Analysis of the EU Raw Materials Initiative


Analysis of the EU Raw Materials Initiative

Europe wants to reduce its dependence on China for suply of rare earth oxides through recycling and stockpiling.
Image: Peggy Greb, US department of agriculture. License: public domain.

February 3, 2011
Johanna Sydow, Lili Fuhr, Ute Straub
In 2008, the European Commission presented its Raw Materials Strategy (RMI) and has since then worked to implement it. On February 2nd, 2011, an update on the Raw Materials Initiative titled “Tackling the challenges in Commodity markets and on raw materials” was presented to the public. The communication was delayed because of France and Germany having different expectations of the initiative. France aimed to include commodities in the initiative which is now part of the new actual version. With this short analysis, we wish to provide a clearer understanding of the practical implications of this European strategy, especially for resource rich developing countries around the world.

1 Commodity Markets

In recent years, commodity markets have experienced increased volatility and unprecedented price movements in all major commodities, including the energy, metal and mineral, agriculture and food sector. Especially price surges of food and agricultural products in 2007/08 have already caused severe impacts in many developing countries, leading to increased hunger and malnutrition and often social unrest. Now we are back in another phase of sharply rising global food prices, which is wrecking further devastation on populations in many of these developing countries.

There are numerous reasons for this on the physical markets (e.g. growing demand, supply shortfalls etc.). But the sharp price rises in 2007/08 and today cannot be adequately explained solely by market fundamentals. Finally - after a lot of skepticism in the beginning - there is a growing consensus among science and politics that excessive speculation on commodity derivative markets by institutional investors plays a major role. Even the EC is admitting in its communication that “it is clear that price movements across different markets have become more closely related, and that commodity markets have become more closely linked to financial markets”.

The reform proposals for commodity markets presented in the EC communication already take the right direction. But in consideration of the increasing probability of a new food crisis – according to the FAO the number of people suffering from hunger is likely to exceed over one billion again – the prompt and consequent implementation of these reforms is still missing.

To create the indispensable transparency on these markets and to stabilize prices, this means first of all:

  • A strict regulation of bilateral derivative trading (over the counter) and an exclusive trade of derivatives on organized trading venues
  • To impose position limits (amount of derivative contracts one investor can hold) for institutional investors
  • Create a strong and efficient supervisory authority

To prevent another food crisis, it is the EC’s obligation to ensure the fastest possible implementation of these measures and not to remain with pure announcements and declarations of intent. The case for moving swiftly to ensure effective regulation has never been more compelling.

2 The Raw Materials Initiative

Which resources are targeted?

Rare Earths from China, lithium from Bolivia and coltan from the Democratic Republic of Congo are examples for materials which are important for technologies used in climate protection, telecommunication and high-tech weapons. This makes them very important for European industries. The category of raw materials which is targeted within the RMI are non-energetic and includes metallic minerals, industrial minerals, construction minerals, wood and natural rubber. The main distinction within this group made in the initiative is that some are traded on the stock exchange and some are not. However, all the materials mentioned are restricted resources on the international market.

This motivated the EU to improve its own conditions for the competition over these resources. A special focus within the initiative lies on critical raw materials like cobalt, lithium and rare earths, which are not traded at the London Metals Exchange. They are classified as critical because they constitute a particularly high risk of supply and Europe sees itself to be highly dependent on imports from China, as it accounted for 97% of the world production in 2009.

But also highly critical are the means the European Union wants to apply in order to take part in this distributive conflict which is growing further and further in consequence of the growing global demand. Competitors are the new emerging economies such as China, India, Brazil, Russia and South Africa who aim for rapid industrialization and development.

Aims of the initiative

The three main aims of the RMI are: to ensure a level playing field with regards to access to the resources in third countries, to foster the sustainable supply of raw materials from European sources and to boost resource efficiency and to promote recycling. It is noticeable, that access to raw materials and a sustainable supply, which does not necessarily mean sustainable extraction methods, are the most specified aims. It already includes sanctions against third countries who want to protect their own economies from European exploitation.

Trade in raw materials

The aim of the European trade policy is an unregulated and unrestricted free market, and the elimination of regulation and taxes in developing countries. The Commission wants to fight export restrictions that may restrict supply for the EU. But many developing countries are highly dependent on income from raw materials exports. Often they have no or only a small processing industry, partly due to earlier trade conditions from colonial and immediate post-colonial times. Export taxes are often an important mean of income to promote industrialization and economic development. But they are also used in the context of environmental protection. To not allow countries to raise taxes on foreign investors, which have far better financial sources than domestic enterprises, endangers the small domestic industries and it may also increase environmental damages caused by resource extraction. The use of sanctions such as WTO settlement disputes is planned for countries who do not agree to deregulate their own market.  

It should be noted that the final public version of the initiative does not mention the exclusion from the General System of Preference as a means of punishment for countries that regulate their markets. This was the case in earlier versions of the initiative. However, the aim to prevent developing countries from protecting their markets can already be observed in the Economic Partnership Agreements (EPAs). But within the EPAs although the way towards a free market is paved, they still mention some small possibilities of regulation. The new Raw Material Initiative seems to try to enforce the rights of importing countries even more.

Lack of Coherence

The initiative shows an enormous lack of coherence, above all regarding development policy goals and sustainability. It only mentions sustainability and development, while at its heart promoting means, which most certainly undermine development perspectives of resource rich developing countries.

Resource extraction projects are having severe impacts on the environment and the livelihood of people at the place of production. Pollution of rivers leaves people without drinking water, which then also cannot meet agricultural needs. The deprivation of agricultural land and resettlements cause poverty instead of preventing it. To give an example: a report of the Commission on Human Rights & Administrative Justice in Ghana states many cases where inadequate compensation, pollution of rivers and resettlement have led to poverty. 

Development funds provided within corporate social responsibility concepts of companies often do not address the special needs of the people, or the money ends up in the pockets of corrupt officials. The operations of the European based company ArcelorMittal in Liberia are a perfect example for this case. Money from the operations only reaches the elite, while poverty and a growing social gap can be observed at the place of extraction . The RMI does not come up with a clear and concrete concept on how to prevent the well known resource curse, while at the same time it further exacerbates the problem through its trade and investment policy angle.

Geopolitical implications

The initiative clearly shows that the EU is ready to take part in the global race for resources. But instead of starting a global dialogue and negotiating for binding rules and regulation in a level playing field, the European Union is actually using means and methods it also criticizes other countries for, especially China. Civil society and affected communities especially in Africa, Asia and Latin America have to pay the costs for this global race.

It should be noted that the initiative mentions the aim of promoting the application of EU standards by EU companies operating in the developing countries. However, the promotion is not enough yet. These standards should be made binding for companies and regulation for this can be put in place by the home governments. The compliance with these standards and principles could then be an example for companies from other regions and encourage them to also implement these norms. In addition, a multilateral process is needed to set global standards and implement a global governance framework for the resource sector. The RMI fails to take a step in that direction.

One concrete example where the RMI and the development needs of resource rich countries do not match is the African Mining Vision from 2009. While the African Mining Vision, which is also mentioned in the Initiative, aims to put the raw material trade and extraction under more regulation to achieve a higher public benefit in Africa, the RMI aims to restrict regulation. It has to be questioned, if the Africa-EU Joint Strategy 2011-2013 brings a fair solution to this conflict of interests. 

Governance and lack of regulations

While the resource sector is characterized by a lack of binding regulations and global governance structures, the RMI takes no step to close this gap and continues to rely on voluntary mechanisms and the good will of companies.

As corruption is a huge problem within the extractive industry sector, it should be welcomed that the Commission proposes to further assist the Extractive Industries Transparency Initiative (EITI) by enhancing European financial and political support. Furthermore the initiative mentions the aim to complement this support by assisting developing countries to implement the EITI. But the EITI is not binding and still does not address transparency at a sub-national level, where a big part of corruption is taking place. Other parts of the value chain are being left out completely.

The US has taken leadership in 2010 by passing a law, the Dodd-Frank Wall Street Reform and Consumer Protection Act, that requires all companies registered with the Securities and Exchange Commission to report the amounts they pay to governments for access to oil, gas and minerals. The EU could take steps to implement a similar binding regulation. Not addressing this issue in the RMI is clearly a sign of failed political leadership.

The RMI mentions “raw material diplomacy” as an element of the strategy to promote human rights, good governance, conflict resolution, non-proliferation and regional stability. However, beyond the naming of these aspects there are no further steps indicated. Many developing countries also view this new strategy as neo-colonial behavior when it puts the EU’s interest in unlimited access to resources above everything else.

The implementation of concrete means is thus important, because there are many cases where mining operations have led to human rights violations, for example with respect to compensation of land, during resettlement and protest campaigns. Frequently, mining operations lead to the violation of the right to food. There is no intent to include human rights, ecological and environmental considerations as binding standards within its instruments for the promotion of foreign trade (like Export Credit Agencies). Violations of human rights and environmental standards cannot be sanctioned. There is no institution to direct the accusations to. This is an important responsibility that the EU still fails to address.

The EITI and other certification systems should be enforced. But without binding regulation, there will be real change on the ground. EU companies should be held legally liable in their home states for violations by their subsidiaries abroad as well as for other entities they control.

Resource efficiency and Recycling

The RMI mentions the intent to improve conditions for recycling and preventing illegal export or dumping of waste electronic and electrical equipment. Urban mining entails a big potential to gain important metals. But this third pillar of the initiative is still the least developed. However, it has to be endorsed that the new version of the initiative is more concrete about the means. Being conscious of the environmental, social and trade problems of land mining, the urban mining should be far more developed. The initiative has to become still more concrete in this aspect by naming means and concrete aims. More effort has to be but in the implementation of this pillar, which could be made measurable. Otherwise it will remain just a paragraph on the paper. NGOs that deal intensely with this aspect could be used as knowledge resources for the concretization.

Role of Civil Society

There is a wide and vibrant civil society around the world working on resource politics and governance issues. Many of these groups have come up with valuable political recommendations and demands in the past years. Unfortunately the whole process of the elaboration of the Initiative has not been dealt with in a transparent manner. Civil society participation was not possible. And even the European parliament played no role.

We strongly hope that the public communication of this new European strategy will allow for a more transparent process in the implementation phase and hope that this short analysis helps to enlighten the debate.

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