The Future of Rare Earth Elements in Africa in the Midst of a Debt Crisis

By

Gustavo Ferreira, Jamie Critelli, and Wayne Johnson


Introduction


The recent escalation in diplomatic and economic tensions between the United States and China has highlighted the U.S.’s heavy reliance on China as a source of rare earth minerals. According to 2018 data from the US Geological Survey, the United States sources 78 percent of its rare earth minerals from China (Casey, 2019). These minerals are embedded in most high-tech products and demand for them continues to increase dramatically amongst industrialized nations. Such dependency poses serious risks to the U.S. economy and military complex. For example, China recently hinted at restricting rare earth sales to the United States as a retaliation to the ongoing trade conflict between these two nations and a recent sale of missiles to Taiwan (Smyth, 2020). Such a threat cannot be taken lightly because following a diplomatic dispute in 2010, China temporarily ceased its exports of rare earth minerals to Japan aimed at its automobile manufacturing industry (Blackwill and Harris, 2016). In an effort to mitigate this dependency on China, the United States government has been actively searching for new sources of rare earth minerals (Scheyder and Shabalala, 2019; Casey, 2019; Smyth, 2020).


Africa has recently emerged as a viable alternative source of rare earth minerals. A decade ago, United States Africa Command (USAFRICOM) identified the exploitation of rare earth elements as a central part of U.S. strategic goals in this region (Becker, 2011). Though supporting production of new supplies of rare earth minerals in Africa comes with many challenges and perils, failing to do so perpetuates the global Chinese monopoly on these critical resources. This issue has become even more pressing because many of those sub-Saharan African countries with rare earth reserves are now in “debt distress” and at risk of defaulting on their international debt.


This paper discusses how such economic vulnerability presents China with renewed opportunities to exert its influence and offer these countries financial reprieve in exchange for access to their mineral resources. As a response, the United States should consider offering short-term financial assistance tools and structural economic assistance to those nations. This would not only mitigate Chinese geopolitical influence in this region, but would also pave the way for longer-term and mutually beneficial agreements that may secure access to alternative sources of rare earth elements.


Rare Earth Mineral Production in Africa


Rare earth elements are a group of 17 elements that can be found naturally in the earth’s crust. While relatively abundant, minable concentrations of these elements are less common than for other ores. Their uses include direct technical applications and facilitation of production and refinement of products (Becker, 2011). Their importance and relevance have increased greatly in recent decades as they have become essential inputs for common high-technology products (e.g. cell phones, flat screen TVs, electric cars, airplane turbines, etc.). Rare earth elements are also key ingredients for the production of advanced military weapons systems and hardware (e.g. night vision goggles, laser range-finders, etc.) (Herskovitz, 2011; Becker, 2011). Consequently, access to a steady supply of these mineral resources is key to the United States’ national security and to the economic viability of many of its industries. Nevertheless, exploitation of rare earths is restricted to a number of countries around the world and any new entrants to this market face serious hurdles. First, because of the technical and environmental complexities along with its significant costs, it takes years if not decades for rare earth mining operations to become profitable (Becker, 2011). Second, any new businesses entering this market will face stiff competition from well-established and vertically-integrated Chinese operations that control global prices and supply chains (Smyth, 2020).


Many policy makers and key stakeholders may raise the question “how did we get here?” Interestingly, up to the late 1990s, the United States held the global monopoly in the production of rare earth elements and was able to meets its domestic demand from its own production (Coles and Brown, 2017). However, due to dwindling interest on rare earth minerals by the U.S. scientific community, more stringing environmental regulations, and higher labor costs, the trend reversed and the United States lost that hegemony to China. (For a more in-depth discussion on how the United States lost its leadership role see Becker, 2011). As a result, China quickly filled the void left by the United States and now supplies over 95 percent of rare earth elements to the world and controls both mining and processing operations. Because of China’s undisputed leverage in this market, they have gradually reduced their exports of rare earth minerals. This was partially due to impressive, continued economic growth and burgeoning industrial activity that demands 100 percent of China’s domestic production. Additionally, China increased tariffs on its exports of rare earth elements. Combined, these factors resulted in significant increases in world prices (Becker, 2011; Scheyder and Shabalala, 2019).

There is a growing consensus that outside North America and Australia, parts of Sub-Saharan Africa offer the greatest potential for rare earth production which could eventually correct the ongoing market imbalance. Specifically, a number of southern and eastern African countries have been identified as having high-graded, large enough deposits of rare earth minerals to make mining exploitation economically feasible and provide their governments and people with new economic opportunities. These countries include Namibia, South Africa, Kenya, Madagascar, Malawi, Mozambique, Tanzania, Zambia, and Burundi (Becker, 2011; Coles and Brown, 2017). Several undergoing projects, involving multinational companies, are in either prospective or early mining stages in these countries; however, recent economic developments in Africa may threaten the U.S. and its allies’ ongoing efforts to diversify the rare earth elements supply away from China. This is because, over the last five years, the aforementioned countries have built up unsustainable amounts of international debt and they are now at high risk of being unable to pay it back. Such adverse economic conditions provide a unique opportunity for China to flex its economic muscle and consolidate its access to mineral resources in Africa.


Economic Instability in Africa and Chinese Influence


Due to the small size of their domestic markets and limited fiscal base, most African countries must resort to international financing sources to fund a significant share of their operations and investments in infrastructure (African Economic Research Consortium, 2018). This year, the International Monetary Fund has raised concerns about dozens of low-income developing countries – including many African nations – that are now facing a debt crisis or are at high risk of slipping into one. Many African governments have accumulated debt levels to the point that they are no longer capable of paying interest or meeting the agreed repayment schedule. It is important to emphasize that highly indebted countries are most vulnerable to economic downturns because the