EU unveils €3bn strategy to cut dependency on China for raw materials

EU unveils €3bn strategy to cut dependency on China for raw materials

The European Union has announced a €3bn strategy, named ReSourceEU, aimed at reducing its reliance on China for critical raw materials. The initiative seeks to de-risk and diversify supply chains for rare earth metals and other essential elements. This move is part of a broader global effort to secure resources vital for the green and digital transitions.

Context & What Changed

The European Union's announcement of the €3bn ReSourceEU initiative marks a pivotal moment in its pursuit of strategic autonomy. For decades, Europe's industrial base has relied on globalized supply chains, prioritizing efficiency and low costs. This model delivered significant economic benefits but created profound vulnerabilities, particularly in the domain of critical raw materials (CRMs). The EU is heavily dependent on imports for a wide range of materials essential for its key industries, including the green and digital sectors. For instance, the EU sources 98% of its rare earth elements (REEs), 93% of its magnesium, and 97% of its lithium from China (source: European Commission, 2023 CRM List). This dependency is not just on the raw ore but, more critically, on the mid-stream processing and refining stages, where China has established a commanding global dominance of 60-90% across various materials (source: IEA, The Role of Critical Minerals in Clean Energy Transitions).

Several catalysts have forced this issue to the top of the policy agenda. The COVID-19 pandemic exposed the fragility of just-in-time supply chains. Russia's invasion of Ukraine and subsequent weaponization of energy supplies provided a stark lesson in the dangers of strategic dependency on autocratic regimes. Concurrently, escalating US-China geopolitical and technological competition, including China's 2023 export controls on gallium and germanium, underscored the risk of supply chains being used as levers of political influence (source: Reuters).

In response, the EU has been developing a comprehensive legislative and policy framework. The 2020 Action Plan on Critical Raw Materials laid the groundwork, and the European Critical Raw Materials Act (CRMA), which entered into force in 2024, provides the regulatory architecture. The CRMA sets ambitious targets for 2030: to extract at least 10% of the EU's annual consumption of strategic raw materials, process at least 40%, and recycle at least 25%. It also mandates that no more than 65% of the Union's annual consumption of any single strategic raw material should come from a single third country (source: ec.europa.eu).

What has changed with the ReSourceEU announcement is the allocation of substantial public capital to operationalize this strategy. While the CRMA provides the rules and targets, the €3bn fund provides the financial impetus. It signals to the market that the EU is willing to co-invest and de-risk the massive private capital expenditure required to build a resilient, domestic CRM supply chain. This moves the initiative from a statement of intent to a funded program of action, directly addressing the economic viability challenges that have historically hindered mining and processing projects in Europe.

Stakeholders

European Commission & EU Institutions: As the architects of the strategy, their primary goal is to enhance the EU's economic security and strategic autonomy. They are responsible for implementing the CRMA, managing the ReSourceEU fund, and designating 'Strategic Projects' that will benefit from streamlined permitting and financial support. Their success will be measured by progress towards the 2030 targets.

EU Member States: National governments are critical for implementation, particularly regarding the permitting of new mines and refineries. There is a divergence of interests: resource-rich nations like Sweden (iron, REEs) and Finland (battery minerals), and Portugal (lithium) see economic opportunities, while densely populated industrial nations like Germany are focused on securing inputs for their manufacturing base. A key challenge will be managing local opposition ('NIMBYism') to mining, which often clashes with national strategic goals.

Large-Cap Industrial Actors: Companies in the automotive (e.g., Volkswagen, Northvolt), renewable energy (e.g., Vestas, Siemens Gamesa), and technology (e.g., ASML, Infineon) sectors are the primary end-users. They are under immense pressure to secure long-term, stable, and ESG-compliant supplies. They are key potential investors and offtakers for new European projects, but they will also be sensitive to any 'green premium' on locally sourced materials that could affect their global competitiveness.

Mining & Processing Companies: This group includes established European players like LKAB (Sweden) and Boliden, as well as global majors (e.g., Rio Tinto, Glencore) who may see new opportunities in Europe. They face significant hurdles, including high upfront capital costs, long project lead times (often 10-15 years), stringent environmental regulations, and securing a social license to operate. The ReSourceEU fund is designed to mitigate some of their financial risks.

People's Republic of China: As the incumbent dominant supplier, China's reaction is a critical variable. It may view the EU's strategy as a direct challenge to its industrial leadership. Potential responses range from competitive pricing to undercut new European projects to the strategic use of export controls on key materials or processing technologies, disrupting EU industries before alternatives are established.

Strategic Partner Countries: The CRMA emphasizes diversifying imports, not just onshoring. This elevates the importance of relationships with resource-rich, like-minded countries such as Canada, Australia, Chile, and Norway. The EU will leverage trade agreements and initiatives like the Minerals Security Partnership (MSP) to build these alternative supply chains. Engagement with resource-rich nations in Africa and Latin America will also be crucial, requiring a diplomatic approach focused on mutual benefit and sustainable development.

Financial Institutions: The European Investment Bank (EIB) and national promotional banks will play a key role in co-financing projects alongside the ReSourceEU fund. Mobilizing private capital from commercial banks, pension funds, and private equity is essential, as the total investment required far exceeds the €3bn public commitment. These institutions will require regulatory certainty and robust de-risking mechanisms to invest in long-term, capital-intensive mining projects.

Environmental & Civil Society Groups: These organizations will act as watchdogs, scrutinizing the environmental and social impacts of new mining and processing projects within the EU. Their opposition can lead to significant project delays or cancellations, as seen with proposed lithium projects in Serbia and Portugal. Balancing strategic imperatives with Europe's high environmental standards and ensuring community buy-in will be a central challenge.

Evidence & Data

The case for ReSourceEU is built on stark data. The EU's 2023 list identifies 34 critical raw materials, with 17 deemed strategic (source: European Commission). Dependency on China is particularly acute for materials vital to the twin transitions:

Rare Earth Elements (REEs): The EU imports 98% of its separated REEs from China. These are essential for permanent magnets used in EV motors and wind turbines.

Lithium: 97% of the EU's supply comes from China, primarily due to China's dominance in the chemical processing stage, even for ore mined elsewhere (e.g., Australia).

Magnesium: 93% of the EU's supply is from China, critical for lightweight alloys in the automotive and aerospace sectors.

Demand is projected to skyrocket. By 2030, the EU's demand for lithium is expected to be 12 times higher than in 2020, and for rare earths, 6-7 times higher. By 2050, lithium demand could be nearly 21 times higher (source: EC Staff Working Document, SWD/2023/75 final). The CRMA's 2030 targets are designed to address this gap directly:

Extraction: 10% of EU annual consumption. This is a significant challenge, as the EU currently produces only around 1% of its lithium and no primary rare earths.

Processing: 40% of EU annual consumption. This is arguably the most critical and achievable target, aiming to capture more value-add and reduce the key bottleneck controlled by China.

Recycling: 25% of EU annual consumption. This target recognizes the potential of a circular economy to create a significant 'urban mine' of secondary raw materials, though it requires substantial investment in collection and advanced recycling technologies.

The financial scale of the challenge is daunting. The €3bn ReSourceEU fund, while significant, is seed capital. A 2023 study by KU Leuven estimated that the EU needs approximately €92 billion in investment across the metals value chain by 2040 to meet its climate goals (source: KU Leuven/Eurometaux). This highlights the fund's role as a catalyst to unlock and de-risk the necessary private investment.

Scenarios (3) with probabilities

Scenario 1: Strategic Realignment (40% Probability)

In this scenario, the ReSourceEU fund and CRMA framework are highly effective. The €3bn acts as a powerful catalyst, unlocking tens of billions in private and EIB co-investment. The ‘Strategic Projects’ designation successfully streamlines permitting for a handful of key mines and refineries (e.g., in Sweden, Finland, France, Portugal) within a 3-5 year timeframe. Diplomatic efforts secure robust supply agreements with Canada, Australia, and Chile, significantly diversifying import sources. European industry leaders form consortia and sign long-term offtake agreements, providing revenue certainty for new projects. By 2030, the EU makes substantial progress, meeting or nearing its 40% processing and 25% recycling targets, while domestic extraction increases meaningfully. Dependency on China for key materials falls below the 65% threshold, enhancing EU economic security, albeit at a slightly higher cost for raw materials.

Scenario 2: Muddling Through (50% Probability)

This is the most likely outcome. The ReSourceEU fund is partially successful, enabling a few flagship projects to proceed. However, widespread progress is hampered by persistent challenges. Permitting remains a significant bottleneck in many member states despite CRMA provisions, due to fierce local opposition and legal challenges from environmental groups. High energy and labor costs in Europe make some projects economically marginal without ongoing subsidies. Diversification efforts with third countries yield mixed results, replacing some Chinese dependency with reliance on other, potentially less stable, sources. By 2030, the EU misses its overall CRMA targets, particularly for extraction. Supply chains are more resilient than in 2024, but critical dependencies on Chinese processing for specific materials (e.g., battery-grade graphite, certain REEs) persist.

Scenario 3: Costly Stalemate (10% Probability)

The strategy largely fails to launch. The €3bn fund proves insufficient to de-risk projects against the scale of investment required and the economic headwinds. China engages in strategic price dumping, making new European projects unviable without massive, politically unpopular subsidies. Local opposition halts several ‘Strategic Projects’ in their tracks, creating regulatory uncertainty and chilling investor appetite. Political cohesion within the EU frays as member states disagree on the environmental trade-offs and financial burdens. By 2030, the EU’s dependency on China has not materially decreased, and its green and digital transitions remain highly vulnerable to geopolitical supply shocks. The ReSourceEU fund is seen as a costly failure, having subsidized a few non-competitive projects without shifting the strategic landscape.

Timelines

Short-Term (2025-2027): The first 'Strategic Projects' will be identified and announced. The €3bn ReSourceEU fund will be allocated, and financing mechanisms established. Member states will transpose CRMA permitting rules into national law. The EU will focus on finalizing strategic partnerships with allied countries.

Medium-Term (2028-2030): The first wave of fast-tracked processing and recycling facilities could become operational. The first new mining projects to benefit from streamlined permitting may begin construction, though significant output is unlikely before 2030. This period is critical for measuring initial progress against the CRMA targets and will likely see increased friction with China as the EU's strategy begins to have a market impact.

Long-Term (2031-2040): Significant new domestic extraction and processing capacity comes online. A mature circular economy for strategic materials begins to take shape, with recycling providing a substantial share of supply. The full impact of the strategy on the EU's strategic autonomy becomes clear. The focus will shift from building capacity to maintaining competitiveness and technological leadership in processing and recycling.

Quantified Ranges

Total Investment Requirement: The €3bn public fund is a fraction of the total need. Credible estimates place the required capital investment to meet EU green transition goals for metals and minerals in the range of €90-€100 billion by 2040 (source: KU Leuven/Eurometaux). The success of ReSourceEU will depend on its ability to leverage private capital at a ratio of at least 10:1 to 20:1.

Dependency Reduction Target: The CRMA sets a clear quantitative goal: reduce dependency on any single third country to a maximum of 65% of supply. For materials like REEs (98% from China) and magnesium (93% from China), this requires a reduction of over 30 percentage points, a monumental task to be achieved by 2030.

Cost Impact on End Products: Sourcing and processing materials in Europe will likely be more expensive due to higher labor, energy, and environmental standard costs. This could result in a 'green security premium' on raw materials. The impact on final consumer goods like EVs or wind turbines is estimated to be relatively small, likely in the range of 1-3% of the total product cost, but could affect the competitiveness of EU manufacturers in global markets.

Risks & Mitigations

Risk 1: Social and Political Acceptance: Strong local opposition (NIMBYism) to new mining projects is a primary obstacle. Mitigation: The CRMA's 'Strategic Project' status must be paired with transparent and inclusive community engagement, robust environmental impact assessments, and clear benefit-sharing agreements to create a 'Social License to Operate'.

Risk 2: Economic Viability and Competitiveness: European projects will struggle to compete on cost with state-subsidized Chinese incumbents. Mitigation: The ReSourceEU fund must use smart financial instruments (e.g., loan guarantees, equity stakes, price floors) to de-risk private investment. Trade policy tools, such as extending the Carbon Border Adjustment Mechanism (CBAM) to processed materials, could help level the playing field on environmental costs.

Risk 3: Geopolitical Retaliation: China could preemptively use export controls or price manipulation to undermine the nascent European supply chain. Mitigation: Accelerate diversification by solidifying alliances through the Minerals Security Partnership and bilateral agreements. Create strategic stockpiles of the most vulnerable materials as a buffer. Invest in R&D for material substitution (e.g., sodium-ion batteries, REE-free magnets) to reduce demand for the most contested materials.

Risk 4: Technical and Human Capital Gaps: Europe has lost much of its mining and metallurgical expertise over the past decades. Mitigation: Launch targeted EU-wide and national programs for education and vocational training in geology, mining engineering, and chemical processing. Foster collaboration between universities, research institutions, and industry through platforms like EIT RawMaterials.

Sector/Region Impacts

Sectors: The automotive sector is most directly impacted, as the strategy is fundamental to securing the battery value chain for its transition to EVs. The renewable energy sector depends on it for magnets and materials for wind turbines and solar panels. The defense and aerospace industries will benefit from secure domestic sources of specialty metals and alloys. The electronics and semiconductor industries require a range of CRMs for their high-tech components.

Regions: Within the EU, the Nordic countries (Sweden, Finland) are poised to become key hubs for extraction and processing. Southern Europe (Portugal, Spain) holds significant lithium potential. Central and Eastern Europe (e.g., France, Germany, Poland) will likely host more of the mid-stream processing and recycling facilities, integrating them with existing industrial clusters. Globally, the strategy will reshape trade and investment flows, benefiting Canada, Australia, and parts of Latin America and Africa as the EU seeks to build resilient, diversified partnerships.

Recommendations & Outlook

For Public Sector Leaders (Ministers, Agency Heads):

1. Execute with Urgency: Prioritize the swift and effective implementation of the CRMA’s fast-track permitting for Strategic Projects. Delays here will render the 2030 targets unattainable.
2. Deploy Capital Smartly: Structure the ReSourceEU fund to maximize private capital leverage. Focus on de-risking instruments rather than direct subsidies for operational costs.
3. Forge Robust Alliances: Move beyond diplomatic statements to secure binding, long-term supply and investment agreements with key international partners.
4. Manage Public Perception: Proactively communicate the strategic necessity of domestic mining and processing, while holding projects to the highest environmental and social standards to build public trust.

For Private Sector Leaders (CFOs, Boards):

1. Embrace Strategic Sourcing: Move from cost-only procurement to a model that values supply chain security and ESG compliance. Engage directly in long-term offtake agreements with emerging European and allied producers.
2. Invest in the Value Chain: For large industrial consumers, consider direct equity investments in mining and processing projects to secure supply and hedge against price volatility.
3. Innovate and Adapt: Double down on R&D for material substitution and circular economy technologies. Designing products for easier recycling will be a key long-term competitive advantage.

Outlook:

The ReSourceEU initiative is a critical and logical step in the EU’s pivot towards a more resilient economic model. However, its success is far from guaranteed and hinges on navigating formidable economic, political, and social obstacles. (Scenario-based assumption) Our baseline forecast aligns with the ‘Muddling Through’ scenario, where the EU will emerge by 2030 with a moderately more secure and diversified CRM supply chain, but with key vulnerabilities remaining and targets only partially met. (Scenario-based assumption) The primary value of this policy, regardless of the outcome by 2030, is the irreversible signal it sends to industry and international partners: supply chain security is now co-equal with climate and digital goals in European industrial strategy. This creates a durable, long-term policy environment that will generate opportunities for companies, investors, and governments that align with the objective of strategic autonomy.