TABLE OF CONTENTS

4........... Access to non-energy raw materials and the competitiveness of EU industry. 11

4.1........ Introduction. 11

4.1.1..... Context of the analysis. 11

4.1.2..... The goal of the analysis. 12

4.1.3..... Defining non-energy, non-agricultural raw materials. 13

4.1.4..... Analytical approach: a framework for interpretation. 14

4.2........ Contextual data. 15

4.2.1..... Global demand and the EU.. 16

4.2.2..... Long-term price evolutions. 17

4.2.3..... The EU’s supply from a global perspective. 18

4.2.4..... Trade flows. 20

4.2.4.1.. Trade data. 20

4.2.4.2.. Trade of iron ore, critical raw materials and rare earths. 23

4.2.5..... Import dependency: evidence from material flow data from Germany and the UK.. 26

4.2.6..... Secondary raw materials and recycling. 27

4.3........ Qualitative analysis results. 29

4.3.1..... Interrelation of the selected industries in the value chain. 29

4.3.2..... Raw materials insufficiency and related competitiveness issues. 31

4.3.2.1.. Cost competitiveness effects. 31

4.3.2.2.. Responses to shortages of raw material at industry level 36

4.3.2.3.. Policy implications at industry level 44

4.3.3..... The role of the non-energy extractive industry. 45

4.3.3.1.. Challenges in the non-energy extractive industry. 45

4.3.3.2.. The role of innovation in the future of the non-energy extractive industry. 46

4.3.3.3.. Policy implications. 46

4.4........ Conclusions and policy discussion. 47

4.4.1..... Competitiveness effects. 48

4.4.2..... The potential of recycling and innovation. 49

4.4.3..... Policy discussion. 50

5........... EU Industry in a Sustainable Growth Context 63

5.1........ Introduction. 63

5.2........ Policy and economic context 63

5.2.1..... EU policy context 63

5.2.2..... Economic context: industry gross value added (GVA) and employment 65

5.3........ Eco-performance of the EU Industry. 71

5.3.1..... Energy consumption and intensity. 71

5.3.2..... Greenhouse gas (GHG) emissions and intensity. 76

5.3.3..... Material flows and resource efficiency. 84

5.3.4..... Waste generation and treatment 87

5.3.5..... Water 93

5.3.6..... Summary and tentative discussion on the impact of the recent crisis. 96

5.4........ Eco-expenditure and eco-innovation. 98

5.4.1..... Eco-innovation. 98

5.4.2..... Eco-innovation and R&D on energy. 105

5.4.3..... Environmental protection expenditures. 108

5.5........ Conclusions and policy implications. 111

5.5.1..... Policy instruments for sustainable growth. 111

5.5.2..... Policy design and implementation. 114

Annex : Definitions and concepts. 117

6........... EU industrial policy and global competition: recent lessons and way forward. 129

6.1........ Introduction. 129

6.2........ Key challenges for the competitiveness of the EU economy. 130

6.2.1..... Exploiting the full potential of the enlarged internal market 130

6.2.2..... Creating a global level playing field with non-EU competitors. 131

6.2.3..... Boosting the real economy in times of financial trouble and fiscal constraints. 135

6.3........ Fostering strategic European interests. 139

6.3.1..... The Lisbon Treaty and competitiveness. 139

6.3.2..... A new industrial policy for the globalisation era. 140

6.3.3..... A European policy approach to serve strategic European interests. 143

6.3.3.1.. European interest 144

6.3.3.2.. Strategic nature of such interests. 145

6.3.3.3.. European companies. 146

6.4........ Industrial competitiveness throughout the production value chain. 148

6.4.1..... Access to resources. 148

6.4.2..... Innovation. 149

6.4.3..... Access to markets. 150

6.4.4..... Restructuring. 152

6.5........ Implications for the interface between industrial policy and other competitiveness-related policies 153

6.5.1..... Securing the strength of the European industrial value chain. 153

6.5.1.1.. Applying merger control and antitrust enforcement to support industrial competitiveness. 153

6.5.1.2.. Making full use of policy toolkits in the global context 156

6.5.2..... Enhancing the scope, impact and timing of targeted state support 158

6.5.2.1.. Timely and efficient state aid assessment in a global context 158

6.5.2.2.. Maintaining a strong and diversified industrial base in Europe. 159

6.5.2.3.. Support for early adjustment processes and restructuring of European enterprises. 159

6.6........ Conclusions. 160

7........... Sectoral Competitiveness indicators. 165

ANNEX.. 177

List of background studies. 177

to the European Competitiveness Report 2011. 177

LIST OF FIGURES

Figure 4.1: Raw material use in the production process and the value chain: analytical framework. 13

Figure 4.2: GDP and GDP evolution of major world countries. 14

Figure 4.3: Top-10 countries by GDP in 2050. 15

Figure 4.4: Price indexes of selected raw materials (2000=100) 16

Figure 4.5: Share of EU-27 in world mining production. 17

Figure 4.6: Exports and imports of raw materials in the EU-27, 2009 – part 1. 18

Figure 4.7: Exports and imports of raw materials in the EU-27, 2009 – part 2. 19

Figure 4.8: Exports and imports of raw materials in the EU-27, 2009 – part 3. 19

Figure 4.9: Relative evolution of imports-exports in the EU-27 between 2005 and 2009. 20

Figure 4.10: Absolute evolution of imports-exports in the EU-27 between 2005 and 2009. 21

Figure 4.11: Major trade flows of iron ore, 2009. 22

Figure 4.12: Production concentration of critical raw mineral materials, 2006. 22

Figure 4.13: Supply and demand for rare earths, assuming current trends continue. 23

Figure 4.14: Domestic extraction used, exports and imports as a percentage of domestic material input, Germany 2007 24

Figure 4.15: Domestic extraction used, exports and imports as a percentage of domestic material input, United Kingdom 2007. 25

Figure 4.16: Estimated waste stream recovery potential in the EU in 2006 and 2020. 26

Figure 4.17: Average recycling rates for the EU-27 by waste stream in 2006. 27

Figure 4.18: Location of the selected industries in the value chain – Germany 2007. 28

Figure 4.19: Share of selected industries in the EU-27 GDP, 2006. 29

Figure 4.20: Waste: excluding scrap metal 38

Figure 4.21: European paper recycling. 41

Figure 5.1: Industrial GVA in the EU-25 USA and Japan, 1995-2007 (indexed at 1995 prices) 64

Figure 5.2: Total % changes in industrial GVA EU-25, 1995-2009. 65

Figure 5.3: Change in industrial employment and industrial GVA, 1995-2007. 66

Figure 5.4: Change in industrial employment and GVA per sector in the EU-25, 1995-2007. 67

Figure 5.5 Change in final energy consumption in million toe from 1990 to 2008. 70

Figure 5.6: Energy intensity of EU industry (manufacturing and construction, % change in final energy consumption versus % change in GVA), 1995 and 2007. 71

Figure 5.7: Energy intensity sector by sector (final energy consumption (in toe)/GVA in million euros (1995 constant prices)), 1995-2008. 72

Figure 5.8: Total GHG emissions in million Gg of CO2 equivalent, 1990-2008. 75

Figure 5.9: Change in EU GHG emissions and GVA – Whole economy, i.e. all NACE rev. 1.1 sectors (GHG emissions (Gg CO2 equivalent)/GVA (in million EUR at 1995 constant prices), 1995-2007. 76

Figure 5.10: Change in GHG emissions from manufacturing and construction (UNFCCC) and GVA in the EU-23 (NACE rev. 1.1 D + F), 1995-2007. 77

Figure 5.11 Change in EU-25 Member States' industrial GHG emissions, 2007-2010. 78

Figure 5.12: Change in industrial GHG emissions in the EU-25, 2007-2010. 80

Figure 5.13: Change in industrial GHG emissions (manufacturing and construction) and final energy consumption by industry in the EU-25, 1995-2007. 81

Figure 5.14: Domestic material consumption (DMC) in the EU-27 by components (in million tonnes) 82

Figure 5.15: Change in DMC and industrial GVA by Member State, 2000-2007. 83

Figure 5.16: Domestic material consumption in the EU-27 by main material categories, 2000-2007. 84

Figure 5.17: Material productivity in the EU-25 in 2007 – Industrial GVA in EUR (1995 constant prices) per tonne of DMC in 2007 and change in material productivity, 2000-2007. 85

Figure 5.18: Total waste generation by industry in the EU-27 (NACE rev.2 A-F), 2004-2008. 86

Figure 5.19: Change in total waste generation by industry (NACE rev. 2 A-F) and GVA in the EU-27, 2004-2006 87

Figure 5.20: Total waste treatment in the EU-27, 2004-2008. 90

Figure 5.21: Water abstraction by EU manufacturing industry by Member State, 1995-2007. 92

Figure 5.22: Change in EPE on wastewater and in water abstraction by manufacturing industry in selected Member States, 2003-2007. 93

Figure 5.23: Change in EPE on wastewater and GVA in industry in selected Member States, 2003-2007 94

Figure 5.24: Motives for environmental innovation (percentage of enterprises with innovation activity), 2008 - Industry (without construction) 99

Figure 5.25: Relative share of public support to sub-fields of energy R&D in the EU-16. 104

Figure 5.26: Public support for R&D into renewable energy resources, international comparison (2009 prices and exchange rates) 105

Figure 5.27: Public support of energy efficiency (not only industrial) R&D (2009 prices and exchange rates) 106

Figure 5.28: Total environmental protection expenditure by industry (NACE A-E, excluding construction) in selected Member States, 2001-2006. 107

Figure 5.29: Public-sector EPE investment and current expenditure by Member State (% of GDP, 2008 unless otherwise indicated) 107

Figure 5.30: Change in industrial EPE and industrial GVA (NACE A-E, excluding construction) in selected Member States, 2003-2007. 109

Figure 6.1: Sectoral manufacturing output and employment developments. 134

Figure 6.2: Change in new loans below and above EUR 1 m — year-on-year change. 135

Figure 6.3: Changes in credit standards applied to the approval of loans or credit lines to enterprises (net percentage of banks reporting tightening credit standards) 136

LIST OF TABLES

Table 4.1: Crosscutting sectoral competitiveness issues related to non-energy raw materials. 61

Table 5.1: Percentage of enterprises with innovation activity reporting an environmental benefit, 2008 – Industry (without construction) 102

Table 5.2: NACE rev. 1.1 classifications used in this report 119

Table 5.3: Entergy intensity of manufacturing plus construction (NACE rev. 1.1 D+F) by Member State in selected years 121

Table 5.4: Energy intensity of industries, for EU-25, in selected sectors and selected years Energy use in thousand toe per million EUR GVA at 1995 constant prices. 122

Table 5.5: GHG emission intensity of manufacturing plus construction (NACE rev. 1.1 D+F) by Member State plus USA and Japan in Gg CO2 eq. per million EUR GVA at 1995 constant prices. 123

Table 5.6: Materials productivity by Member State per million EUR of industrial GVA (NACE rev. 1.1 A-F) at 1995 constant prices, per tonne. 124

of DMC for the whole economy in selected years. 124

Table 5.7 – Green components in economic stimulus packages, 2009. 125

List of country abbreviations

AT || Austria

BE || Belgium

BG || Bulgaria

CY || Cyprus

CZ || Czech Republic

DE || Germany

DK || Denmark

EE || Estonia

EL || Greece

ES || Spain

FI || Finland

FR || France

HU || Hungary

IE || Ireland

IS || Iceland

IT || Italy

LI || Liechtenstein

LT || Lithuania

LU || Luxembourg

LV || Latvia

MT || Malta

NL || Netherlands

NO || Norway

PL || Poland

PT || Portugal

RO || Romania

SE || Sweden

SI || Slovenia

SK || Slovakia

UK || United Kingdom

Acknowledgements

This report was prepared in the Directorate-General for Enterprise and Industry under the overall supervision of Heinz Zourek, Director-General, and Viola Groebner, Director of the Directorate for Industrial Policy and Economic Analysis.

The publication was developed in the unit ‘Economic Analysis and Impact Assessment’, under the management of Konstantin Pashev, Head of Unit, and João Libório, Project Manager.

Specific contributions and coordination of work on individual chapters were provided by Tomas Brännström, Jorge Durán-Laguna, Maya Jollès, João Libório, Ágnes Magai and Mats Marcusson. See page 301 for a list the background studies on which individual chapters are built.

Comments and suggestions by many colleagues from the Directorate-General for Enterprise and Industry as well as from other services of the Commission are gratefully acknowledged.

Statistical support was provided by Luigi Cipriani and Claudio Schioppa. Dominique Delbar-Lambourg and Patricia Carbajosa-Dubourdieu provided administrative and organisational support.

Comments on the report would be gratefully received and should be sent to:

Directorate-General for Enterprise and Industry

Unit B4 - Economic Analysis and Impact Assessment

European Commission

B-1049 Brussels (Belgium)

or by e-mail to konstantin.pashev@ec.europa.eu or joao.liborio@ec.europa.eu

4. Access to non-energy raw materials and the competitiveness of EU industry 4.1. Introduction 4.1.1. Context of the analysis

The accessibility and affordability of non-energy, non-agricultural raw materials[1] is crucial for ensuring the competitiveness of EU industry.[2] The competitiveness of several European sectors such as electronics, cars, chemicals or construction can be hampered by a limited or more costly supply of certain raw materials. Like the US and Japan, the EU is highly dependent on imports for many of its raw materials for industrial and manufacturing purposes. While the EU has many raw material deposits, their exploration and extraction is hindered by increased competition for land use and the higher costs of safeguarding the environment and human health.

The fast-changing geopolitical and economic context affects the supply and demand of these materials. On the one hand, the industrialisation and urbanisation of emerging economies (e.g. the BRICs) has increased global demand for particular industrial raw materials,[3] as these countries have become more important purchasers of such materials on global markets.[4] Also the fast diffusion of emerging technologies is expected to raise global demand.[5] On the other hand, the mining and production of certain raw materials is concentrated in a few countries, and the free and transparent operation of global markets in these raw materials is not ensured. In many cases, distorting measures such as export taxes, quotas, import subsidies, and restrictive investment rules hamper access for EU industry.

Recent sectoral studies have highlighted a number of problems: i) high volatility of world market prices; ii) increased use of short-term supply contracts (e.g. supply of iron ore); iii) monopolisation of supply for certain ‘high-tech’ materials in certain countries; iv) growing competition and demand from emerging economies and increased concentration of suppliers of raw materials, leading to a more difficult price negotiation position, especially for SMEs.

The European Commission has launched a number of policy initiatives to address the challenges regarding access (conditions) to raw materials. In particular, the Raw Materials Initiative has highlighted the importance of access to non-energy, non-agricultural raw materials for the competitiveness of crucial industries in the EU-27 economy.[6] The document set out a three-pillar approach towards an integrated strategy. These pillars are:

1. Fair and sustainable supply of raw materials from global markets;

2. Fostering a sustainable supply of raw materials within the EU;

3. Boosting resource efficiency and promoting recycling.

This was later followed up by the identification of 14 critical raw materials.[7] Their critical nature is based on the fact that they are entirely produced in a limited number of countries outside the EU, and have low substitutability and recycling rates. The Communication of February 2011 on ‘Tackling the challenges in commodity markets and on raw materials’ examined the problems in the wider context of commodity trade and emphasised the role of commodity derivatives and the link between physical and financial markets.[8] The overarching flagship initiative under the Europe 2020 Strategy for a resource-efficient Europe,[9] considers the problem of non-energy industrial raw materials in the wider context of a resource-efficient Europe in a global setting and in relation to related issues such as climate change, biodiversity, land use, deforestation, sustainable consumption and competitiveness. In March 2011 the Council of the European Union endorsed the three-pillar approach and the accompanying actions.[10] The Communication on Trade, Growth and World Affairs (2010) also addressed the strategic importance of access to an undistorted supply of raw materials to ensure the competitiveness of the EU economy[11]. The upcoming Communication on the European Innovation Partnership on Raw Materials will address the role of R&D and innovation in tackling the scarcity of raw materials.

4.1.2. The goal of the analysis

The main objective of this chapter is to analyse the nature and degree of vulnerability of the EU industry in terms of access to raw materials in a systematic and qualitative way. The focus is on the competitiveness effects for certain industries, taking into account the supply constraints on non-energy, non-agricultural raw materials from a sectoral point of view. ‘Access’ to raw materials is understood in a wider sense, meaning also the access conditions.

As part of this overall objective, this chapter looks into:

· Recent trends in global demand, the EU's supply and trade in raw materials, as well as the role of secondary raw materials and recycling in Europe.

· The competitiveness effects of a set of selected sectors for which raw materials are a critical factor in their relative global competitiveness. It examines supply-related issues regarding raw materials, e.g. price volatility, location of crucial materials, changes in contracting terms, etc., and the responses at company level to these challenges, including improving material efficiency, recycling, use of substitute materials, and organisational strategies.

· The role of the EU extracting and recycling industries in reducing the vulnerability of EU industries with respect to access raw materials.

· Potential public policies concerning access to raw materials, e.g. measures to promote resource efficiency, undistorted access to raw materials in third countries, measures to promote sustainable supply from domestic sources (mining plus recycling), and other aspects such as globalisation and trade in waste streams.

In terms of geographical coverage the focus is on a comparison of the EU as a whole with the rest of the world (e.g. the main emerging international players, such as China).

The analysis is qualitative in nature, comprising an independent and systematic analytical exercise based mainly on interviews with industry stakeholders, and on relevant literature and data.

4.1.3. Defining non-energy, non-agricultural raw materials

Non-energy, non-agricultural raw materials can be defined as raw materials that are mainly used in industrial and manufacturing processes, semi-products, products and applications and are not primarily used to generate energy. As such, industrial minerals and purified elements (e.g. feldspar, silica), ores and their metals and metallic by-products (e.g. copper, iron but also germanium, rhenium, rare earth elements) and construction materials (e.g. sand gravel, aggregates) are within the scope, but it also includes materials such as wood and natural rubber. Furthermore, crude oil and gas can be also considered as raw materials for industrial production [12].

This chapter focuses mainly on unprocessed non-energy, non-agricultural raw materials. However, such raw materials are processed into various products and components used by sectors further up the product value chain. These sectors are thus affected indirectly by the same raw materials issues.

4.1.4. Analytical approach: a framework for interpretation

Figure 4.1 depicts the relationship between raw materials and competitiveness, in the context of the supply chain. It will serve as the backbone for the various parts of the analysis.

The top part of the figure indicates four layers of competitiveness that can be distinguished at sectoral level: inputs, structure, processes and outcomes. These are related to the product market, in which both producers and consumers (or businesses in the case of intermediate consumption) operate.

The middle part of the figure shows the raw material flows throughout the production process, going from raw material to waste. An important aspect is the recycling of raw materials, leading to secondary material flows that reduce the import dependency and on top of that are often associated with lower energy processing costs.

The bottom part indicates the related risks. While problems such as increasing material prices and price volatility as well as monopolisation of supply for certain materials and trade restriction measures can be classified as supply risks, the problem of growing competition and consumption in emerging markets concerns the demand side of the product market. Also, risks and (technological) challenges can be identified at the recycling stage can be identified. These risk factors can be further refined, such as increased demand due to the development of emerging technologies, changes in consumer preferences, etc.

Figure 4.1: Raw material use in the production process and the value chain: analytical framework

Source: IDEA Consult.

4.2. Contextual data

This section presents data portraying the EU in its wider global economic context with respect to non-energy, non-agricultural raw materials. The data revolve around five themes:

– Demand: GDP growth of major economic blocks in the world, indicating where increasing demand for raw materials is expected to come.

– Price: changes in the prices of particular raw materials e.g. copper, zinc, aluminium.

– Supply: location of major deposits in the world and the EU’s position.

– Trade: major raw material trade flows in terms of value and quantities, indicating that the EU is a major importer.

– Secondary raw materials and recycling: estimated waste stream recovery potential.

4.2.1. Global demand and the EU

The key factors driving the demand for raw materials are global economic and population growth and new technological applications. In particular, the growing appetite of the emerging economies for raw materials is seen as major force driving global demand.[13] The influence of China and, increasingly, India is commonly seen as dominant in this context. This is both a reflection of the scale of their economies and their current economic dynamism. Since the 1990s, developing countries have significantly increased their consumption of raw materials to help fuel their economies, and are now among the leading consumers and high long-term demand is expected.[14]

Figure 4.2 shows the GDP of major countries in the world in 2010 and estimates for 2015. The EU-27 and the US are the main economic blocks, both in 2010 and in the near future. Yet for other countries, in particular the BRIC countries, relatively significant changes are anticipated. According to IMF forecasts, India, Russia and Brazil will have economies of similar sizes as those of France, Italy and the UK.

Figure 4.2: GDP and GDP evolution of major world countries

Note: The vertical scale is expressed in billion USD.

Source: IMF.

In 2010, China passed Japan as the world’s second largest producer of goods and services. Japan is followed by the major European countries Germany, France, the UK and Italy. For the time being, the United States’ GDP amounts to two and a half times the GDP of China. The combined GDP of the EU-27 is about 10% higher than the GDP of the US. According to the IMF's forecasts for the near future, this world order will not change substantially by 2015. However, it is expected that China's GDP will be more than half of US GDP by 2015.

According to other forecasts[15] the economic world order is expected to change substantially by 2030 (see Figure 4.3). China will likely have surpassed the United States to top the GDP rankings, with India third. By 2050, the traditional large economies such as Japan, UK, Germany and France are expected to fall further back in the global GDP rankings. Of course, one has to bear in mind that long-term forecasts are by their nature very speculative. Yet they point to a certain economic growth pattern that will also have an impact on global demand for non-energy, non-agricultural raw materials.

Figure 4.3: Top-10 countries by GDP in 2050

Note: The vertical scale is expressed in billion USD.

Source: Goldman Sachs, Global Economics Paper, n 170, ‘The expanding Middle: The Exploding World Middle Class and Falling Global Inequality’, July 2008.

4.2.2. Long-term price evolutions

Demand from emerging economies has pushed up prices for important metals and minerals.[16] China's economic dynamism is described as a major factor in commodity market developments. China currently consumes about 30% of the world's base metals, against about 5% in the early 1980s. Increasing demand from emerging economies ‘appears to represent a longer-term structural shift in consumption’ and not just a ‘cyclical movement’[17]. The literature also suggests that global markets for metals and minerals tend to be volatile, partly due to time lags in the response of supply to changes in demand, but technological change in products also often changes the demand for strategic metals and minerals, contributing to high price volatility.[18] Furthermore, the export restriction measures often applied, such as quotas and minimum export prices have also contributed to soaring raw materials prices.

From 1990 onwards, prices had been relatively stable up to the year 2002. From 2003, the prices of the materials considered here generally started to increase, sometimes gradually (aluminium, cement, iron ore) and sometimes sharply (copper, zinc, iron and steel scrap). Much of the increase in prices from 2003 to 2008 can be explained by the strength of the demand and the lagged response of the supplying industry (Humphreys, 2009). In the case of copper, prices stabilised again from 2006 onwards, while in the case of zinc, prices fell sharply again. The prices of iron ore and steel scrap continued to increase vigorously up to 2008.

When prices are measured against their year 2000 levels, one can observe that prices for zinc, bauxite, aluminium and cement rose at a gentle pace, with increases of between 20% and 60% during 2000-2008 (See Figure 4.4). On the other hand, prices for iron ore almost tripled during the same period. Prices for iron and steel scrap and copper more than tripled, with an average yearly increase of 17% during this period. While the economic crisis of 2008/9 had a significant impact on the prices of metals, some metal prices, such as copper and iron ore – have recovered to near pre-crisis levels.

Figure 4.4: Price indexes of selected raw materials (2000=100)

Source: United States Geological Survey (USGS).

4.2.3. The EU’s supply from a global perspective

The supply of non-energy, non-agricultural raw materials is described as relatively inelastic in the literature. This is mainly the result of long lead-times in the mining and recycling industry. Investments in the extractive industries are associated with high capital intensity and a long-term payback characteristic, often involving substantial risk.[19] Furthermore, investments are very often influenced by environmental considerations and political decisions. This is one of the reasons why supply does not immediately respond to changes in demand, since weak price signals can leave a ‘legacy of underinvestment’ reaching years into the future.[20] The resulting lag in the response to growing demand can translate into temporary supply gaps.

The second pillar of the EU’s Raw Material Initiative focuses on fostering sustainable supply within the EU. Figure 4.5 indicates the share of the EU-27 in world mining production for a set of minerals and metals.

Figure 4.5: Share of EU-27 in world mining production

Source: IDEA Consult based on USGS.

For most mining materials, the EU-27 only accounts for a small share of world mining production. Only for salt and potash is mining production in EU-27 on a global scale, with shares of 20% and 13% of world production, respectively. For some critical raw materials, EU-27 share is below 5% (tungsten) or even non-existent (antimony, manganese, platinum). Due to price increases, the return on investment of recovery and recycling of certain materials has changed over recent years, especially in Europe and North America.[21]

Within the EU, several countries are quite significant producers, yet in terms of global supply the amounts produced are relatively small. Austria was estimated to have been the fourth biggest tungsten producer in the world in 2009. Portugal is also a significant producer of tungsten. Poland is the EU’s biggest producer of silver, and also quite active in producing of copper, zinc and lead. Ireland is the EU’s largest producer of zinc. Sweden has a variety of raw materials. It is the leading producer of iron ore in the EU, and also processes lead, gold and zinc, too. Bulgaria and Spain are also quite significant producers of gold. Within the EU, Germany produces most of the potash and the largest amount of ammonia and salt.

4.2.4. Trade flows

The literature on trade and global supply chains highlights the highly uneven distribution of metal and mineral reserves across countries as a key contextual factor (see for example OECD 2010a). Large shares of important raw materials are concentrated in a relatively small number of countries and other economies have limited domestic supplies and therefore depend on imports. Some of the major producers and exporters of raw materials are located in developing economies. The global supply chains for essential raw materials have become increasingly complex and interdependent, which leaves supply relatively vulnerable. The vulnerability of industry can be assumed to be greatest in sectors unable to replace scarce and expensive raw materials with more abundant and cheaper materials with similar properties (Angerer et al., 2009). The unequal distribution of raw material reserves is also considered to be an important source of trade friction.

4.2.4.1. Trade data

The trade balance for raw materials in the EU-27 leans strongly to the import side (see Figure 4.6 and 4.7.). For the main raw materials, unagglomerate regards the most important materials, such as unagglomerated iron ore and copper ore, imports surpassed USD 5 billion and USD 4 billion in 2009, respectively. Imports of agglomerated iron ore and precious metals each amounted to more than USD 1 billion in 2009. Other important imports, surpassing USD 300 million in 2009, are ores from aluminium, molybdenum and titanium ores.

Figure 4.6: Exports and imports of raw materials in the EU-27, 2009 – part 1

Note: values are in million USD.

Source: UN Trade data.

Figure 4.7: Exports and imports of raw materials in the EU-27, 2009 – part 2

Note: values are in million USD.

Source: UN Trade data.

Within the EU-27 some materials have a positive export balance. However, these balances are much smaller than the positive import balances. Silver has a positive export balance amounting to USD 80 million. Other materials with a positive balance sheet are tungsten and some slag and ash materials (Figure 4.8).

Figure 4.8: Exports and imports of raw materials in the EU-27, 2009 – part 3

Note: values are in million USD.

Source: UN Trade data.

Over time, it is worth noting that between 2005 and 2009, net imports of some materials into the EU-27 increased strongly (Figure 4.9). This was the case for ‘niobium, tantalum and vanadium ores’, and for some ash and slag materials. Net imports of lead ores, copper ores and nickel ores also increased. On the other hand, net imports decreased for certain materials - roasted molybdenum concentrates and waste of iron, - and certain ores - zirconium, chromium, zinc and manganese.

Figure 4.9: Relative evolution of imports-exports in the EU-27 between 2005 and 2009

Source: UN Trade data.

Figure 4.10 presents the largest changes in absolute net imports were seen evolution the case of copper with an increase of more than USD 1 billion, and in the case of iron with a decrease of more than USD 1 billion (both agglomerated and unagglomerated) decreased in the same value.[22] Net imports of most materials decreased between 2005 and 2009, by USD 600 million for zinc ores and by USD 500 million for molybdenum ores.

Figure 4.10: Absolute evolution of imports-exports in the EU-27 between 2005 and 2009

Note: Values are in million USD.

Source: UN Trade data.

4.2.4.2. Trade of iron ore, critical raw materials and rare earths

Iron ore, critical raw materials and rare earths are especially important for the sound functioning of European industry. It is worth taking a closer look at global trade in these materials.

Iron /steel is a very important metal being used widely many sectors. The major flows of iron ore are from the two major production regions (South America, notably Brazil, and Australia) to the major consuming region (Asia, notably China, Japan and Korea) (see Figure 4.11). The two producing regions export a large share of their production. Another important producer, India, only exports half of its iron ore production, being an important consumer too. Europe, with a very low production rate (see Figure 4.4), imports mainly from South America and the Russian Federation. China, as an important producer, has no substantial exports of its iron ores. In fact, China needs to import iron ores from Russia, Australia, India and South America.

Figure 4.11: Major trade flows of iron ore, 2009

Source: adapted from www.bhpbilliton.com

The above overview of certain selected critical raw materials (see Figure 4.12) shows the high dependency of European industrial countries on other countries, very often third world countries or emerging economies. By far, the most resource-rich country in this respect is China. This country is the world’s top exporter of rare earths, graphite, magnesium, antimony and fluorspar. Moreover, it has the largest reserves of rare earths, tungsten, graphite and antimony. Other important countries for these resources are Russia, DR Congo, South Africa, Brazil and Mexico. European dependency can be observed in the import column: very often, the most industrialised countries (Germany, France, Spain, Italy, UK, the Netherlands, Austria and Belgium) are among the top 15 importers.

Figure 4.12: Production concentration of critical raw mineral materials, 2006

Source: Press release by European Commission MEMO/10/263 on 17/06/2010.

Recent trends often show a similar picture. Following the economic downturn, demand for these critical raw materials fell on a global scale. In 2010, global demand started to increase again, driven by emerging countries, resulting in price increases in general. Combined with the fact that technological evolution is further pushing demand for some of these critical raw materials (graphite, rare earths), prices for 2011 are expected to soar to levels far above those before the economic downturn. Mining projects are (re)starting production and new mining opportunities are being explored worldwide (magnesium, fluorspar, cobalt, antimony). Only in the case of cobalt is production likely to outpace demand, possibly resulting in lower prices.

Rare earth elements[23] are widely used in a variety of applications that are growing on a global scale, such as cell phones, computers, electric and hybrid vehicle motors, wind turbines etc. Rare earth elements are relatively plentiful in the earth's crust;. However, it is difficult to find them in sufficient concentration in places where they can be profitably mined and processed. China, with the most abundant resources in the world, dominates the world market and exports the largest amounts of rare earth compounds and metals, followed by Austria, Japan, Russia and the USA. In recent years, the biggest importers of rare earth have been Japan, USA, Germany, France and Austria. Figure 4.13 shows that global demand for rare earth is expected to outpace Chinese supply if current trends continue. To meet this demand, production and supply by the rest of the world should further increase during the following years.

Figure 4.13: Supply and demand for rare earths, assuming current trends continue

Source: Industrial Minerals Cooperation, http://www.industrialmineralscorp.com.au/ accessed on 2nd February 2011.

4.2.5. Import dependency: evidence from material flow data from Germany and the UK

A natural question to ask after having discussed the limited supply of non-energy, non-agricultural raw materials in Europe, its relatively large net import rates, and the EU’s recovery prospects is to what degree can the EU´s material requirements be covered by own supply. It is clear from the analysis in previous sections that the answer in general is relatively little. However, a more precise answer can be given on the basis of material flow data. These data are shown for two major economies in the EU: Germany and the UK.

Material flow data from Germany and the UK show a 100% import dependency for a range of raw materials, such as bauxite, alumina, nickel, copper, lead, zinc, tin and iron ores, as there is virtually no domestic extraction that can be used in domestic industries. Germany imports substantially higher shares from inside the EU-27 in comparison with the United Kingdom.[24]

For certain materials, domestic extraction has to be supplemented by imports. In Germany, this is the case for marble and granite, chalk and slate. In Germany, domestic extraction fills up the domestic needs for limestone, salt, sand and gravel and certain non-metallic minerals, while there is an extraction overabundance that can be exported for wood and certain clays.

Figure 4.14: Domestic extraction used, exports and imports as a percentage of domestic material input, Germany 2007

Note: DEU: domestic extraction used which is the total amount of the domestic mining/quarrying extraction used in domestic industries or for export. DMC: domestic material consumption:, which is the total of the domestic extraction used and the difference between imports and exports, which is the total amount used of a certain material in domestic industries.

Source: Eurostat, Material Flow Accounts.

In the UK, however, significant amounts of fertiliser materials, wood and biomass are available from domestic sources, though additional imports are needed. Domestic extraction meets domestic demand for chalk and limestone. Small surpluses can be exported in the cases of salt, sand and gravel, certain clays and slate.

Figure 4.15: Domestic extraction used, exports and imports as a percentage of domestic material input, United Kingdom 2007

Source: Eurostat, Material Flow Accounts.

4.2.6. Secondary raw materials and recycling

A substantial increase in world output has boosted the demand for raw materials used for industrial and manufacturing purposes. At the same time, the quantity of waste produced has risen, so the potential to use more secondary raw materials as inputs has also increased. As the previous section reports, although the EU’s global position is relatively modest as a supplier of primary raw materials, in terms of secondary raw materials, there is still substantial potential.

Recycling has often been identified as an important component of improved and sustainable resource management. Together with the development of substitute materials, recycling and improved resource management may reduce the current global population’s current resource footprint, implying a decoupling of economic growth and environmental impact.

As regards the recovery and reuse of raw materials good waste management is a crucial point. The EU has seen a significant change in waste management in general, driven by EU and national legislation[25] and supported by rising prices for both energy and non-energy raw materials.

Birnstengel and Hoffmeister (2010) estimated that in 2006, 23 % of the EU’s total waste stream could be recovered as secondary raw materials, amounting to 675 million tonnes. Somewhat more than half was actually being recovered for energy and material, leaving 45 % of the potential still largely unused, mainly dumped as landfill or incinerated without energy recovery. Figure 4.16 indicates the EU’s recycling potential for each of the 17 identified waste streams for 2006 and projections for 2020. It is evident that the potential differs across waste streams. The biggest potential is found for paper, plastics, bio-waste and wood, but also for iron and for ashes and slag.

Figure 4.16: Estimated waste stream recovery potential in the EU in 2006 and 2020

Source: Birnstengel and Hoffmeister (2010).

To a certain degree, the potential depends inversely on the actual EU recovery rate. However, the variance across Member States also plays a role. Ceteris paribus, the higher the variance, the higher the potential. Figure 4.17 shows the EU recovery rate per material and the range of recovery rates across Member States. One can observe that for the major raw materials (rubber and tyres, iron and steel, copper, lead, paper and cardboard, aluminium, solvents, zinc, glass and ashes) the recovery rates are more than 60 % for the EU as a whole. For other metals, plastics and textiles, recovery is still on the low side.

Figure 4.17: Average recycling rates for the EU-27 by waste stream in 2006

Note: the yellow whisker plots indicate the ranges over the Member States. The green bars indicate recovery rates for the EU-27 as a whole.

Source: Birnstengel and Hoffmeister (2010), p.4.

One may conclude that for certain metals and minerals there is still substantial untapped potential within the EU as a whole for the recovery of non-energy raw materials.[26] Conversely, for other materials such as copper, aluminium, lead, zinc as well as ‘other metals’, recovery is gradually reaching its full potential.

4.3. Qualitative analysis results

The following section complements the statistical evidence with qualitative information from expert interviews for a selection of industries. They were selected through an iterative process, starting with a literature review, followed by inquiries among experts for an independent view and subsequently discussions with industry representatives.[27] In this section, the positions of the selected sectors in the value chain are first identified, then the main competitiveness issues with respect to raw materials shortages are discussed. Following this, policies related to each sector and the role and challenges of the European non-energy extractive industry are illustrated, since the industry plays an increasing role in reducing dependency on imports of raw materials.

4.3.1. Interrelation of the selected industries in the value chain

An important aspect is the interrelation of the raw material intensive industries and the way in which raw materials risks and consequences pass through the value chain. To give an example, the Figure 4.18 for Germany presents the share of the selected industries to GDP and their position in the value chain. The latter is calculated as the percentage of output produced for final use.[28]

Figure 4.18: Location of the selected industries in the value chain – Germany 2007

Note: the numbers refer to the NACE classification.

Source: IDEA Consult based on Eurostat: symmetric input-output table for Germany, 2007.

An important observation is that industries higher up in the value chain contribute to a larger degree to the economy’s GDP. While in certain EU Member States such as Sweden, metal ores and other mining and quarrying might have bigger weights in the economy, it is characteristic for EU economies that these activities account for relatively small shares in overall GDP.

In order to present a picture closer to the situation of the EU-27 and to the selected sectors discussed later, Figure 4.19 shows the % share in GDP for the EU-27 as a whole. In general, one can observe a similar pattern for the EU-27 as for its largest economy, in terms of relative position. Yet there are a few important differences. The German economy has relatively higher shares for most of the selected sectors. The share of machinery and equipment is much lower for the EU as a whole than for its main economy. Based on the economic importance of the manufacturing sectors and their high raw material intensity, the impacts of shortages of raw materials on the steel, non-ferrous metal, automotive, chemical as well as paper and pulp industries will be investigated in the next section.

Figure 4.19: Share of selected industries in the EU-27 GDP, 2006

Note: ‘Basic iron and steel’, ‘Basic precious and other non-ferrous metals’ and ‘Recovery of sorted materials’, based on data 2008.

Source: Eurostat.

4.3.2. Raw materials insufficiency and related competitiveness issues

The competitiveness effects of non-energy raw materials on the selected European industries are illustrated in this section. Two main competitiveness issues can be identified in terms of raw materials shortages. The first concerns cost competitiveness effects on essential raw material inputs for production, stemming from different sources, such as increasing global demand, trade restrictions, transportation costs etc. The second issue concerns the solutions and strategies that industries tend to adopt to tackle the relative shortage of raw materials, including increasing material efficiency, using recycled and substitute materials, as well as choosing various organisational strategies. Finally, the policy implications relevant to each industry are presented.

4.3.2.1. Cost competitiveness effects

The input effects resulting from shortages of raw materials differ across industries, not only in terms of subject, but also in terms of weight. The price increase in globally-traded raw materials has hit most industries, ranging from steel and non-ferrous metals, to sectors such as car manufacturing. There are several reasons for rising input costs for raw materials. Those most important for the sectors selected will be illustrated here.

First, prices for most raw materials have been escalating over the last decade (see section 4.2.2). Prices of raw materials depend mainly on the time lag with which supply follows demand. Increasing demand from emerging countries has been a major factor accounting for the rise in prices. Clearly, these lagged adjustments have an important effect on price levels and there volatility.

Second, besides supply scarcity and adjustments, supply concentration is also a factor in determining prices. A large share of many raw materials is concentrated in a small number of countries, which often apply export restriction measures.[29] Export restrictions lead to a decrease in export volumes, thus affecting global competition and supply chains. Export restrictions contribute to pushing up international raw material prices due to curbs on supply to the global market, while domestic consumers of raw materials enjoy lower input costs for production. Certain countries often support their domestic industries by offering them lower prices for raw materials (and energy). So the gap between domestic and international prices provides an artificial cost advantage for domestic consumers[30].

Third, Europe faces a competitive disadvantage in terms of transport and trade costs for raw materials whose sources are concentrated in other continents, e.g. in Asia, Africa or South America.

Finally, the oligopolistic nature of production for many raw materials, as well as changing contract terms, also affects prices. Due to the relatively strong bargaining position of suppliers, the duration of contracts has been switched from long-term to short term, and negotiations take place more frequently. This leads to price volatility, and in many cases, price increases.

All of these dimensions may raise production costs directly or indirectly. When this increase is not equalled in other regions of the world, Europe's competitive position deteriorates. The more raw material-intensive an industry is, the stronger the effects on competitiveness are likely to be. The impacts of issues concerning raw materials can differ depending on their place in the value chain. Process industries such as non-ferrous metal industry are directly affected, while industries active further down the value chain, such as the car industry, undergo knock-on effects from the same raw material issues. The market structure and power relations between industries along the value chain determine the extent to which a shortage of raw materials is transmitted to downstream industries and, ultimately, to the final consumer. Below, selected sectors are given as examples to illustrate the related cost competitiveness effects.

· Steel industry

As one of the key sectors in the EU, the steel industry is a good example to illustrate the channels through which prices for the main input material for production have been escalating for the main input material. This puts additional competitive pressure on producers if costs to downstream industries and consumers can not be passed on. Rising costs for raw material in this sector stem from different sources such as the oligopolistic structure of the iron ore market, trade costs and unfair trade conditions.

The steel sector is very dependent on the supply of raw materials. In 2010, costs of raw materials accounted for roughly 70% of total costs, and iron ore[31] for more than 40%. Even though the EU produces iron ore, a significant portion of iron ore needs (84%) is imported from overseas. Accordingly, costs of raw material have a considerable impact on profitability and strategic investment decisions.

Following a strong increase in market concentration over the last decade, three big suppliers[32] control the market for the supply of iron ore. Over a third of the world supply of iron ore and 67% of world seaborne iron ore are concentrated in the hands of these three major exporters. One of the consequences of this oligopolistic structure is that iron ore prices have outpaced mining costs significantly. Prices for iron ore are now about four times the cost of production (about USD 30.00/tonne) at main mines[33]. Producers’ market power has increased significantly, resulting for example in the introduction of short-term contracts which transfer the price hikes, and associated risks, more easily further downstream in the supply chain. Since 2010, after a tradition that lasted 40 years, contract prices are set on a quarterly basis, reflecting a switch of power from the steel industry to the mining industry. As well as higher prices, the steel industry also faces price uncertainty. This affects the its ability companies to hedge against the risk of higher prices in future make forward-looking business plans, more generally.

As prices of iron ore are set globally, increased input prices would not necessarily create an advantage for countries with better access to iron ore. However, producers in regions with abundant reserves usually enjoy a strategic cost advantage over steel producers that need to import iron ore from abroad. The cost of raw materials in production has been highest for Western Europe, while Russia, India, South Africa and Brazil are among the most competitive steel producers in the world, partly due to local access to iron ore resulting in lower raw material costs.[34]

The competitiveness of the European steel industry is also affected by high transport costs for imported iron ore and other raw materials. According to Eurofer[35], transport costs represent up to 15% of the production costs. It is clear that countries with better access to raw materials have a competitive advantage because of lower transport costs.

Export restrictions are partly responsible for the limited supply of iron ore available or for higher prices on the global market. The forms of export restriction most often applied are export taxes and quotas, which have contributed to raising international prices for iron ore and scrap. Export taxes imposed mainly by emerging countries can range from between 5-20% for iron ore and 10-35% for scrap, pushing up international prices significantly. Additionally, emerging countries producing steel are also imposing export restrictions on the export of scrap, giving an unfair cost advantage to the local industry.

The combination of the above factors, basically pushed by the increasing demand from industrialising economies, has resulted in serious price increases for both iron ore and scrap. The cost structure of steel production has gone through a significant change. In 2005, the cost of iron ore in the production process for Western Europe accounted for slightly above 20% against an estimated 40% in 2010.[36] The extra costs and risks (because of difficult planning and hedging) are also problematic for the steel industry's customers, as costs are passed on down the supply chain as far as possible.

· Non-ferrous metals industry

The non-ferrous metals[37] industry can be characterised by competitiveness issues similar to those the steel industry faces. Trade restrictions and subsidies are often applied by countries producing raw materials. The industry incorporates a range of activities along the value chain, including mining, smelting, recycling and refinery upstream, and second processing and fabrication intermediaries further downstream. The products of the industry, non-ferrous metals, are important inputs for a range of economic activities, such as transport, mechanical engineering, aerospace, construction, packaging, electricity and energy, consumer electronics, medical devices etc.

The inputs needed by the non-ferrous metal sector include virgin metal ores and concentrates and recyclates. The European non-ferrous metal industry is highly dependent on the imports of these metals, including ores, concentrates and refined metals and scrap. Raw material costs can range from 49% to 85% of total production costs in the industry, depending on the subsectors and type of products. The balance of supply and demand determines the price of the metals on the exchanges.

The non-ferrous metal industry, like the steel industry is very often targeted by trade distortion measures, in the form of export restrictions, trade subsidies and state support in non-EU countries.[38] These measures, coupled with increasing global demand, have resulted in prices hikes and volatility on the global market. They result in relatively higher input costs and higher levels of uncertainty for the European non-ferrous metal industry. Several metal-producing countries, such as China, Russia, and Ukraine have applied trade restrictions on exports of many non-ferrous metals and their scrap, such as aluminium, copper, nickel and tungsten[39]. Export quotas and bans reduced export VAT rebates have often been placed on these materials. Export taxes on them typically range between 5 and 30%, depending on the producing country and the type of raw material.

One of the most debated trade restriction issues has recently been the export quotas, export taxes and VAT refund imposed on rare earth exports from China. Rare earths are not non-ferrous metals, though they are sometimes used as inputs for non-ferrous metal production. World prices in these raw materials are currently typically 20-40% higher than Chinese domestic prices.[40]

In addition, indirect or direct subsidies, such as providing access to lower-cost energy for export-oriented smelters, or stimulus packages, ensure competitiveness advantages for the raw material producing countries, notably Russia and China.

· Automotive industry

The automotive industry, as a downstream industry, feels the indirect effects of limited access to raw materials. Due to rising raw material input costs in the steel and non-ferrous metals industry, it faces serious challenges, since cars are complex products consisting largely of steel, non-ferrous metals, as well as polymers, rubber and glass. The industry is also affected by the risk associated with the use of critical raw materials. As a result of the future developments in car-design, the demand for critical raw materials is expected to increase. Environmental standards and requirements and customer convenience play an especially crucial role here. According to the European Automobile Manufacturers Association (2010), the demand for rare earths and lithium will rise, due to more use of advanced electronics, magnetic materials, new surface treatment systems and alternative propulsion technologies.

Rising prices of raw materials may have a significant negative impact on the materials input costs of the sector, so customers are expected to face higher prices for end-products. A study on resource productivity[41] points out that if the prices of more raw materials inputs used in the car production go up, the product price for the final customer would also go up significantly.

· Chemicals industry

The competitiveness of the European chemicals industry is affected by rising prices for raw materials, and the emergence of newcomers better placed to benefit from control of advantaged feedstocks. The European chemicals industry is a significant supplier to other sectors and its competitiveness is highly dependent on imported raw materials, as these costs account for some 34% of manufacturing costs, while energy accounts for 2%. Oil and gas are the main inputs for the industry, so new players from oil-and gas- producing countries and emerging economies, especially China and India create challenges for the European chemical industry. The Middle East increasingly uses its favourable feedstock availability to develop its own integrated chemicals production chain, thereby strengthening its position in a wider range of basic petrochemicals. The European chemicals industry is gearing up to face the emergence of companies in the Middle East and Asia, where proximity of feedstock is considered is an advantage for chemicals producers, while developed countries try to leverage their traditional strength in technology and expertise.[42]

Trade barriers and unfair trade practices imposed by non-EU countries such as export restrictions, export taxes for ethylene feedstock, gas, palm oil, and key minerals (e.g. fluorspar), also create a substantial burden for the European chemicals industry.[43]

· Pulp and paper industry

The pulp and paper industry also faces challenges stemming from a shortage of raw materials, even though wood, the primary raw material for the industry, is widely available in Europe, especially in Finland and Sweden. The competition for raw materials in this sector is not primarily due to non-EU countries protecting their resources nor to the depletion of the materials. For wood, the challenge is due to the bio-energy industry competing for access to the material, facilitated by European environmental regulations, and by the difficult mobilisation of wood due to the small ownership structure of forests, biodiversity protection and varying efficiency levels in Member States’ action plans. Furthermore, the rise in exports of recovered paper to non-EU countries creates an additional pressure on the industry. Industry representatives estimate that the supply of wood will not be able to meet demand for both industries (biomass and paper) at current rates.[44]

Raw materials consumption in the last two decades went through a significant change in the European pulp and paper industry. Use of wood pulp decreased more than 10 percentage points during this period, and was practically replaced by the use of recovered paper. In 2009 some 88% of wood came from EU sources (plus Norway and Switzerland), the remainder originating mainly from Russia. CEPI sees a gap of more than 200 million m3 between supply and demand of wood by 2020 due to an increase both in traditional demand (e.g. paper and construction) and non-traditional demand (bio-energy).

4.3.2.2. Responses to shortages of raw material at industry level

Companies in different sectors have developed various strategies to reduce import dependency and to mitigate the costs and risks related to shortages of raw materials. These include more efficient use of materials, increased use of recovered and recycled raw materials, and use of substitute/alternative materials as well as organisational strategies such as outsourcing or relocation of the production process. From the long-term sustainability point of view, the first group of solutions are beneficial, while the others may have rather negative effects on European's growth and employment.

Resource efficiency, including raw material efficiency, is one of the most important challenges for European industry. Sustainable production has become an integrated part of EU industries’ competitiveness strategy, albeit to various degrees, depending on the technological possibilities and the markets in which the industries are operating (see Chapter 5).

Improving material efficiency is a constant objective for companies, since it leads to cost reduction and increased competitiveness. Material efficiency can be improved in the four main steps of product manufacturing, i.e. production of raw materials (e.g. exploration and extraction of raw materials); product manufacturing (streamlining different stages of production, using new production methods); use; and end-of-life[45].

Use of recycled materials can contribute to reducing dependency on primary raw materials, depending on the sector and products. Many raw materials in process industries can be replaced by others. This is especially important for critical raw materials, where abundant materials can be a substitute for potentially scarce and critical ones (e.g. indium for zinc).[46] Minimising losses of raw material, increasing the use of recycled and recovered materials, and substitute/alternative materials are of key importance in reducing primary raw material import dependency, thereby improving the competitiveness of European manufacturing industries. All of these dimensions are supported by the European Commission through initiatives such as the Factories of the Future Research Programme, Sustainable Process Industry Public Private Partnership, and European Green Cars Initiative, etc.

Insufficient supply and rising prices of materials force companies to invest in more efficient modes of production, which can reduce waste. Another increasingly used method, recycling has often been identified as an important component of a better, sustainable resource management. The European recycling industry is the most competitive in international comparison. There is considerable potential to increase the share of recyclates in European manufacturing sectors. However in the sectors selected, the use of secondary raw materials is relatively high compared to third countries. Recycled and recovered material has also been widely used in the EU steel industry, car manufacturing, and pulp and paper. The chemicals industry is different in the sense that the recovered and recycled chemicals and especially polymers (plastics) cannot be used to replace virgin raw materials. Focusing more on R&D efforts, substitute/alternative materials are being increasingly used in some downstream industries.

Various organisational strategies can ensure the supply of sufficient raw materials. These include integration along the value chain, relocation of production or outsourcing. The most common examples will be illustrated in the relevant sectors.

Below, these different responses to shortages of the raw materials are discussed in more detail.

· Steel industry

Resource efficiency and increased use of scrap could be a solution for problems arising from supply of raw materials for the steel industry. Steel is 100% recyclable Due to the long life of steel products, approximately 45% of steel produced in the EU comes from steel scrap. In comparison, Chinese recycled scrap steel accounts for only 8% of total steel production, while for the U.S., the total is 33%.[47]. Increasing use of scrap steel in the sector makes it possible to reduce dependency on imported iron ore and contributes to sustainable production. However, the steel industry has to contend with the increasing export of scrap from the EU-27, while non-EU countries impose export restrictions on it. According to the criteria of the "End of Waste Regulation", scrap metal is treated as a waste product, so there are no export restrictions. EU-27 exports of ferrous waste and scrap more than doubled during the last decade, generating a significant loss of resources for the European steel industry.

There are several initiatives to increase resource efficiency (including material efficiency) in the steel industry. The European Steel Technology Platform (ESTEP), which brings together research and other institutions, the European Commission and Member States, was set up with the aim to give new impetus to European research into materials and processes. One of the aims of the ESTEP Research Agenda is to ensure more sustainable and profitable steel production in Europe through innovation and new technologies.

New production methods with electric arc furnaces (EAF) can use up to 100% scrap as input for steel. However, as scrap is scarce, partly due to European exports, its use is still quite low and the possibility of boosting the amount of steel produced with EAFs is limited. At present, research is being carried out into making use of secondary powder material (resulting from primary steel making) as a raw material alternative in EAF steelmaking. The breakthrough technology project of the steel sector (ULCOS) receives funding from Research Fund for Coal and Steel (RFCS) and the EU 6th framework programme.

Regarding organisational strategies to mitigate the effects of the oligopoly in the iron ore market, vertical integration is a possibility for steel makers to help tackle raw material scarcity. Traditionally, control over mining activities has often been led by smelters, and there appears to be a trend towards higher levels of vertical downstream integration between the mining and refining stages of production.[48] Backward vertical integration, investing in new mines or buying up existing ones, is often observed in the steel industry outside the EU as a strategy to ensure better access to raw materials and lower transaction costs.[49] Chinese steel companies, for instance, have been actively investing abroad in iron ore mining to secure supplies.[50] This international presence is increasingly facilitated by state support. But EU-based producers have also started to take initiatives for vertical integration, e.g. Arcelor-Mittal, the world's leading steel company, has secured in-house supply of almost half the company’s iron-ore needs. For the EU steel industry, it is strategically important to ensure future access to raw materials through increasing vertical integration through acquisitions, mergers and joint ventures/partnerships. However, this option is possible only for global players with the financial resources and the geological expertise to make such investments.

· Non-ferrous metal industry

Non-ferrous metals are infinitely recyclable. However, primary resources are essential to cover total demand and produce high-quality products. Recovery and recycling rates within the EU are among the highest in the world. Secondary raw material use in the sector has increased substantially. The two main sources of non-ferrous metal scrap for recycling are industrial waste streams and end-of-life scrap. While industrial waste is used efficiently, as regards the latter there is still much potential to increase use of end-life scrap. Regarding the most important raw materials in this industry, more than 70% of EU refined lead production stems from scrap metal, along with, nearly 60% of aluminium and over 40% of refined copper.

Recycling of scrap metal is essential to maintain the competitiveness of the EU non-ferrous metal industry. However valuable resources have been shipped to developing and emerging countries. This is one of the biggest problems the sector is facing. For example the EU has lost a significant amount of its own copper scrap resources, almost 1.2 million tonnes in 2009, of which nearly 80% has ended up in China. Rising demand for aluminium scrap is even more striking. In 2000, the EU was a small net importer, while in 2009, more than 1.1 million tonnes of aluminium scrap were exported. It is thus important to improve the Waste Shipment Regulation to reduce exports of non-ferrous scrap metal, particularly aluminium and copper.

R&D and innovation have an important role in improving material efficiency, developing new production processes and substitutions in the non-ferrous metal industry. The industry is constantly looking for cheaper substitutes with the same or better qualities than the originals. The European Aluminium Technology Platform, set up in 2005, is a key tool to ensure cost, eco- and material efficiency to support the competitiveness and sustainability of the largest subsector in the non-ferrous metal industry.

· Automotive industry

Since cars consist of numerous different parts, the automotive industry is one of the best examples to illustrate how soaring prices for raw material, along with lack of supplies and environmental regulations, have led to more efficiency and more use of non-primary raw materials. Resource-efficient technologies and the use of recyclates and substitutes are the two main strategies the automotive industry is deploying to reduce dependency on raw materials.

The industry is one of the most innovative sectors in Europe. According to ACEA, the sector spent more than EUR 26 billion or 5% of their turnover on R&D in 2009 and accounted for more than 50% of the global patent applications in the automotive sector. The industry files around 6,300 new patents each year in the following fields: materials technology, recycling, ICT and telematics, energy and fuels, drive-train development, aerodynamics and ergonomics. German auto manufacturers, a vital part of the European automotive industry, spent almost 10% of their total turnover on innovation purposes in 2009. Most of this was spent on improving product quality and developing new technological solutions. According to statistics, only 6.8% of the expenditures on innovation led to cost reduction[51].

Resource-efficient technologies are increasingly being used in the automotive industry. Thanks to efforts by manufacturers to reduce waste in the period between 2005 and 2009 the total waste per unit produced (excluding scrap metal) went down by 9.9% (see Figure 4.20). The total waste in the sector decreased, by 22.6% over the same period.

Figure 4.20: Waste: excluding scrap metal

Note: Data refer to passenger cars.

Source: ACEA, 2009.

The recycling of scrap cars is of key importance, which is adequately regulated by the End-of-Life Vehicle Directive.[52] The Directive on Reusability, Recyclability and Recoverability of motor vehicles[53]set new requirements for vehicle recycling. In 2008 total reuse, recovery and recycling rates varied between 79.8-92.9% in the Member States, with Germany having the highest rate in Europe.

A technical approach to finding substitutions is at the core of the automobile manufacturing industry's R&D agenda.[54] ACEA estimates that the first significant volumes for recycling of electrical vehicles, which contain rare earths, cobalt and lithium, will come around 2025-2030 at the earliest. Demand for these materials is expected to boom around 2015-2020, so the industry hopes to have a new generation of batteries based on other materials by 2025-2030. To meet environmental, safety and price demands, the use of light, smart and innovative materials, such as composites, and the efficient use of high value-added metals will be inevitable in car manufacturing. Research activity focuses on materials such as carbon fibres, natural/glass fibres, high strength steel/aluminium, magnesium technologies, and hybrid materials.[55]

The European automotive industry is involved in a wide range of collaborative European research and development projects. The European Council for Automotive R&D (EUCAR) plays an important role and provides automotive manufacturers with a platform for identifying common pre-competitive European R&D. Some innovative projects in the field of materials and manufacturing are worth mentioning, see Box 4.1.

Box 4.1: EUCAR Projects in the field of materials and manufacturing

Multi-level protection of materials for vehicles by smart nanocontainers The aim of the project is to develop new active multi-level protective systems for future vehicle materials. A multi-level self-healing approach will combine several damage prevention and reparation mechanisms within one system. These will be activated depending on the type and intensity of the environmental impact.

Multi-functional materials and related production technologies integrated into future industries: This project, which closed last year, aimed to introduce new materials and processes, to reduce cost and development time and increase customisation possibilities. The following achievements have been reported.

- weight reduction of 18% through flange reduction for laser welding of mass flow meter (MFMs)

- single part roof bow by stretch bending to achieve scability and re-use

- 44% increase of MFMs utilisation rate

- 2.7 kg weight reduction with nano-composits for the rear spare wheel well

- 20% increase of frontal passive safety through integration of APM foam into rails

MyCar Project enables an ultimate degree of customisation, which could allow every customer to purchase a unique vehicle. The project will further develop and integrate technologies that enable the vehicle assembly process to become self-adaptive to any kind of market variation, capable of producing cars with an extended degree of personalisation. MyCar aspires to integrate the customer into the automotive industry's assembly processes.

Adaptive Control for Metal Cutting project: This project aims to develop a generic modular adaptive control platform that will allow metal cutting processes to respond to changing circumstances. The main goals are:

- Robust production processes by optimizing the performance of machining processes;

- Reconfigurable production enabled at process level;

- Development of Adaptive Machining Systems for difficult metal cutting operations;

-Achievement of an online quality control system for mass customisation and small batch production.

Source: EUCAR, http://www.eucar.be/projects-and-working-groups/projects-and-working-groups, accessed on 06.07.2011.

However, from a general sector perspective, current critical raw materials might be substituted for various raw materials before they can be recycled. Yet the same materials might be in great demand for applications in other industries, which will then definitely require adequate recycling technologies as a valuable option to sustain future access to critical raw materials.

As regards organisational strategies responding to raw material challenges, outsourcing of manufacturing cars or car parts can be seen as an option to secure access to raw materials. This concerns not only rare-earths, but also aluminium where China has recently turned from net exporter to net importer.[56] Setting up part of the production in China and South-East Asia may enable access to raw materials at better prices. The European car manufacturers have increased production capacities in these emerging countries, which could enable access to input materials at a lower cost by avoiding export restrictions.

· Chemicals industry

Decreasing availability of raw material and increasing prices require raw materials efficiency in the chemical industry too. From economic and sustainability reasons, a decrease in raw material intensity is unavoidable.[57] R&D and innovation play a significant role. In general, the chemical sector is the most innovative industry. Its share of all EU manufacturing patent applications was 16% in 2007.

The industry is largely based on oil and natural gas, but due to material and cost efficiency concerns, the share of renewable raw materials[58] used in the manufacturing process has increased substantially. A broader use of renewable raw materials also contributes to reduce environmental impacts of the use of fossil fuels. However, using renewable raw materials means a challenge as regards competition for land use, due to increasing demand worldwide for biomass, food, fodder and bioenergy.[59] The chemical industry was estimated to account for around 8% of total feedstock use in the industry. There is still significant potential to increase the share of renewable raw materials in the medium and long term. Nonetheless, this process is dependent on developments regarding the overall availability of these renewable raw materials and the degree of economic viability of new production technologies. New processes in the industry, such as chemical leasing (see Chapter 5) or other new materials, such as CO2 and other unconventional carbon sources open up new possibilities for the sustainable production of fine chemicals.[60] Furthermore, the European Technology Platform for Sustainable Chemistry supports chemistry biotechnology and chemical engineering R&D and innovation in Europe.

As regards organisational strategies the chemical industry can provide interesting examples. Resource-seeking FDI, securing raw material inputs at lower costs (though often coupled with other investment motives) is often applied by raw material intensive industries. Constraints for the further development of the chemical industry in Europe include existing trade barriers and unfair trade practices. These barriers may in certain cases prompt the relocation of activities from Europe to other parts of the world. This strategy provides access to materials under similar economic conditions to those enjoyed by he main global competitors.[61] Obviously relocation can be profitable for companies, yet is sub-optimal from a European growth and job perspective.

· Pulp and paper industry

Raw materials efficiency is one of the key drivers for the competitiveness of the EU paper and pulp industry. The European paper industry is the leader in collection, sorting and recycling of paper. The industry's recycling was 68.9% in 2010[62] and has risen substantially over the last 15 years. Recycling is thus relatively high in Europe compared to third countries (see Figure 4.21). Today, recovered paper accounts for 44% of total raw materials used in papermaking. This means a rise of over 16 percentage points, as compared to 2000. However, as is the case for scrap metal, paper recovered in Europe is increasingly exported, notably to China, where demand for pulp and recovered paper has been growing and the industry is subsidised. About 20% of the recovered papers go outside Europe per year, creating a significant loss for the European industry. The industry plans to increase the use of the recycled inputs within Europe instead of exporting these for use in the rest of the world.

Figure 4.21: European paper recycling

Source: Adapted from European Recovered Paper Council, Monitoring Report 2010, accessed on 29.06.2011.

Further improvement is now sought in the eco-design of end products to improve the efficiency of the recycling process. The Forest Based Sector Technology Platform was set up to assist the forest-based sector, including the pulp and paper industry and its shareholders in fulfilling their future research, development and innovation needs. For example, new technologies are being developed to improve the material and energy efficiency of recycling operations.

4.3.2.3. Policy implications at industry level

The selected European industries are facing serious competitiveness challenges due to raw materials scarcity. They are affected by the distorted global raw materials market and/or by EU legislation and policy.

As regards the steel industry, challenges for European policy in the near future are to make the structure of iron ore supply more competitive, eliminate trade distortions in the supply of raw materials, and create breakthrough technologies towards low-carbon production. It is important that competition policy, including merger control, continue to be enforced in the iron ore supply market where the degree of concentration is already high. Continuing negotiations with resource-rich countries in FTA and WTO may lead to a more balanced trade situation. Furthermore, the EU should continue to promote recycling and to address obstacles to the development of recycling industries. Finally, it is advisable to continue and strengthen the support for investments in research through e.g. RFCS, Research Framework Programme or other funding instruments.

One of the two main issues considered as important for the non-ferrous metal sector is the quality of recycling, in terms of the processes to ensure optimum output. Despite increased recycling, another issue for the sector is access to primary materials (ores and concentrates) so that can respond to increasing demand and provide the required quality. For recycling, turnover time plays an important role. Policies that promote the collection and treatment of scrap and end-of-life goods are welcomed in this respect.

In a complex industry such as car manufacturing, the competitiveness issues are driven by a number of different factors. In the short term a greater and more immediate effect can be achieved by policies to stimulate, increased resource efficiency by improving production organisation and by promoting equal opportunity access to critical raw materials on international markets. Depending on the effectiveness of negotiations, trade policy can bear fruit as well in the relatively short term. In the long term the competitive position of European car manufacturing can best be promoted by supporting research and development efforts to achieve more extensive and more effective use of substitutes for critical raw materials and a greater general material efficiency in general. Policies promoting the recycling of critical raw materials can achieve a positive impact not only in terms of import substitution but also in terms of improving energy efficiency and limiting the environmental impact of the industry.

The EU chemical industry would benefit from further global tariffs dismantling and continued support and promotion of general WTO rules to address trade problems related to the discriminatory supply of raw materials. At bilateral level, the EU should continue to address the issues of unfair trade practices that cause imbalances in access to raw materials and world markets. It is desirable to continue to support the R&D, innovation and the further expansion of infrastructure in order to maintain and promote the technological advantage of the European chemicals industry. In particular support should go in particular towards increasing energy and resource efficiency, reducing CO2 emissions and expanding the use of renewables. Although it is too early to envisage considerable substitution of fossil-based feedstock by renewables, it is desirable to support market developments towards renewable raw materials with the focus on the sustainability of the markets for both inputs and outputs. Steps should be taken to define standards and criteria for products, including sustainability criteria.

Given the competing use of wood and land by other industries and for other purposes, it is advisable to stimulate integrated and prioritised land use policies at Member States level. At EU level, a balanced approach embracing different policy themes (waste, recycling, competitiveness and trade, raw materials and management of natural resources) should be considered in order to prioritise on objectives where overlaps occur and to clarify this towards all actors involved, e.g. by defining a cascading order of use. The European Commission has launched initiatives on these matters in the recent past. With respect to exports of recovered paper, waste paper should be recycled close to the place of consumption, keeping secondary materials within European borders.

4.3.3. The role of the non-energy extractive industry

The main company strategies and possible policy responses to tackle the scarcity of raw materials have been discussed in the previous section. Besides these, as the second pillar of the Raw Materials Initiative points out, the non-energy extractive industry has great potential to mitigate import dependency on several raw materials. It is therefore it is worth mentioning its role and the challenges it is faces in more detail.

The non-energy extractive industry can be divided into three main sub-sectors, according to the different physical and chemical characteristics of the minerals produced and on the downstream industries they supply:[63]

· construction minerals and aggregates

· industrial minerals, and

· metallic minerals

4.3.3.1. Challenges in the non-energy extractive industry

The micro-economic analysis[64] revealed that the current EU non-energy extractive industry is in a relatively good competitive position in comparison to the rest of the world. Overall its apparent productivity is higher and in contrast to most of the other industries, its profitability is comparable. This suggests that the EU companies in this sector provide a viable basis for further development and as such an avenue for alleviating some of the raw materials pressure for the downstream industries.

It is estimated that Europe still has significant extracting potential for non-energy raw materials.[65] In the past, given the low prices of raw materials, it was sometimes more profitable to import these than to extract them. That is why there are still several large deposits, and there is potential to benefit from these. However, the EU cannot expect to be self-sufficient in providing for its material resource needs.

A number of concerns regarding the competitiveness of the non-energy extractive industry are emphasised by the industry and the European Commission.[66] These issues include the need for a more detailed and systematic monitoring of raw materials in Europe. Geological surveys are carried out at Member State level, yet mutual consistency, as well as the introduction of advanced techniques at EU level, such as GMES,[67] are essential for prioritising and defining further actions and would facilitate a co-ordinated joint knowledge base. Another challenge is the competing land use, mostly related to stringent environmental regulations, such as Natura 2000. Start-up costs are relatively higher compared to non-EU countries, due to relatively higher insurance requirements, more administrative regulations, and administrative fragmentation. The industry indicated that the EU financial sector is less inclined to invest in mining projects than counterparts in e.g. the U.S., Australia and Canada, where more financial expertise and capital is available.

4.3.3.2. The role of innovation in the future of the non-energy extractive industry

The non-energy extractive industry has viewed innovation in resource-efficient and sustainable production technologies as an important driver for its future competitiveness in Europe. There have already been important policy initiatives have already been taken such as the European Technology Platform on Sustainable Mineral Resources, which aims to modernise and reshape the European mineral industry to secure the future supply of/access to raw materials. It plans to do this by supporting the revival of exploration of Europe’s mineral potential; developing innovative and sustainable production technologies; implementing best practices; reuse, recovery and recycling as well as new product applications; and creating European added value through RTD-based technology leadership, education and training.

New technology innovations help to overcome environmental and social objections to non-energy materials extraction in the EU. For example, through subsea mining exploitation of raw materials located deep offshore would contribute to solving the complex worldwide equation linking security of supply, sustainable development and industrial competitiveness. Intelligent Deep Mine provides eco-innovative and intelligent exploration and extraction. Optimising extraction and processing of resources throughout their lifecycle or using mines for geothermal energy production at the end of their life are all expected to contribute to sustainable raw materials extraction.

4.3.3.3. Policy implications

One of the major policy issues is working towards an integrated policy vision on developing of the EU non-energy extracting industry, to make it consistent with land use and environmental policies. The industry would expect this to improve the investment climate, especially since investments are typically long-term.

Much of the authority on mining and land use lies with the Member States. This is a barrier to the creation of a common policy on these matters. A clear European vision could steer Member States in their own policy choices in a coherent manner. That is why the European Commission sees its current role as a facilitator for the exchange of best practices.[68] A European Commission report entitled, ‘Exchange of best practices in land use planning and permitting’ (2010) presented best practices in the field of land use planning policies for minerals, the geological knowledge base and networking, and integrating subsurface information in GMES. In this respect, three practices are considered important in promoting investment in extractive industries:

– Defining a national minerals policy, to ensure that mineral resources are exploited in an economically viable way, harmonised with other national policies, based on sustainable development principles and accompanied by a commitment to provide an appropriate legal and information framework;

– Setting up a land use planning policy for minerals comprising a digital geological knowledge base, a transparent methodology for identifying mineral resources, long term estimates for regional and local demand and identifying and safeguarding of mineral resources (taking into account other land uses), including their protection from the effects of natural disasters;

– Putting in place a process to authorise mineral exploration and extraction which is clear and understandable, provides certainty and helps to streamline the administrative process (e.g. the introduction of lead times, permit applications in parallel, and one-stop-shops).

On the operational side of mining, the "time to permit" is a hindering factor. Continued dialogue between Member States to align the permitting process according to best practices in other countries is necessary. The system of one-stop shop system, for example, could be elaborated in all Member States.[69]

Insurance requirements are another concern. Aligning these with the actual size of the mine or quarry, rather than the eventual full size, to be reached only in the future, would considerably reduce capital requirements upon start-up.

Finally, promoting for R&D and innovation for sustainable extraction is crucial for this industry’s (future) competitiveness.

4.4. Conclusions and policy discussion

The goal of this chapter was to gain a better insight into five aspects of access to non-energy, non-agricultural raw materials and the challenges involved:

1. global demand and supply

2. the competitiveness effects in the selected industries

3. the responses given at industry level to raw materials challenges (including the role of recycling, R&D and organisational strategies)

4. the EU policies that can be developed

5. the role of the EU non-energy extracting industry in alleviating the EU industry’s raw materials vulnerability.

The approach in the original research was mainly qualitative in nature, drawing on existing literature and data, and using inquiries among representatives of a selected set of EU sectors for which competitiveness effects were identified. The selection of the sectors was based on insights from the literature review, experts in the field and from the overarching EU association Business Europe. In contrast with existing studies, the specific focus of the present study was on the sectoral and competitiveness angle.

4.4.1. Competitiveness effects

The analysis made clear that the prices of raw materials have been increasing significantly over the long term with a dip during the financial crisis. For the industries surveyed, the share of virgin raw materials was significant ranging from one third in the steel sector to more than two thirds in the paper and pulp industry, chemicals and car manufacturing. Here, non-energy raw materials include not only metals and minerals, but also crude oil, gas and wood.

In comparison with the rest of the world, the micro-economic analysis[70] indicated that steel, non-ferrous metals and chemicals in the EU typically have higher productivity levels, yet end up with lower profitability rates. The trends along the (global) business cycle were usually similar. This suggests that EU companies on average face with relatively higher costs, which makes the issue of increased raw materials prices particularly sensitive. For other sectors such as the EU paper and pulp industry and EU car manufacturing, the profitability, patterns were more complex. In both sectors, a positive productivity gap with the rest of the world could be observed. Yet the EU paper and pulp industry showed a gradual decline in profitability while the EU car industry improved its profitability over time, unlike the companies in the rest of the world. In the car industry, raw materials issue has a different impact than in the paper and pulp industry. A potential explanation might be that there is more scope for the EU car industry to invest in R&D and innovation in trying to find substitutes for expensive raw material inputs. Moreover, the competitive use of wood by less regulated sectors (e.g. waste incineration) and the ‘export leakage’ of recovered paper due to high demand in the BRIC countries indirectly add to the costs of the paper and pulp industry.

Sector interviews confirmed that market concentration on the supply side contributed significantly to the price increase in raw materials, especially in the case of commodities such as iron ore, copper, zinc and lead. In the case of iron ore, one can observe an increased market power of the global mining companies. This is reflected in their imposition of short-term supply contracts on the steel mills, which in turn try to pass the resulting risks and price increases through to their customers, some of which are large players, such as car manufacturers, though the others are mostly small players, such as the metal working industry. The effects of market concentration can nonetheless be bypassed through company strategies such as vertical integration. Yet such a strategy that is not feasible for all companies in the EU, and certainly not for most SMEs.

An important aspect for the competitiveness for all selected sectors is the absence of a global level playing field in trade. Virtually all manufacturing sectors surveyed depend to a large extent on imported raw materials. Export restrictions on certain materials in BRIC countries, implicit subsidies, and soft loans place EU companies at a relative cost disadvantage. However, a switch to EU raw materials is often not possible, even though the EU is a global leader in the production of certain minerals. This is because the materials are not available in the EU or not in the specific grades required for product quality process efficiency.

4.4.2. The potential of recycling and innovation

In the investigated industrial sectors two main drivers for reducing dependence on primary raw materials can be identified. The first driver is purely economical, related to economic gains from material efficiency, reuse of recycled materials (such as in the steel, non-ferrous metals, pulp and paper and the car manufacturing industries) and use of cheaper substitute materials. The second driver originates in requirements imposed by safety and environmental regulations, which primarily stimulate recycling activities and resource efficiency, particularly in the chemicals and in the automotive industries.

When the industries described in this report are considered in terms of their relative performance in recycling, the steel, non-ferrous metals and paper and pulp industries are clear leaders. This is mainly due to two facts. First, metals and paper are highly recyclable products, where the quality and utility of the recycled material is almost the same as that of the virgin raw materials. Second, one should note the relative upstream position of these industries in the whole production value chain. There are a number of other downstream industrial sectors (such as car manufacturing, electronics, printing and publishing, etc.) whose end products are subsequently recycled. In the automobile industry, for example, the high degree of reuse and recycling is mainly driven by the high recycling capabilities of the upstream steel and non-ferrous metals industries.[71]

A more complicated situation with recycling is observed in the chemical industry. It possesses quite substantial chemical processing capabilities, which should allow it to perform many of the operations required for the recycling of chemicals. Nonetheless, the intensity of recycling in this industry is primarily driven by safety and environmental regulations, rather than by reuse and cost-saving factors.

What is the potential of the EU recycling industry in alleviating EU industry’s raw materials vulnerability? Looking at the current situation with recycling in the EU, economic gains from raw materials recycling are relatively high in most of the industries considered. The additional efforts currently undertaken in Europe to expand the recycling activities are primarily driven by the environmental and safety concerns. Additional stimuli for recycling are created by regulations to reduce the CO2 and improve efficiency.

The untapped potential seems to lie more in improving framework conditions, which are linked with policy, and in applying the latest methods and techniques to increase resource efficiency. Examples are materials recovery from municipal solid waste, self-disassembling joints, and specialised plants for complex recycling. Also, promoting the use of product-service systems improves material efficiency and recycling performance as well as reuse. Another interesting avenue for achieving sustainable production is the organisation of local production activities within a setting of industrial symbiosis.

Regarding the potential of the EU recycling industry to reduce vulnerability with respect to raw materials likely promising developments may come from adjusting production technologies to ensure greate