Europe's rearmament intensifies concerns surrounding critical minerals supply

Europe's new era of defense spending, and the anticipated surge in demand for critical components, ammunition and advanced weapons systems, is ramping up concerns around the availability and foreign dependency of various strategic materials, including critical minerals.

Faced with uncertainty surrounding the US commitment to European security and an immediate need to support Ukraine in its fightback against Russia, the EU has proposed an unprecedented package of measures aimed at boosting defense spending by Eur800 billion ($906 billion) over four years.

Modern military systems and equipment rely on a diverse assortment of essential materials. From the superalloys used in jet engines, missiles and naval vessels to the rare earths required for the manufacture of high-powered magnets used in radar, sonar and electronic warfare systems, these materials offer specific properties required to sustain Europe's essential military capabilities.

While the volumes required are relatively modest when compared to other industrial applications, the irreplaceability of these materials, as well as China's dominant role within minerals supply chains, has become increasingly acknowledged as a significant strategic vulnerability.

In recognition of this dependence, NATO, the US and the EU have released their own lists of the raw materials they deem critical, both for defense purposes and broader economic competitiveness. Referring to its own list of 12 materials, NATO has stated that "the availability and secure supply of these materials are vital to maintaining NATO's technological edge and operational readiness."

Time to ReARM

Announced by European Commission President Ursula von der Leyen on March 4, the ReArm Europe Plan, or Readiness 2030, focuses on the build-out of specific military capabilities, including air and missile defense, artillery systems, missiles and ammunition, drone systems and cybersecurity, while streamlining access to EU funds for defense-related projects.

EU member states will be permitted to increase their military budgets by as much as 1.5% of gross domestic product, while a new Eur150 billion loan scheme will allow them to boost their defensive capabilities through common procurement.

The proposal says that member states may only use the instrument to buy products from companies "established and headquartered" in the EU, the EEA/EFTA countries (Norway, Switzerland and Iceland), and Ukraine. Purchases from third countries will still be permitted, provided these countries enter a bilateral "Defense and Security Partnership" with the EU beforehand.

In setting the EU on a path toward greater strategic autonomy, the proposals are set to facilitate a monumental expansion of the European defense industry.

Supply chain vulnerability

Russia's invasion of Ukraine has highlighted the immediate production shortfalls and extended lead times for certain military capabilities, including ammunition, which utilizes materials such as aluminum, copper, nickel and iron, Benedetta Girardi, strategic analyst at the Hague Centre for Strategic Studies, said in an email to S&P Global Commodity Insights.

"The availability of raw materials is not the issue in the very short term, but rather the low production rate in Europe and the long times needed for procuring such capabilities from abroad and transferring them to Ukraine," she said.

Longer term, she acknowledged that the war had heightened awareness surrounding the potential weaponization of commodities.

"This, together with other global developments such as increasing Sino-American competition in the Indo-Pacific, has pushed many states worldwide to start thinking about stockpiling and 'friendshoring' of critical goods/materials," she said.

These strategic vulnerabilities have been heightened by the fact that China dominates the mining and processing of certain critical minerals, such as lithium, cobalt, copper, graphite and manganese, considered essential across a wide array of defense and energy transition technologies.

Beijing's implementation of export controls on graphite, germanium, gallium, bismuth, tungsten, tellurium, indium, molybdenum and certain rare earth elements, on which it holds near monopolies, has only served to exacerbate these concerns.

In response, Western governments are adopting several strategies, including supply diversification, stockpiling, recycling and boosting domestic production capacity to minimize overdependence and reduce the potential for price shocks.

In Europe, this effort is enshrined in the EU Critical Raw Materials Act, which aims to strengthen EU capacities with respect to the extraction, processing and recycling of critical minerals while reducing dependency on China.

Despite such legislation, Girardi said that the financial and practical challenges associated with establishing and scaling up operations mean that Europe will remain highly dependent on China for its critical mineral requirements in the medium- to short-term future.

"Some of these materials are in particular high demand, such as cobalt, lithium, germanium and gallium, making them more prone to shortages in the short-to-medium term," she said.

By 2035, S&P Market Intelligence analysts forecast that the global market for lithium carbonate equivalent will account for a deficit of approximately 416,000 mt. Similarly, the global market for refined cobalt is expected to post a supply deficit of around 3,000 mt by 2035.

In light of these likely shortages, Girardi argued that the critical mineral requirements of the defense industry must not be considered in isolation from other sectors, driving demand higher.

"While the general increase in defense spending is a good signal of Europe waking up to the need of strengthening its own defense capabilities, only a fraction of that spending will actually go into the procurement of new capabilities," she added.

"Rather than increased defense spending, the real risk multiplier is the multiplicity of other sectors that are also dependent on critical raw materials, first and foremost the energy transition, but also the medical, IT, and automotive sectors."

Platts assessed battery-grade lithium carbonate at $8,507/mt DDP China on May 21, up $27/mt day over day but down $428/mt week over week.

Platts assessed lithium hydroxide at $8,758/mt on May 21, unchanged day over day and week over week.