EU Critical Raw Materials Act Introduces New Supply Chain Obligations for Large Companies

On 12 December 2023, the EU Parliament adopted the third trilogue agreement on a Regulation establishing a framework for ensuring a secure and sustainable supply of critical raw materials (EU Critical Raw Materials Act, ‘CRMA draft’). The text builds—with significant changes—on the EU Commission proposal of 16 March 2023 (COM(2023) 160 final, ‘Commission Proposal’).

With the CRMA draft, the EU seeks to ensure that EU companies have a secure and sustainable supply of critical raw materials (‘CRM’). To increase companies’ risk preparedness in the most strategic areas, Art. 24 CRMA-draft requires large EU companies active in extraction, refining or recycling of strategic raw materials (‘SRM’) to conduct internal audits of their respective supply chains and take necessary mitigating measures.

Background

A large number of technologies in key sectors of the EU such as renewable energy, digital industry, space and defence depend on CRM. CRM are raw materials with high economic importance whose supply chains are at a high level of risk (see recital 1 to the CRMA-draft). The risk comes from a reliance almost exclusively on EU imports, in most cases from a small number of suppliers in a few third countries.

A subset of CRM is SRM. These are raw materials of high strategic importance and with a potentially significant gap between global supply and projected demand, for which also an increase in production is relatively difficult (see the Commission Communication on CRM, COM(2023) 165 final, p. 3 with footnote 8).

The demand for CRM is already high today but is forecasted to rise in an unprecedented way, inter alia, due to the green and digital transition. Recent supply crises in connection with the COVID-19 pandemic and Russia’s war on Ukraine have shown a severe vulnerability of many EU companies to CRM supply chain disruptions. As geopolitical, social, and environmental challenges are constantly rising, so is the threat of further disruptions.

The CRMA-draft has the following objectives (see Commission Proposal, p. 2):

1. to strengthen the different stages of the EU CRM value chain;
2. to diversify the EU's imports of CRM to reduce strategic dependencies;
3. to improve the EU's capacity to monitor and mitigate current and future risks of disruptions to the supply of CRM; and
4. to ensure the free movement of CRM on the EU market while ensuring a high level of environmental protection, by improving their circularity and sustainability.

The CRMA-draft contains in Annex I, section 1, a list of all SRM (examples are: Copper, Lithium, and Titanium metal) and in Annex II, section 1, a list of all CRM. The Commission shall review and, if necessary, update these lists at least every three years (see Art. 2 sec. 3 CRMA-draft). The raw materials value chain encompasses ‘all activities and processes involved in the exploration, extraction, processing, and recycling of raw materials’ (see Art. 2 sec. 4 CRMA-draft).

In the implementation of CRMA-draft objective (3) (see above), the Commission shall monitor CRM supply risks and make publicly available a regularly updated monitoring dashboard (see Art. Art. 20 sec. 1 and 4 CRMA-draft). On large companies using SRM, new supply chain obligations are imposed under Art. 24 CRMA-draft.

SRM Supply Chain Obligations Under Art. 24 CRMA-draft

Art. 24 CRMA-draft—entitled ‘Company risk preparedness’—establishes the obligation of large companies manufacturing strategic technologies in the EU to regularly audit their supply chains, take mitigating efforts and, depending on national implementation, report to their board. The aim is for companies to become aware of their SRM supply risks and create appropriate mitigation strategies (as required) to be better prepared in case of supply disruptions (see recital (47) to the CRMA-draft).

Scope

Art. 24 sec. 1 CRMA-draft requires EU Member States to identify large companies operating in their territory that use SRM to manufacture:

• batteries for energy storage and e-mobility;
• equipment related to hydrogen production and utilisation;
• equipment related to renewable energy generation;
• aircrafts, traction motors;
• heat pumps;
• data transmission and storage;
• mobile electronic devices;
• equipment related to additive manufacturing;
• robotics;
• drones;
• rocket launchers;
• satellites; and
• advanced chips.

Large companies are those that had more than 500 employees on average and a net worldwide turnover of more than EUR 150 million in the last financial year for which annual financial statements have been prepared (see Art. 2 sec. 31 CRMA-draft). The timeframe for the above identification is within 12 months of entry into force of the CRMA and within 12 months of each update of the SRM list in Annex I, section 1 to the CRMA-draft by the Commission (see above).

Only companies identified by an EU Member State in this way are subject to the obligations of Art. 24 sec. 2 to 5 CRMA-draft (‘obligated companies’), as described below.

Performing an SRM Risk Assessment

According to Art. 24 sec. 2 CRMA-draft, an obligated company shall, at least every three years and to the extent the required information is available, perform a risk assessment of its SRM supply chain. The raw materials supply chain encompasses all activities and processes of the raw materials value chain—which includes exploration, extraction, processing, and recycling (see above)—up to the point where raw material is used as an input for the manufacturing of intermediate or final products (see Art. 2 sec. 27 CRMA-draft).

The risk assessment shall include:

1. mapping where the SRM are extracted, processed or recycled;
2. analysing the factors that might affect the supply of SRM; and
3. assessing vulnerabilities to supply disruptions.

If the required information is not provided by the suppliers of the obligated company upon request, the risk assessment can be based—to the extent possible—on information published by the Commission under Art. 20 sec. 4 CRMA-draft (see above) or on otherwise publicly available information (see Art. 24 sec. 3 CRMA-draft).

Taking Mitigating Efforts

If an obligated company in its risk assessment detects significant vulnerabilities to supply disruptions, it shall take mitigating efforts. This includes assessing the possibility of diversifying its supply chains or substituting the SRM (see Art. 24 sec. 4 CRMA-draft).

Reporting to the Board of Directors

An obligated company can voluntarily present a report to its board of directors, describing the results of the risk assessment, the source of information on which the assessment is based, any significant risks detected, and planned or implemented mitigation measures (see Art. 24 sec. 5 CRMA-draft).

Such a report can also be required under national law, if the respective EU Member State has made use of its authorisation to do so under Art. 24 sec. 6 CRMA-draft.

Timeline and Next Steps

As a next step in the legislative procedure, the CRMA-draft needs to be approved by the Council. This is expected in January 2024. The CRMA will then enter into force on the 20th day after its publication in the Official Journal of the European Union.

With the CRMA underway, the Commission will be able to finalize another outstanding key legislative proposal of its 2024 Commission Work Programme (COM(2023) 168 final) before the end of its mandate in June 2024.

Thea C Bauer is a Senior Associate at Dentons Europe (Germany).