Europe's auto industry fears supply disruptions as China tightens rare earth exports

Europe’s car industry is bracing for major supply problems after China announced stricter limits on shipping rare earth materials abroad. Industry officials worry these new rules could spark months of production headaches.

Last week, China’s Commerce Ministry unveiled expanded restrictions on exporting rare earths and the technology used to process them. Beijing says it wants to prevent these minerals from ending up in military gear and other sensitive applications where they shouldn’t be used.

Chinese leaders aren’t backing down from the policy either. They’ve said they’re “not afraid” if this leads to a trade fight with America, especially after President Donald Trump threatened to slap 100% tariffs on Chinese products.

It isn’t the first time China has squeezed rare earth supplies

Earlier, Beijing imposed similar export limits that have been causing headaches for European automakers. A July agreement was supposed to help speed up shipments to the region, but car companies are still dealing with major disruptions.

Germany’s main automotive trade group, the VDA, issued a bleak warning about what’s coming next. The organization said China’s latest restrictions will have “far-reaching consequences for deliveries of the affected products to Germany and Europe.” Moving these materials around once they do arrive will also get harder.

The battery and semiconductor industries will get hit “particularly hard,” according to a VDA spokesperson who emailed CNBC on Tuesday. Since car manufacturers depend heavily on both sectors, the automotive world will feel the pain too.

German industry leaders want their government to step up pressure on China right away. They’re also calling on European Union officials in Brussels to get tough with Beijing and hammer out a solution that actually works.

“The fact is that the Chinese export restrictions on rare earths and permanent magnets implemented in April this year have already significantly exacerbated the supply situation for rare earths and strategic materials. The new measures now go even further,” the VDA spokesperson explained.

These specialized metals are absolutely essential for making electric vehicles work. They’re also needed for all sorts of high-tech gadgets, electronics, and renewable energy systems. As the world shifts away from fossil fuels, demand for rare earths and similar critical materials is expected to skyrocket.

China runs the show when it comes to rare earths

The country churns out roughly 60% of all rare earth minerals and materials worldwide. That gives Beijing enormous leverage over global supply chains. U.S. officials have repeatedly warned this creates serious strategic problems as countries try to go green.

Roberto Vavassori chairs ANFIA, Italy’s auto parts industry group. At a Milan conference on Tuesday, he painted a troubling picture of what’s happening behind the scenes. While manufacturers managed to keep their assembly lines running when China first tightened the screws over the summer, their backup supplies of rare earth metals are now running dangerously low.

That safety cushion companies relied on earlier “is not there anymore,” Vavassori told conference attendees, according to Reuters. ANFIA didn’t respond to requests for additional comments.

Rico Luman analyzes transportation and logistics trends for ING, the Dutch banking giant. He thinks China’s newest export crackdown creates real problems for supply chains around the world.

“China dominates 90% of global refinery capacity and therefore it’s a real bottleneck,” Luman wrote in an email to CNBC.

Companies still have some materials stockpiled in various locations, including at Tradium’s massive storage facility near Frankfurt. Because of this, Luman doesn’t think we’ll see immediate catastrophic shortages. But he’s worried about what happens next.

Rare earths actually include dozens of different elements, and some specific types could start running short much sooner than others. Whether supply problems get better or worse depends entirely on how upcoming negotiations between China and other countries play out, Luman said.

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