Securing supply chains for the digital and green transition: a talk with Plutonic RMA founder

Introduction

The EU is set to release the highly anticipated Raw Materials Act on 14 March with the aim to secure critical raw materials (CRMs) needed for the digital and green transition and to combat dependencies on third countries. Our Managing Partner, Margreet Lommerts, talked to Gijsbert Wierink, founder of Plutonic Raw Materials Advisory (RMA) and associated with Publyon, to share his views on the upcoming policy and its impact on supply chains. As an expert in strategic sustainable raw materials and supply chains, Plutonic RMA finds itself right in the midst of the proposed policy measures by the EU.

Critical raw materials are materials that are economically and strategically important and subject to supply risk. This means that the raw materials are not easily substituted, making them critically important. Examples of critical raw materials are lithium, metals or minerals such as copper, nickel or magnesium. These materials are used to manufacture a wide range of products, from, chips, electric car batteries, and smartphones to wind turbines.

According to the World Bank, global demand for critical raw materials is expected to skyrocket 500% by 2050, causing sharp price rises and increased supply risks in the near future.

In 2020 the EU has classified 30 raw materials as critical, documented in a list of CRMs aimed at helping governments and industries take better-informed decisions, and improve their own strategies to cope with the risks associated with those minerals. This list is updated every three years to keep up with the rapid evolutions of the industry.

Gijsbert, in terms of diversifying CRM supply sources, how can the EU successfully secure stable supplies, boost its strategic autonomy and decrease its dependency on imports?

“In the past year, we have seen shifts in economic importance with changing technology and changes in supply risk because of the War in Ukraine and the resulting animosity between the EU and the Russian Federation. For the European Union, dependency on a single country must be avoided if Europe wants to prevent a repeat of the current energy crisis caused by an overreliance on Russian fossil fuels.”

We need to adjust our expectations for how much of our supply sources we can diversify and engage more in sustainable dialogue with resource-rich countries around the world. Decision-makers in EU institutions should be pragmatic in their goals, by admitting that 70% diversification is good enough to reinforce the strategic autonomy of the EU. However, this pragmatic policy approach should have a long-term outlook, and not be inspired by the whims of the day. Instead, we need stable and predictable policy initiatives and investments in the EU economy and the (re-)allocation of businesses into the EU.”

In which way is the Critical Raw Materials Act connected to the completion of the European Green Deal?

“The European Commission put forth the European Green Deal in 2019, followed by the presentation of a Green Deal Industrial Plan on 1 February 2023. The ambitions of these plans hinge in large part on the production of renewable energy and the sustainable use of materials. For areas such as solar cells, wind turbines and batteries we need specific raw materials, and we need them in larger quantities and more quickly than we have access to them at this very moment. Under the current system of supply and demand, this can result in price and regulatory volatility resulting in supply issues.

In addition to access, the Green Deal is also about how the materials and products are made. The core focus of the Green Deal is obviously on reducing climate change, but there are also other components such as stimulating the European way of life. Decision-makers in the EU should not reinforce the cycle of poverty and corruption in third countries by encouraging short-term buyer behavior which is not aligned with broader sustainability and governance goals.”

How important do you see recycling of critical raw materials in securing raw materials supply to the EU and advancing towards a more circular EU economy?

“Recycling can help dampen volatility and control the markets for primary raw materials. If a company needs, say 700 tons of aluminum per year instead of 800 tons, this can make a big difference on the demand side. In effect, this is also a form of diversification of source streams. Also, what is recycled is not thrown away or simply burnt. Waste streams are also controlled in this way. In product design, we need a stronger focus on recyclability of materials and compounds. But more importantly, we need policymakers and the society-at-large to be aware of the impossibility of CRMs like aluminum being 100% recyclable in industrial practice. Supporting EU educational programs and partnerships throughout Member States creates an opportunity to inform the public and businesses of the importance of recycling and to build a knowledge base in Europe, while also pointing out that recycling industrial minerals is costly and intensive practice.”

Looking into the future, are there any specific sectors you identify as being more exposed to supply risks? And how can business in these sectors prepare for supply chain risks?

“There are quite a few examples, such as rare earths for permanent magnets in for example wind turbines. However, one example that really sticks out is semiconductors. The energy transition requires us to optimize and redesign our energy generation and management systems. This means that the energy transition is dependent on digitalization and the invention of new technologies. This digitalization transformation requires the availability of a wide variety of semiconductors, sensors, and software systems.

In general, businesses need to integrate a fundamental understanding of their raw material supply chains. Currently, many businesses are insufficiently aware of supply chain pinches because supply chain transparency is often limited. This is because companies have become used to a different reality, where we have had relatively easy access to the critical raw materials we need. It is imperative that businesses understand what kind of materials go into their products and how vulnerable those materials are in the global market. They need to trace where their raw materials come from to gain an understanding of the accessibility of these raw materials. Once you have understood your business’s needs, I advise companies to create an integrated supply chain strategy and forge strategic partnerships with suppliers and, in some cases, customers.”

Who do you see as key partners in achieving EU self-sufficiency in Critical Raw Materials?

“The first key partner is the EU itself. We need to develop our internal extraction of critical raw materials within the EU. Concurrently, there is no doubt that we need to create long-term partnerships with third countries and ensure that these partnerships last. This means that we need to develop a strong and coherent foreign policy on how we engage with partners to structure our dependency on external actors. Now, a lot of the necessary critical raw materials for our twin transition are in the Global South. These are regions that Western states have been notoriously bad at cooperating with in the past and which we often lack a fundamental understanding of.

We need to create both a transactional relationship with these countries as well as deliver a strong and positive collaborative approach to these regions. A key part of doing this is to understand these regions and ensure that the partnerships we engage in are as satisfying to our partners as they are to us. This means that our partnerships need to be on their terms as well as ours, constructed in a partnership in which everyone benefits.”

What are the business opportunities for organizations working at the forefront of supply chains of CRM, and will it become riskier for these organizations to do business with countries in the Global South?

“On the “cold business side”, arbitrage and market price control. On the ethical side, the CRM Act provides an opportunity for organizations to be more engaged with their supply chains and help create more responsible materials use and flows. A good complementary legislative initiative is the Corporate Sustainability Due Diligence Directive, which will make ethical engagement with supply chains mandatory.

In the Global South, there are both risks and opportunities for the EU. The risk for the EU is that organizations can become dependent on regions and regimes that may have very different interests to the EU as well as being strategically influenced by adversary states. Additionally, these states may not have the best working relationship with Europeans. On the other hand, there are great opportunities for the EU to create sustainable and ethical supply chains that can help lift the Global South out of poverty and reduce corruption. This can contribute to more stable environments for business, education, and a workable economy. The EU Global Gateway can play a role here. This is also why we need to understand the countries and regions that we work with so that partnerships benefit everyone in a positive way.”

Do you believe it’s feasible that the European Union will become strategically autonomous in the foreseeable future through the implementation of the Critical Raw Materials Act (CRMA)?

“First of all, we need to think about what strategic autonomy means to us and what our objectives are. Strategic autonomy is the ability of a state or region to shape its domestic and foreign policy relatively independent of other states. This points to one of the core issues for the EU. The EU has strong domestic policies and regulations, but foreign policy has until very recently been weak and incoherent. At the moment, we are maintaining a dangerous balancing act, weighing short-term economic incentives against long-term sustainability goals. Under the current political and public pressure, policymakers in the EU may make decisions that can lead to companies investing or even moving outside the EU. The CRMA aims to be one of the tools to address this problem by providing a common language and tool by which EU Member States and businesses can work together. Bringing this into practice is one of the great challenges of our time. I am confident that we will find new solutions to strengthen a sustainable and competitive Europe, but the road will not be easy. Time will tell.”

Conclusion

While the need for CRMs can create obstacles for businesses, it also creates opportunities and competitive advantages for corporations that respond quickly to the challenges around CRMs. For companies, it is important to sufficiently anticipate and prepare their businesses to ensure the resilience of their supply chains. Companies can do this by reviewing their product portfolio and map the CRMs they rely on. Hereafter, it is crucial to map where those CRMs are coming from, engage with the suppliers and invest in researching possibilities for using recycled materials. This will enable companies to gain a competitive advantage as well as an understanding of the resilience of their products and supply chains. Furthermore, it will lead to a smarter method of production of renewable energy and more sustainable products, by upgrading the recyclability of materials desperately needed to enable the EU’s energy transition.

Is your business fit for the digital and green transition?

The twin green and digital transition is set to be the key to decarbonizing the economy, adopting a circular development model, supplying the mobility transition with green and smart alternatives and relaunching Europe’s industrial leadership. Business leaders and decision-makers have a key role to play in tackling the climate emergency. By adopting this twin transition, leaders can bring the digital and sustainability agendas together to improve digital function, drive sustainability goals and future-proof their organizations.

Publyon offers tailor-made solutions to navigate the evolving policy environment at EU level and anticipate the impact of the twin transition on your organization.

For more information on Publyon’s full range of services, do not hesitate to contact us.