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 their governments have insufficient budgetary resources to provide support to the economy in the event of a recession (Onyekwena and Ekeruche, 2019). Economic recessions and increases in sovereign risk are often linked and together may have a compounding effect on each other. For example, a developing nation that is highly dependent upon exports of natural resources or agricultural commodities may face a commodity price shock that greatly reduces the value of its exports. This will in turn cause a depreciation in the exchange rate and increase foreign currency-denominated debt.


Although the reasons for the emerging debt crisis in Africa are complex and specific to each country, many governments borrowed in foreign currencies and are finding debt hard to finance after significant depreciations of their own domestic currencies. The Republic of Congo and Mozambique have already defaulted on some of their loans. Six other African countries are now on the verge of defaulting and are making only intermittent loan payments - Chad, Eritrea, Somalia, South Sudan, Sudan and Zimbabwe. Finally, Zambia and the Central African Republic are at risk of falling into debt distress in the very near future (Aizenman, 2018).


Table 1 shows how, in the last year, economic risk has increased across all African countries identified as having potential for exploitation of rare earth elements. In the third quarter of 2020, all these economies are considered to be at high economic risk, with Mozambique and Burundi heading into the extreme risk category.


One of the many consequences from such a negative economic outlook is the increase in sovereign risk. As shown in table 2, half of the same selected countries have been at very high risk of default, with Burundi already defaulting on their sovereign debt.


So, what makes this debt crisis different from previous ones and how could it impact the global market for rare earth minerals? In the past, much of debt was owed to multilateral institutions like the World Bank, the International Monetary Fund or bilateral creditors; however, the structure of public debt has changed over the years, and a significant share of African debt is now held by private banks and bondholders. In addition, over the past two decades, China has become the single largest creditor to Africa. This happened in part because China’s lending practices put much less emphasis on good governance (African Economic Research Consortium, 2018). It was estimated that in 2018, nearly 20 percent of African government debt was owed to China in the form of concessional loans, credit lines, and development financing (Sun, 2020). Hence, China will inevitably play a key role in upcoming debt relief efforts and will likely handle individual African countries on a case-by-case basis. This will include bilateral negotiations, development of individual strategies and various means of debt relief.


Most important, and given the transactional nature of its foreign policy, China is likely to use its economic leverage to achieve long-term geoeconomics goals in the region. This should not come as a surprise because China has offered unsustainable financing to poor and vulnerable economies in the past while demanding national assets as collateral. For example, China negotiated debt relief with Sri Lanka in exchange for a 99-year lease of the Hambantota port and surrounding land. Moreover, as part of its economic assistance to Zambia, China requested a Zambian copper-mining asset as collateral (Mishra, 2020; Sun, 2020). Based upon this precedent as well as its geopolitical calculus, China is well-poised to demand future rights to mining rare earths as part of debt relief negotiation packets and financial bailouts to those African nations.

Conclusion and Recommendations


Though the U.S. government has been taking steps to boost domestic rare earth minerals production and developing partnerships with multinational mining corporations, it will take decades until these efforts yield meaningful results. Until then, the United States will have to either continue to rely upon Chinese imports, with all the associated risks, or develop alternative sources in places such as Sub-Saharan Africa. Nevertheless, China has been already approaching African nations and taking steps to exploit their potential for rare earth elements. As the financial situation of those countries continues to deteriorate, they become increasingly vulnerable to Chinese external influence. Specifically, Chinese officials may offer financial bailouts to African governments struggling to meet their international debt obligations in exchange for access to their rare earth deposits. If China succeeds with this type of transactional diplomacy, it will exacerbate the current market imbalance and further diminish the supply of these mineral elements to the U.S. defense complex and other critical industries and applications.


To mitigate economic and political influence from peer or near-peer competitors, the U.S. government should consider developing short-term financial assistance tools in order to prevent the financial collapse of those nations. This would in turn preclude those governments from accepting aid from China in exchange for access to their mineral resources. Such a proactive posture will contribute to long-term stability and economic development of these nations and would reduce the U.S. growing dependency on China as the world’s largest supplier and processor of earth rare minerals.


With its limited resources and political capital in the region, the United States, through USAFRICOM and other governmental agencies, must prioritize its efforts in a cost-effective manner and determine how they will apportion resources in the development of rare earth exploitation in Africa. Because of the idiosyncrasies of African nations there should not be a one size fits all solution. Instead, USAFRICOM and U.S. government agencies should develop tailored exploitation strategies based on objective metrics and indicators such as the nation’s overall economic health, education levels, government transparency, legal systems and property rights, etc. For example, for an African nation with a robust central government but overall low education levels, the U.S. involvement could be focused on providing training to the local population in mining operations. Lastly, the Civil Affairs community operating in Africa should be the eyes and ears of USAFRICOM and other U.S. government agencies. Specifically, Civil Affairs teams interacting with African local authorities and populations should be monitoring and gathering intelligence on activities that may indicate efforts by the Chinese to secure access to rare earths resources.


About the Authors

Gustavo Ferreira, Ph.D. is a Senior Agricultural Economist with the U.S. Department of Agriculture and a Civil Affairs Officer serving in the 353d Civil Affairs Command as an Agricultural Officer. Prior to joining the Federal Government, he was an Assistant Professor at Virginia Tech University’s Department of Agricultural and Applied Economics and worked as Postodctoral researcher at Louisiana State Univeristy. He holds a Ph.D, in Agricultural Economics from Louisiana State University.

Jamie Critelli is a Civil Affairs Officer serving in the 353CACOM as an Agricultural Officer. He is an independent farm business owner and has worked globally in agriculture supply chain roles on 5 continents. He graduated with honors from Cornell University, and holds a Masters of Business Administration in Supply Chain Management from Eidgenössische Technische Hochschule (ETH), Zurich

Wayne Johnson is a Civil Affairs Officer serving in the 353CACOM and was the Team Chief of Agriculture, Economics, and Infrastructure Civil Affairs Functional Specialists for Africa Command and Europe Command. He obtained MS degrees in international development economics from the Georgetown School of Foreign Service and in management from the Cornell Graduate School of Management, where he is finishing his Ph.D.

Disclaimer: The opinions, conclusions and recommendations expressed or implied above are those of the authors and do not reflect the views of any organization or any entity of the U.S. government.


References


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Cover photo: https://www.mining-technology.com/features/into-africa-the-us-drive-for-african-rare-earth-minerals/



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