and enforcing them rigorously, as well as ensuring that local communities are adequately consulted and compensated for any negative impacts.

One potential solution to these supply chain and environmental risks is increased investment in recycling and reuse of critical minerals. By developing more efficient and effective methods of recycling and reusing these materials, we can reduce our reliance on mining and extractive activities and decrease the environmental impact of critical mineral production.

As such, the growing importance of critical raw materials in the green transition presents both opportunities and challenges. On one hand, it creates new markets for critical materials and drives investment in new mining projects. On the other hand, it poses risks related to supply chain vulnerabilities, geopolitical tensions, and environmental impacts of mining. To address these risks, governments and industry stakeholders must work together to ensure supply chain diversification, reduce dependencies on a single country, and invest in sustainable mining practices. International cooperation and coordination can also play a key role in managing the critical materials issue.

Europe, for instance, has been waking up to the urgency of securing strategic commodities and has taken steps towards this goal with the Critical Raw Materials Act. This Act showcases Europe’s commitment to securing critical materials and reducing its dependency on non-EU countries. It also highlights the need for a holistic approach to critical raw materials that takes into account environmental and social impacts, as well as the need for innovation and recycling.

Overall, the green transition is a complex process that involves numerous stakeholders, including governments, industry, and civil society. Ensuring the sustainable and responsible supply of critical materials is a crucial component of this transition, and requires a coordinated effort from all parties involved. By addressing the risks and opportunities associated with critical materials, we can create a more sustainable and resilient future for all.