By: TANJA SREBOTNJAK, Director of the Hixon Center
Previously, I wrote the first segment of this series for the Hixon Center’s blog about the history of critical raw materials (CRM) in the European Union and the United States. In this second installment, I will provide a deeper look at how the EU and the U.S. define material criticality.
In a 2007 report, the U.S. National Academies of Sciences (NAS) defined a material as critical “if it is both important in use and subject to potential supply restrictions.” This confluence of factors is represented in a two-dimensional “criticality matrix.” Importance in use relates to the total value of goods and products that use a certain material. For example, for rare earth elements (REE), the main industrial sectors are emission controls, magnets and electronics, metallurgical, optical and ceramics, petroleum refining, and other applications (unspecified). Since some materials have existing or emerging substitutes, the dollar values of goods and products made with REE are adjusted by a substitutability factor.
The second dimension, supply risk, is evaluated according to five aspects: (i) the current and projected demand for the material relative to supply, (ii) the size of the market for the material with small markets being more likely subject to supply disruptions, (iii) the degree to which production of the material is concentrated in a few mines, companies or countries, (iv) the extent to which the material is a co- or by-product and hence dependent on the factors that drive the main material’s market price and availability, and (v) the extent to which domestic demand for the material can be reduced by recovering scrap during processing and through recycling at the end-of-life stage.
Based on these indicators, the NAS developed a scoring system ranging from 1 (least important in use and risk) to 4 (highest importance and risk) to assess importance in use and supply risk for a number of metal and non-metal minerals. As shown in Figures 1 and 2 below, scores of 3 or 4 in both dimensions correspond to the material being classified as critical, materials with scores of 2 on one dimension and 3 on the other are considered to be near-critical and scores below that define non-critical materials. The NAS methodology was applied under a short-term and a medium-term horizon.
The matrix and assessment methodology is still in use today and some federal departments have adjusted it to their specific criticality assessment needs, such as the Department of Energy in its 2011 “Critical Materials Strategy” for the renewable energy sector.
As I mentioned in the first pot, in the EU , critical raw materials are part of several strategic EU initiatives, including the Renewable Energy Directive, the Circular economy strategy and the Raw Materials Initiative. The last was launched in 2008 to address the challenges the EU is facing with respect to the access to raw materials (the EU is a significant consumer of raw materials but not a significant producer for the majority of them). In 2011, the EU published the first list of critical raw materials using an assessment methodology that has been refined in 2014 and 2017. This post is based on the 2017 list of 27 materials and the methodology used to assess them, but interested readers can learn more about the previous assessments on the European Commission’s website. Just as in the U.S., the European list was developed with the primary purpose of identifying “the raw materials with a high supply-risk and a high economic importance to which reliable and unhindered access is a concern for European industry and value chains.” The EU updates its list (and methodology) at least every three years due to changing market and geopolitical conditions as well as evolving industrial and technological development. The following is a bit technical, but I have included this detail to show the many factors that influence material criticality and how important their correct measurement is.
Economic importance, or EI, is defined and calculated similar to the NAS approach but yields a continuous score. The parameter is used to provide “insight on the importance of a material for the EU economy in terms of end-use applications and the value added of corresponding EU manufacturing sectors at the NACE Rev.2 (2-digit level).” Importance is also corrected by the availability of material substitutes via a substitution index, SIEI, that incorporates technical and cost aspects of the substitutes for individual applications. The formula for EI is:
where the index s refers to the industrial sector according to NACE Rev.2 (2-digit level, i.e., relatively coarse), As is the share of end use of a raw material in a NACE Rev. 2 (2-digit level) sector, Qs is the sector’s value added at the NACE Rev. 2 (2-digit level), and SEEI is the substitution index of a raw material related to economic importance.
The substitution index, SEEI, is calculated as follows:
where i indexes an individual substitute material and a indexes an individual application of the candidate material, SCP is the substitute cost performance parameter, Sub-share measures the sub-share of each substitute within an application and Share assesses the share of the raw materials in an end-use application.
The Supply risk, SR, dimension of criticality is designed to assess the risk of a disruption in the EU supply of the material. It is also a continuous score and considers the concentration of primary supply from raw materials producing countries, while also including their governance performance and trade openness aspects. The SR depends on the EU import reliance, IR, which takes into account both global suppliers and the countries from which the EU sources the raw materials (which may be different from producing countries). SR is measured at the extraction or processing stage, which is typically the “bottleneck” stage for supply risk. Substitution and recycling are considered risk-reducing measures. The SR formula is shown below
where GS refers to global supply, i.e. global suppliers countries mix, EUsourcing is the actual sourcing of the supply to the EU, i.e. EU domestic production plus other countries importing to the EU, HHI is the Herfindahl-Hirschman Index and used as a proxy for country concentration, WGI is the scaled World Governance Index, which is used as a proxy for country governance, t is the trade parameter adjusting WGI, IR measures import reliance, EOLRIR is the end-of-life recycling rate, and SISR is the substitution index related to supply risk.
Import reliance and the HHI are measured as follows:
where Sc is the share of country c in the global supply (or EU sourcing) of the raw material and WGIc is the scaled World Governance Index of country c.
The variable t is calculated as follows:
where tc is the trade-related variable of country c for a candidate raw material (RM), ET-TAc is the parameter reflecting an export tax imposed (%) by country c, possibly mitigated by trade agreement (TA) in force, EQc is the parameter reflecting an export physical quota imposed by country c (in physical units), EPc is the parameter reflecting an export prohibition introduced by country c for a candidate RM and EUc is the EU countries’ parameter c for a candidate RM and is set equal to 0.8.
The end-of-life recycling rate is calculated as “the ratio of scrap recycling and European demand for a candidate raw material (equal to primary and secondary material inputs)”:
And finally, the specific substitution index, SISR, is calculated as:
where i denotes an individual substitute material, a denotes an individual application of the candidate material, SP is substitute production reflecting global production of the substitute and the material as an indicator of whether sufficient amounts of substitute material are available, SCr measures substitute criticality and into account whether the substitute was critical in the previous EU list, SCo is substitute co-production that takes into account whether the substitute is a primary product or mined as a co-/by-product; Share is the share of the candidate materials in an end-use application, and Sub-share is the sub-share of each substitute within each application.
The 2017 EU assessment involved 78 candidate raw materials, 27 of which are determined to be critical (see Part 1). This includes nine new critical materials and three that are no longer considered critical (chromium, coking coal, and magnesite).
As both methodologies illustrate, material criticality is a complex topic that depends on many, fluid factors and hence requires frequent updates in order to provide meaningful guidance to industry and government.
In the next and final segment of this series, I will show how material criticality links to life cycle assessment and how it can be used to craft more sustainable guidelines for industry and consumers.