Trade tensions between the United States and other countries — especially China — are fueling concerns among U.S. multinational corporations about disruptions to critical raw materials supply chains. As a result, numerous clients have reached out to RANE in recent months for help evaluating the importance and applications of various critical raw materials, analyzing their value chains and predicting potential supply chain threats. These questions can be particularly daunting since many U.S. multinationals are far removed from the initial part of their value chains, with most critical raw materials mining, processing and fabrication often done by distant suppliers. Knowledge among companies is often even scarcer regarding niche or obscure critical raw materials that are nonetheless vital to their operations. As the risk of supply chain disruptions rises, companies that proactively develop contingency plans will be able to navigate these dangers most effectively.
Critical Raw Materials and Strategic Competition
Critical raw materials are an integral part of the strategic competition between the United States and China. For the United States, dependence on Chinese raw materials is a major vulnerability, given that China is its preeminent strategic rival. China mines or processes more than half of the world's supply of many critical raw materials, including aluminum, antimony, cobalt, both light and heavy rare earth elements, gallium, germanium, natural graphite, magnesium, tin, tungsten, vanadium and zinc. Many of these critical raw materials have chemical properties that make them indispensable in certain aerospace, defense and technology sectors where few alternatives exist, and even the few alternatives come with significant trade-offs in performance. Vanadium, for example, has important strength-improving and anti-corrosive properties that make it a crucial component of many military-grade metal alloys, including Ti-6Al-4V — a titanium alloy developed at the U.S. Army's Watertown Arsenal following World War II that was quickly hailed as a strategic military breakthrough and proliferated across the aerospace and defense sectors due to its high strength and light weight.
Western fears about reliance on Chinese raw materials date back to at least 2010, when China ceased exporting 17 critical rare earth elements to Japan for two months over a fishing rights dispute. However, fears have risen much higher over the last two years as China has increased restrictions on critical raw materials, including by expanding export controls on critical minerals and technologies like gallium, germanium, graphite and rare earths. In response, the United States has increasingly diversified its supply chains away from China, incentivized the production of alternatives, and restricted dozens of Chinese-linked companies' access to dual-use items, escalating strategic trade tensions.
The United States — especially the Trump administration — has made securing China-free critical raw materials a key part of its national security strategy. Many of these efforts have focused on securing supplies from alternative countries, evidenced most recently by the Trump administration's April 30 infrastructure and critical minerals agreement with Ukraine. The Trump administration is also negotiating critical raw minerals agreements with Rwanda and the Democratic Republic of the Congo, which is a major producer of several key niche commodities for the electronics supply chain, including tantalum and tin, as well as cobalt and copper. Additionally, Trump's bombastic threats to take over Greenland are driven in part by a desire to gain access to the island's natural resources. Domestically, Trump also signed executive orders in March and May that invoke the Defense Production Act to fund critical raw materials projects and allow the United States to unilaterally approve subsea mining projects for raw materials, respectively. More practically, the Defense Department has also introduced requirements to phase out the use of certain critical raw materials in defense articles produced by China and other adversarial countries. Finally, in April, Trump initiated a Sec. 232 national security investigation that could place tariffs on certain critical raw materials and their derivatives to make U.S. (and potentially U.S.-friendly) mining and processing projects more commercially viable compared with their Chinese competition.
Despite the U.S. government's efforts to vitalize production and processing outside of China, diversification is impractical in the short and medium terms for many critical raw materials, as mining and processing projects can take years to come online. Western companies have sought for more than a decade to boost their production of rare earth elements but have only marginally displaced China as a major producer of light rare earth elements and have barely moved the needle on heavy earth elements, which include several of the more important rare earths such as dysprosium, holmium, ytterbium and yttrium. Additionally, many critical raw materials are only recovered as a byproduct of high-volume processing of other critical raw materials. For instance, gallium and germanium, exports of which China has banned to the United States, are not directly mined and are instead recovered as a byproduct of processing bauxite (aluminum), zinc or germanium-rich lignite coal. In many cases, processing niche critical raw materials is also not very lucrative; while there is a growing market for rare earth elements that may increase the commercial viability of more non-Chinese rare earth projects, Chinese companies could surge production to keep prices low to deter competition.
Next Steps for Companies
With trade restrictions likely to continue expanding, particularly if U.S.-China talks deteriorate, most large companies should begin assessing their risks and identifying ways to mitigate them. Supply chain disruptions are most likely to threaten large multinational U.S. companies operating in strategic sectors, particularly defense contractors or companies with defense contractor units. Such companies — or at the very least their defense-related subsidiaries — are at risk of falling under China's targeted export ban on dual-use critical raw materials and intermediate goods. Renewable energy, technology and automotive companies are also at risk, given their high dependence on many niche critical raw materials like rare earth elements, as well as their high strategic value, particularly amid the artificial intelligence revolution and energy transition.
Companies should start by identifying critical raw materials in their supply chains. While this process can and should involve discussions with suppliers, several of RANE's clients have noted that some suppliers do not or cannot answer their requests. To overcome this gap, companies should conduct in-house reviews of various critical products and components to identify which critical raw materials are most likely involved in producing the goods they consume. While most critical raw materials, like those listed by the U.S. Geological Survey, are commodities that end up in final components, process materials, such as noble gases, acids and catalysts, should also be identified, both for companies' own manufacturing processes and those of their suppliers.
After identifying the critical raw materials on which they depend, companies should assess and potentially rank those materials based on several factors. One risk dimension is the potential for physical supply disruptions from a production and mining perspective, such as the extent to which the raw material is mined globally, China's involvement in the supply chain and whether non-China supply can fulfill Western demands. Companies should also assess Chinese and U.S. restrictions on the material, as well as the likelihood that those restrictions will expand in the future. Another key dimension is the importance of the critical raw material to an organization's goods and to what extent it can be substituted for other materials. RANE has found that substitutions exist in many applications, although trade-offs and the time needed to shift to alternative materials complicate these replacements. In some cases, however, there are no viable alternatives from a technical perspective. For example, indium tin oxide is often used as a thin film coating for display panels and many other devices or products, and few alternatives are used commercially or are commercially viable in many cases. Additionally, it is important to assess to what extent the industry or the industry of a supplier depends on the raw commodity compared with the rest of the economy. For example, many construction companies require high volumes of niche metals to use in metal alloys, with other industries accounting for only 10% or less of nationwide imports of these materials. Because of this discrepancy, a supply chain disruption may not affect smaller industries as much if they can afford to pay higher prices to secure restricted materials at a lower volume. Finally, companies should rank raw materials according to the quantity and value of the products in which they are used.
After collecting this data, companies should build out a map of key production and processing nodes, as well as other important supply chain arteries of their highest priority critical raw materials. This strategy will enable companies to identify supply chain vulnerabilities like trade restrictions, extreme weather events, conflicts (such as those in Congo) and ESG-related risks, as well as create or expand their overall supply chain risk management and monitoring systems.
Finally, companies should engage in contingency and scenario planning. Through war gaming, scenario planning and stress testing, companies can develop mitigation and contingency planning strategies to reduce the risk of disruptions. Many of these strategies will resemble those used to increase the resilience of supply chains of intermediate goods, including stockpiling high-risk critical raw materials and/or components. However, not all critical raw materials can be stockpiled easily or at all, and increasing stockpiles also comes at the cost of warehousing. Another strategy involves identifying alternative tier two suppliers that use different tier three suppliers, mitigating the risk of a localized supply chain disruption.
The Upshot
While disruptions to supplies of critical raw materials are a significant risk to many U.S. companies, two factors will help mitigate the impact of disruptions in many cases. First, the rarest critical raw materials that are at highest risk of disruption often represent a small fraction of the total cost of production or of an intermediate good bought from a supplier. For example, semiconductor manufacturers use many critical raw materials in fabrication, either as process materials or raw materials, but the vast majority of the cost of chip production is tied to other factors, like labor costs, maintenance, and research and development — with raw materials accounting for less than 5% of the semiconductor's overall cost. This means that if a supply chain disruption increases the price of raw materials without fully cutting off the supply, price increases for consumers may be limited or nonexistent.
Second, many of the most severe export restrictions that China has implemented focus on direct exports to the United States, rather than exports at large. Since most U.S. multinationals that sit at the end of an industry's value chain purchase components and parts from foreign companies — which still have access to the necessary raw materials — U.S. companies, at least currently, can still produce their goods. This dynamic will likely continue, as China does not want to cut off exports to the entire world and does not have a robust export control enforcement regime to thoroughly verify end-users far up the value chain. Nevertheless, Chinese export restrictions will likely multiply, and accessing critical raw materials will become a growing concern of compliance officers and supply chain managers, forcing companies to increasingly incorporate critical raw materials into their overall enterprise risk management paradigms.
