Europe's missed raw materials transition: How systematic policy failure jeopardizes the energy transition
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Published on: November 24, 2025 / Updated on: November 24, 2025 – Author: Konrad Wolfenstein
Europe's missed opportunity for a raw materials transition: How systematic policy failure jeopardizes the energy transition – Image: Xpert.Digital
The systematic underestimation of geopolitical risks in favor of short-term cost optimization
Worse than the gas crisis: Why Europe's new dependency is existentially threatening
### The untapped treasure in the North: Why Europe ignores its gigantic raw material reserves ### Billion-dollar funds without effect: The chronology of a total state failure in the raw materials transition ### Recycling plants stand still: The absurd failure of the German raw materials strategy ###
It seems like a fatal déjà vu of history, but the dimensions are far more threatening: While Europe is still struggling with the aftermath of the Russian energy crisis, the continent is heading full speed into the next, even more serious dependency trap.
The energy transition, the centerpiece of Europe's future strategy, hangs by a thread – and China holds one end of that thread firmly in its grasp. Whether electric cars, wind turbines, or modern weapons systems: without rare earth elements, modern industry grinds to a halt. But while Beijing has been creating facts on the ground for decades, securing market shares of over 90 percent in magnet production and using prices as a geopolitical weapon, Europe remains stuck in a dangerous mix of naiveté and bureaucracy.
This analysis exposes the fundamental weaknesses of a flawed industrial policy. It reveals why vast deposits in Scandinavia lie dormant, why state-of-the-art recycling plants in Saxony-Anhalt have to stand idle, and why billions of euros in government funding have so far been wasted. It is the story of a systemic failure foretold, where short-term cost optimization was prioritized over long-term security – with the risk that the European raw materials transition will fail before it has even properly begun.
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When political short-termism meets geopolitical realities
Germany and Europe possess significant reserves of rare earth elements, yet instead of developing these strategic resources, policymakers have remained in a wait-and-see mode for more than a decade, a stance that is increasingly becoming a threat to their very existence. The critical dependence on Chinese raw material supplies has now reached a level that far surpasses Russia's dependence on gas. This analysis examines the economic mechanisms, structural shortcomings, and geopolitical miscalculations that have brought Europe to this precarious position.
The scale of the problem can be seen in concrete figures. In 2024, Germany imported approximately 5,200 tons of rare earth elements, 65.5 percent of which came directly from China. For some elements, the dependency is significantly higher: 76.3 percent of lanthanum compounds, which are needed for batteries, among other things, came from the People's Republic in 2024. These figures reveal only the tip of the iceberg, as they only capture direct imports. When one considers that China controls roughly 87 to 92 percent of global processing capacity and dominates 90 percent of global magnet production, the true extent of the dependency becomes clear. Even rare earth elements formally imported from Austria or Estonia are often of Chinese origin and were merely processed further in Europe.
The economic anatomy of a strategic misjudgment
The development of this dependency follows a pattern that has repeated itself in economic history: the systematic underestimation of geopolitical risks in favor of short-term cost optimization. After 2010, when China drastically reduced its export quotas for rare earths for the first time, thereby putting Japan under political pressure, global markets experienced a sharp price explosion. Prices for neodymium and dysprosium multiplied several times over within a few months. This crisis should have served as a wake-up call. Indeed, it led to a brief surge in exploratory activity: companies worldwide searched for alternative deposits, and the German government adopted its first raw materials strategy in 2010. But when prices fell again in 2012, interest waned as quickly as it had arisen.
This volatility is no accident, but a deliberately employed instrument of Chinese economic policy. Through state subsidies and strategic reserves, China can manipulate global rare earth prices. If prices fall, alternative projects outside China become unprofitable and must be abandoned. If prices rise, China benefits from its secured market share. This mechanism works particularly effectively because developing new mines is extremely capital-intensive and takes between ten and fifteen years. No private company can survive such investment cycles without state protection against price fluctuations of up to a thousand percent.
The economic logic behind China's dominance can be traced back to several factors. First, the People's Republic began developing methods for recovering rare earth elements as a byproduct of iron ore mining as early as the 1950s. Deng Xiaoping's legendary 1987 statement, "The Middle East has oil, China has rare earth elements," marks the beginning of a consistent strategic focus. Second, minimal environmental and social standards enabled extremely low production costs. The region around Bayan Obo, on the border with Mongolia and home to the world's largest rare earth mine, is now among the most polluted places on Earth. Highly toxic acids seep directly into the ground, radioactive thorium and uranium are released, and vast settling ponds filled with toxic sludge poison groundwater and rivers. The social and environmental costs are externalized, while China internalizes the economic benefits.
Third, China systematically secured patents for mining and processing technologies. Today, the People's Republic possesses not only the raw materials but also the technological know-how essential for the entire value chain. This vertical integration creates dependencies that extend far beyond the mere procurement of raw materials. Even if Europe were to develop its own mines, it would initially remain reliant on Chinese processing technologies.
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Europe's hidden treasures: Potential without prospects
The irony of the situation lies in the fact that Europe is by no means lacking in raw materials. The geological conditions for partial self-sufficiency are certainly present, yet they are not being utilized. The most striking example is the deposit near Kiruna in northern Sweden. The state-owned mining company LKAB estimates the reserves at more than two million tons of rare earth oxides; some geologists even assume over three million tons. This would be by far the largest deposit in Europe and could theoretically cover up to 18 percent of the EU's annual demand. The deposit is also already well-developed, as LKAB has been mining iron ore there for decades. Nevertheless, according to LKAB, commercial mining will not begin for at least another eight to ten years. First, a test facility must be commissioned in 2026 to test the extraction process. This will be followed by lengthy permitting procedures, the construction of processing plants, and the assessment of environmental impacts. For LKAB, rare earths remain a byproduct, cross-subsidized by iron ore mining.
The situation is similar in Norway, where, according to the latest estimates, the largest European deposit could lie in the south of the country. The company Rare Earths Norway speaks of quantities that exceed the Swedish deposit. However, here too, the projects are in a very early stage of development. Further large quantities are also suspected to lie beneath the seabed off the Norwegian coast, including up to 38 million tons of copper and 1.7 million tons of cerium. However, extraction from beneath the seabed is extremely technically challenging, highly problematic from an ecological perspective, and economically uncertain.
Even in Germany, significant deposits exist. The Storkwitz deposit near Delitzsch in Saxony was discovered by East German geologists in the 1970s while searching for uranium. At that time, the potential quantities were estimated at up to 136,000 tons of rare earth elements. More recent studies have yielded more conservative estimates of approximately 20,000 to 40,000 tons of rare earth compounds. In 2012, new exploratory drilling began to assess the deposit according to international standards. However, the results were sobering: the concentration of rare earth elements, at around 0.48 percent, is too low, and the deposit extends several hundred meters deep, making extraction extremely complex. In 2017, the companies involved declared the project uneconomical and relinquished the mining rights. Storkwitz remains a symbol of Germany's dilemma: the raw materials are present, but under current market conditions, they are not profitable to extract.
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The vicious cycle of market distortion
Herein lies the core problem: The rare earth market is fundamentally dysfunctional. Prices are not only extremely volatile, but they also fail to reflect the true strategic value of these raw materials. China can render projects outside its borders unprofitable at any time through subsidies, export restrictions, and market manipulation. A private company investing in a mine in Europe bears an enormous economic risk. The upfront costs are immense, the amortization periods are long, and throughout the project's lifespan, there is a risk that China will drive prices down to the point where operation is no longer viable.
This very dynamic systematically prevents the development of European capacities. It is a classic case of market failure, where the strategic externalities of raw material dependence are not factored into prices. The costs of disrupted supplies, the risks of geopolitical blackmail, the impact on industrial value chains – all of this is not reflected in current market prices. Economists would speak of a coordination problem: Each individual actor acts rationally by buying the cheapest Chinese raw materials, but collectively this behavior leads to a suboptimal situation in which entire industries become vulnerable.
The Chinese export restrictions imposed in April 2025, affecting seven key rare earth elements, brought this problem to the forefront. Prices suddenly skyrocketed: neodymium became about 36 percent more expensive within a few months compared to the previous year, and dysprosium almost 30 percent more. For some of the heavier rare earth elements, which are particularly scarce, prices even doubled. German automakers and suppliers sounded the alarm. Industry representatives warned that stockpiles could be depleted in four to six weeks, potentially leading to production stoppages. The automotive industry needs rare earth elements for permanent magnets in electric motors, for sensors, for catalytic converters, and numerous other components. An average electric motor contains about 600 grams of neodymium, in addition to other rare earth elements like dysprosium, which are used to ensure the magnets' temperature resistance.
Although China made some concessions in October 2025 as part of a trade détente with the US, suspending some export controls for a year, experts view this merely as a tactical reprieve. China's fundamental willingness to use raw materials as geopolitical leverage remains. This is not a theoretical threat, but established practice: China already used export restrictions in its territorial dispute with Japan in 2010, and rare earth elements are also being used as a strategic weapon in the current trade conflicts with the US.
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Recycling as a dormant alternative
Given this precarious supply situation, recycling seems like an obvious solution. Indeed, significant quantities of rare earth elements are contained in discarded products in Europe: old hard drives, decommissioned wind turbines, defective electric motors, and shut-down MRI machines. With the Critical Raw Materials Act, the EU has set the goal of meeting at least 25 percent of its demand for strategic raw materials through recycling by 2030. Technically, this is entirely feasible, and individual pioneering companies are demonstrating that it can work.
Since May 2024, the company Heraeus Remloy in Bitterfeld has operated Europe's largest recycling plant for rare-earth magnets. Its capacity is 600 tons per year and could be doubled to 1,200 tons in the medium term. This would correspond to almost two percent of Europe's annual demand. The technology is mature: old magnets are sorted, melted down, and processed into a fine powder, from which new magnetic materials of the same quality as those made from primary raw materials can be produced. Energy consumption is 80 percent lower than in extraction from ores, and the CO2 balance is correspondingly better. The company collected 350 tons of used magnets over three years for this purpose. The barrels containing the valuable material are stacked high in the warehouses in Bitterfeld.
But the plant sits idle for many hours each day. While demand exists—nearly every automaker has expressed interest—buyers are waiting until their stockpiles of primary raw materials are depleted. As long as Chinese rare earths are readily available and seemingly inexpensive, there is no immediate incentive to switch to recycled materials. This reveals another paradox: even with functioning recycling technologies, binding purchase commitments and quotas are lacking. EU legislation does not stipulate that recycled raw materials must originate in Europe. In fact, recycling is increasingly being carried out in Asia. Even European companies export scrap materials to China, where they are processed and then resold to Europe as recycled rare earths.
The global recycling rate for rare earth elements is currently less than one percent. Experts believe that long-term rates of 15 to 50 percent are achievable, but this requires massive investments, binding regulatory requirements, and a systematic collection of used electronic devices. Currently, countless electronic devices lie dormant in drawers and storage rooms because there are no comprehensive take-back systems. Wind turbines are decommissioned after 20 to 25 years, and their magnets could be recycled relatively easily. However, a systematic collection and utilization of these resources does not yet exist.
Company representatives are therefore calling for binding quotas. Magnets sold in the EU would have to contain a certain minimum percentage of European recycled material. This would increase planning certainty, make investments in recycling capacities profitable, and strengthen strategic independence. The additional costs per vehicle or wind turbine would be minimal. However, such regulations are currently lacking.
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From the gas fiasco to rare earths – is history repeating itself?
Political failure as a pattern
The question of why Europe failed to act decisively despite repeated warnings and identifiable risks cannot be answered with a single cause. It is a combination of institutional failure, misguided incentive structures, and fundamental misjudgments about the nature of global markets.
Germany's 2010 raw materials strategy was primarily aimed at reducing trade barriers and facilitating German companies' access to international commodity markets. Sustainability criteria and strategic independence played a subordinate role. Critics at the time accused the strategy of primarily serving industry interests and neglecting development policy, human rights, and environmental aspects. This criticism was justified, but it overlooked an even more fundamental problem: The strategy was based on the assumption that open markets and free trade automatically lead to secure supply chains. This assumption proved fundamentally flawed as soon as state actors began using raw materials as geopolitical instruments.
Following the price crisis of 2010, there was certainly some activity: exploration companies were founded, test drilling was carried out, and feasibility studies were conducted. But when prices fell again, interest waned. Crucially, the government largely refrained from involvement. Unlike Japan, which after 2010 invested state funds in developing the Mount Weld mine in Australia and thereby reduced its import share from China from over 90 percent to under 60 percent, Europe relied on private investors and market forces. This reluctance proved to be a strategic error.
The US also reacted decisively to the recent supply shortages. The Trump administration took direct stakes in mining companies, invested billions in mines and processing plants in Australia, and forged strategic partnerships with Japan and Saudi Arabia. The US Department of Defense is funding projects to secure rare earth elements with military relevance. This seemingly un-American industrial policy demonstrates how seriously the strategic dimension is now being taken.
Europe, on the other hand, long relied on symbolic measures. While the Critical Raw Materials Act of 2024 sets ambitious targets, its implementation has been sluggish. By 2030, ten percent of strategic raw materials are to come from European mining, 40 percent from European processing, and 25 percent from recycling. Furthermore, dependence on a single supplier country is to be limited to a maximum of 65 percent. However, these targets are non-binding, and concrete instruments for their enforcement are largely lacking.
In autumn 2024, the German government launched a raw materials fund with a volume of one billion euros. Through the state-owned development bank KfW, raw material projects in Germany and abroad are to be supported with equity investments of between 50 and 150 million euros. Projects must focus on critical raw materials and contribute to the supply of the German and European economies. Almost 50 companies have submitted applications. However, one year after the fund's establishment, not a single euro has been disbursed. The interministerial raw materials committee, which is responsible for making the decisions, has not yet approved a single project. Furthermore, the fund's resources were drastically cut in the 2025 budget: risk hedging fell from 272.9 million euros to 98.7 million euros, a decline of almost 64 percent. In November 2025, the Federal Ministry for Economic Affairs and Energy announced its intention to contribute up to 100 million euros to the development of rare earth elements in Australia. However, it remains to be seen whether and when these funds will actually be disbursed.
Scientists like Jens Gutzmer, director of the Helmholtz Institute for Resource Technology, have repeatedly pointed out that the state cannot simply stand by and watch dysfunctional markets unfold. What is needed are firm purchase commitments at guaranteed prices, similar to the feed-in tariffs for renewable energies in the 2000s. Only in this way can mines and recycling companies obtain the planning security necessary for long-term investments. Furthermore, strategic reserves must be built up, as many other nations already possess. Germany has no significant stockpiles of critical raw materials. In a crisis, these reserves would be exhausted within a few weeks.
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- China's strategy reveals the failure of Western economic policy using the example of battery storage
The costs of dependency
The economic and strategic costs of raw material dependence are difficult to quantify precisely, but they are substantial. At the immediate level, there are price risks. Every increase in the price of rare earth elements increases the cost of electric motors, wind turbines, electronic products, and numerous other goods. The price increases of 2025 will translate into higher product prices in the coming years and impair the competitiveness of European companies.
More serious, however, are the strategic risks. This dependence restricts political room for maneuver. Europe cannot afford harsh sanctions against China, even if geopolitical conflicts were to necessitate them. The mere threat of supply stoppages is enough to force Europe to exercise restraint. This affects not only economic interests but also security policy issues. Rare earths are essential for weapons systems, radar installations, precision munitions, fighter jets, and drones. At the end of 2024, NATO published a list of twelve defense-critical raw materials, including several rare earths. In the event of a conflict, Europe would be dependent on Chinese deliveries to keep its arms industry running. This situation is both absurd and dangerous.
Furthermore, concrete production losses are looming. In the spring of 2025, suppliers and car manufacturers warned of shortages. ZF Friedrichshafen stated that many of its plants were on the verge of shutting down. Without the necessary magnets, no shock absorbers, steering systems, or electric drives could be produced. Volkswagen, BMW, and Mercedes confirmed that production was currently still running, but the situation was tense. The automotive industry is the backbone of the German economy. A prolonged production halt would have devastating consequences for employment, value creation, and international competitiveness.
The energy transition is also directly affected. Offshore wind turbines require approximately 500 to 600 kilograms of permanent magnets per megawatt of capacity, which in turn contain significant amounts of neodymium and dysprosium. Without a secure supply of these raw materials, the expansion of wind energy stalls. In August 2025, the German Federal Ministry for Economic Affairs and Energy and the European wind industry presented a roadmap that aims to source 30 percent of permanent magnets from resilient, i.e., non-Chinese, sources by 2030 and half by 2035. However, these goals are ambitious, and concrete measures for their implementation remain vague.
A system failure that was entirely predictable.
The situation Europe finds itself in is not a fateful misfortune, but the result of systematic political misjudgments. It is a textbook example of how short-term cost minimization leads to existential dependencies in the long run. The parallels to the energy policies of the 2000s and 2010s are obvious: Back then, Germany massively increased its gas dependence on Russia because Russian gas was cheap and readily available. The geopolitical risks were systematically underestimated or ignored. When Russia cut off gas supplies in 2022, Europe faced an acute supply crisis that was only averted through enormous financial efforts and a stroke of luck.
This pattern repeats itself with rare earth elements, only the dependence is even greater and the alternatives even scarcer. Unlike gas, which can be replaced by liquefied natural gas imports from other regions if necessary, there are hardly any short-term alternatives for rare earth elements. The few mines outside China cover only a fraction of global demand, and new projects take years to become operational.
The responsibility for this situation lies not with individual politicians or governments, but with systemic deficiencies. First, there is a lack of long-term strategic planning that extends beyond legislative periods. Raw materials policy is by definition long-term, yet political decision-making processes are short-term oriented. Second, a naive belief in the self-regulating power of markets prevails. Markets function well for many goods, but they systematically fail with strategic raw materials because external effects and geopolitical risks are not factored in. Third, there is a lack of institutional coordination. Raw materials policy falls under the purview of several ministries whose interests do not always align. The Ministry of Economic Affairs focuses on security of supply, the Ministry of Finance on budget consolidation, the Ministry of the Environment on sustainability, and the Ministry of Foreign Affairs on diplomatic relations. This fragmentation leads to delays, compromises, and half-hearted solutions.
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Approaches to a change – it's not too late yet
Despite the bleak starting point, the situation is not hopeless. Europe possesses the technological, financial, and institutional resources to put its raw material supply on a more stable footing. However, this requires a fundamental policy shift and a willingness to invest significant resources in building independent capacities.
First, the development of European deposits must be accelerated with government support. Swedish, Norwegian, and other European deposits must be developed more quickly, with direct government participation in the risk-sharing. Firm purchase commitments at guaranteed minimum prices would encourage private investors and create long-term planning security. Permitting processes, which currently take up to 15 years, must be drastically accelerated without compromising environmental and social standards.
Secondly, recycling must be massively expanded through binding quotas and financial incentives. Manufacturers of magnets and magnet-based products should be required to use an increasing proportion of recycled materials. Collection points for old devices must be established nationwide, and the recovery of rare earth elements from electronic waste must be made economically attractive. In the long term, recycling rates of 30 to 50 percent are achievable if appropriate incentives are in place.
Thirdly, strategic reserves must be established. Germany and Europe need stockpiles that can bridge several months in a crisis. These reserves cost money, but they are insurance against geopolitical shocks. Other countries like Japan and the USA have long possessed such reserves.
Fourth, international partnerships should be diversified. Projects in Australia, Canada, Brazil, and other countries with stable political systems and rule-of-law structures should be promoted. Germany's recently announced participation in an Australian project is a step in the right direction, but the investment of €100 million is modest given the scale of the problem.
Fifth, research and development must be intensified. Alternative materials that can replace rare earths must be promoted. Some car manufacturers, such as BMW, have already developed electric motors that do not require rare earth magnets. Such innovations should be broadly supported. At the same time, investments must be made in more efficient extraction and recycling technologies.
Sixth, a coherent European industrial policy is needed. Fragmentation into unilateral national actions weakens Europe. Only together does the EU possess the financial strength and the single market to develop an independent raw materials policy. The 47 strategic projects selected by the European Commission in March 2025 are a start, but their implementation must be accelerated.
All of this costs money, a lot of money. But the cost of inaction is even higher. Every day that Europe fails to reduce its dependence increases its vulnerability and diminishes its political room for maneuver. The raw materials issue is not a technical detail, but a key issue for Europe's industrial future and geopolitical sovereignty. Whether Europe meets this challenge will be decided in the coming years.
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