_ J.C. Kofner, economist, MIWI Institute. Munich, December 26, 2024.
Rare earth elements (REEs) such as neodymium, dysprosium, terbium, lanthanum, yttrium, cerium, praseodymium, scandium, gadolinium, and europium are essential for Germany’s key industries. They are used in the automotive sector (e.g., electric motors, catalytic converters), electronics (displays, LEDs, magnets), renewable energy (wind turbines, batteries), medical technology (MRI, lasers), aerospace (light metal alloys, engines), and optics (cameras, lenses) (vbw, 2024).
Nationwide, 1.3 million employees (17% of the workforce in manufacturing) are engaged in the production of REE-containing goods. These contribute €161 billion (22%) in value added and €501 billion (21%) in production value (IW Consult, 2024). This underscores the manufacturing sector’s significant dependence on rare earths.
In 2023, Germany’s industrial demand for rare earth elements reached nearly 6,000 tons, entirely met through imports (Destatis, 2024).
Germany’s high-tech and innovative industries increasingly rely on a stable and cost-effective supply of rare earths. The automotive sector is particularly affected, as approximately 65% of its value added depends on the availability of these elements (IW Consult, 2024).
At the same time, there are significant supply risks for the domestic economy. Neodymium, yttrium, and scandium, for example, are classified as high-risk elements (vbw, 2024). This is primarily due to Germany’s 95% dependency on REE imports from China (Written Inquiry by the AfD Parliamentary Group in the Bavarian State Parliament, 2024). In 2023, China accounted for 91.3% of global refined rare earth production (IW Consult 2023).
Potential supply disruptions or stoppages could arise from domestic Chinese events—such as port closures during the 2020 pandemic or energy-driven production cuts, as seen with aluminum in 2021—or from the political weaponization of trade by the Chinese Communist Party (CCP). A precedent for such actions is the Chinese export controls on REEs imposed in 2010 (IW Consult 2023, IW Consult, 2024).
The economic impact of a supply shock in rare earth elements would be catastrophic for domestic industries, potentially leading to a 4% drop in GDP—comparable to the economic consequences of the COVID-19 restrictions in 2020/21.
The German government must develop a strategy to ensure the cost-effective and secure supply of rare earths for its industries. This strategy should be built on three central pillars:
- Securing and diversifying REE imports from abroad.
- Promoting the extraction of rare earth elements from domestic reserves in Germany.
- Expanding recycling capacities for rare earth elements in Germany.
The European Critical Raw Materials Act (ECRMA), which comes into effect in spring 2024, pursues three key objectives: securing and enhancing the resilience of imports, promoting domestic primary raw material production, and strengthening the secondary raw material economy (Europäische Kommission, 2024). While EU supranational initiatives are generally viewed critically, the ECRMA contains several sensible approaches. It sets benchmarks for domestic capacities along the supply chain of strategic raw materials by 2030: 10% of the EU’s annual demand for extraction, 40% for processing, and 25% for recycling. Additionally, the EU should not rely on a single non-EU country for more than 65% of its annual demand for any strategic raw material at any processing stage. The following policy proposals align with the ECRMA’s goals.
The German federal government should advocate for the inclusion of local content requirements for rare earths sourced from domestic extraction or recycling within the framework of the European Critical Raw Materials Act (ECRMA). Such requirements would regulate access to public funding. A similar approach already exists in the U.S. under the Inflation Reduction Act (IRA) and is therefore also justifiable in trade policy terms at the EU level (vbw, 2024).
Securing and Diversifying Rare Earth Element (REE) Imports from Abroad
The federal government must repeal the Supply Chain Due Diligence Act (LkSG) and advocate for the abolition of the Corporate Sustainability Due Diligence Directive (CSDDD) at the EU level, as these regulations endanger Germany’s supply of rare earth elements. They are practically unfeasible, increase bureaucracy and costs, weaken the competitiveness of German companies, and favor competitors from countries such as China (IfW Kiel, 2021).
The federal government’s decision in October 2024 to establish a raw materials fund under the Kreditanstalt für Wiederaufbau (KfW) as a public-private institution is fundamentally commendable. This fund allocates up to one billion euros for the years 2024 to 2028 to finance projects in mining, processing, or recycling, regardless of whether these initiatives are implemented domestically or abroad. However, for projects abroad, it ensures that no additional supply dependency for Germany arises. The funded resources align with the EU’s Critical Raw Materials List and include both light and heavy rare earth elements (REE) as well as scandium. Pure exploration risks are not financed, and the funding requirement per project should range between 50 and 150 million euros (KfW, 2024; BMWK, 2023).
Abroad, the raw materials fund supports the diversification of REE supply chains by helping to overcome the high fixed costs of new mining and processing projects. However, excluding projects in countries under sanctions, such as Russia, is a critical error that must be rectified, as German industry depends on cost-effective rare earth elements from all available sources. Russia, with over 21 million tons, possesses the world’s third-largest rare earth reserves (USGS, 2023). Additionally, the requirement that projects meet the KfW raw materials fund’s due diligence standards is economically hostile and should be eliminated without replacement.
The capital of the KfW raw materials fund should be increased to 5 billion euros by 2028. The financial means for this are available: an AfD-led federal government could free up over 100 billion euros annually in the federal budget through savings in climate, energy transition, and asylum programs (Boehringer, 2024). Moreover, potential financing options within the framework of IPCEI projects (Important Projects of Common European Interest) should be explored.
To diversify REE supply chains, the federal government should establish raw material partnerships with leading producer countries outside China, such as the USA, Australia, Canada, Sweden, Brazil, India, Malaysia, Russia, South Africa, Tanzania, Thailand, Vietnam, Greenland (Denmark), and Burma (USGS, 2024).
To increase stockpiles of rare earth elements, federal states should promote the operation and commissioning of dedicated storage facilities through the following measures:
- Reducing the real estate transfer tax rate for the relevant properties to 0%.
- Compensating municipalities for lost tax revenues from the federal budget if they reduce corporate tax and property tax for the relevant properties and storage facilities to 0%.
- Accelerating approval processes for REE storage facilities.
Given their industrial criticality, these measures should apply to all processing stages of rare earth elements—from raw materials (e.g., oxides and alloys) to nearly finished intermediate products such as microchips and supermagnets.
Promotion of Rare Earth Element Extraction from Domestic Deposits in Germany
Highly developed industrial nations such as the USA, China, and Sweden refute the notion that advanced countries must rely exclusively on imported raw materials. They demonstrate how the targeted extraction of domestic minerals and fossil fuels can significantly strengthen national industries. German policymakers should also acknowledge and support this strategy more actively.
The federal government should expand the mandates of the KfW Raw Materials Fund to include geological surveys of reserves and the economic potential of rare earth element (REE) extraction from domestic deposits, as comprehensive knowledge in this area is still lacking. To date, there have only been sporadic reports, such as the discovery of rare earth elements (lanthanum, cerium, and neodymium) in Storkwitz, northwest of Leipzig, which was found accidentally during uranium drilling by Wismut AG in the GDR era. This deposit reportedly contains around 20,000 tons of ore (LVZ, 2017).
The most extensive investigations of rare earth elements in Germany were conducted between 2013 and 2017 in Bavaria by the Bavarian State Office for the Environment (LfU). These studies revealed that Bavaria possesses its own REE reserves, distributed across deposits in southern and northern Bavaria. The annual potential was estimated at 444 tons of light REE oxides and 62 tons of heavy REE oxides. However, economic extraction is currently challenging, as the low concentration of REEs in the material means that the costs for extraction, processing, refining, separation, and production exceed market prices (LfU Bayern, 2024).
In a second step, the KfW Raw Materials Fund should specifically promote the domestic extraction and refinement of rare earth elements once potential reserves have been identified through exploration. This would not only reduce dependency on imports but also strengthen domestic value creation and secure strategic raw materials for German industry.
To make rare earth element refinement more cost-effective, the federal government should exempt REE refining from the CO2 levy on natural gas and other “green transformation” requirements. This includes avoiding financial disadvantages resulting from the EU Sustainability Taxonomy and the pressure to convert to expensive hydrogen.
Approval processes in Europe often take significantly longer than those in international comparison. While the lead time for mining projects in Europe typically ranges from 10 to 15 years, it is only 7 to 10 years in the USA and an average of 2 to 3 years in Canada and Australia (KfW Research, 2023). To accelerate the implementation of projects for rare earth element extraction and refinement in Germany, the federal government should pursue a significant reduction in approval timelines under the European Critical Raw Materials Act (ECRMA). For processing projects, a maximum duration of 15 months is targeted, while extraction projects, particularly in mining, should be approved within 27 months (vbw, 2024).
Expansion of Recycling Capacities for Rare Earth Elements in Germany
The End-of-Life Recycling Input Rate for rare earth elements (REEs) in Germany currently stands at merely 3–8 percent (LfU Bayern, 2020). The recycling rate varies significantly depending on the element: while yttrium achieves a recycling rate of approximately 30 percent, the rate for neodymium is only about 1 percent (IW Consult 2023).
The so-called “urban mining” presents high potential for recovering and reprocessing REEs from used electronic devices and other waste materials. Across Germany alone, unutilized “drawer phones” are estimated to contain 44.1 tons of neodymium (Nd) worth €7 million (IW Köln, 2023). Researchers project a doubling of neodymium-containing magnetic material in Germany by 2040, reaching 600,000 tons (öko Institut, 2022). The total material value of metals in Germany’s anthropogenic stock is estimated at €650 billion (Umweltbundesamt, 2017).
To advance the circular economy for REEs, it is crucial to promote domestic recycling companies developing innovative solutions for recovering REEs from waste materials (Umweltbundesamt, 2021). For instance, the German technology company Heraeus inaugurated Europe’s largest recycling facility in Saxony-Anhalt in May 2024, with an initial capacity of 600 tons per year, expandable to 1,200 tons (VDI, 2024). Furthermore, the KfW Resource Fund should play a key role by specifically financing new REE recycling projects, thereby contributing to closing material loops.
Another important step to reduce REE recycling costs is improving the political framework. Similar to REE refining, the federal government must exempt REE recycling from CO2 levies on natural gas and all requirements related to the “green transformation,” such as the mandatory switch to hydrogen.
To facilitate the implementation of REE circular economy projects in Germany, the government should aim to significantly shorten approval procedures for recycling facilities to a maximum of 15 months (vbw, 2024).
Finally, the federal government should increase funding for research projects in REE recycling, particularly those aimed at improving efficiency and reducing costs. Under the “r4 – Innovative Technologies for Resource Efficiency” program, the Federal Ministry of Education and Research (BMBF) allocated €60 million by 2018 to develop REE recovery processes (PTJ, 2018). Projects such as “REEsilience” and the EU-supported “REE4EU” focus on recovering and utilizing secondary materials. KIC EIT RawMaterials promotes sustainable resource use, while the Fraunhofer Institute is working on technologies like FUNMAG and SepSelsa to process old materials such as neodymium magnets and phosphor waste (Fraunhofer Institut, 2024). The EU project SUSMAGPRO is developing a recycling supply chain for REE magnets with 18 partners across Europe (SEZ, 2024). An innovative approach is “biomining,” where bacteria are used to extract REEs from waste (TUM, 2023).