ASPI - Our national interest requires more than just headlines on critical minerals

By Matt Keogh MP for ASPI - After Covid-19 (Volume 3): Voices of federal parliament

01 December 2020

As governments continue to navigate the fallout from the Covid-19 pandemic, it’s becoming increasingly clear that many of the issues we’re confronting aren’t new. They’re merely pre-existing challenges exacerbated by the current circumstances we find ourselves in.

Long before Covid-19, there was discussion about the need for Australia to diversify its export commodity offering and customer base. While this has never been about stopping what has worked extremely well for our nation to maintain a high standard of living, it’s about continuing to grow the pie into the future and de-risk our high reliance on the sale of a limited number of bulk commodities to a small number of customers (the vast majority going to one in particular). Countries around the world are facing this same problem but in reverse: a growing need to use processed critical minerals, including rare earths, when nearly all of the supply is available from only one country.

Those conundrums have been intensified by the Covid-19 crisis, making it even more crucial now that as a nation we make the most of our natural advantages to not only diversify our own economy but to seize the opportunity to alleviate supply issues for others around the world at the same time.

Australia’s resources sector currently contributes about 10% of Australia’s GDP, amounting to over $250 billion in exports in 2018–19 (DFAT 2020). China is Australia’s top export market, valued at $153 billion or 33% of Australia’s total exports (Tang 2020). According to recent figures from the Department of Foreign Affairs and Trade, China currently imports $79.5 billion worth of iron ore, $13.8 billion of coal, and $16 billion of natural gas from Australia (Nally 2020).

Unfortunately, events in the lead-up to and during this pandemic have highlighted vulnerabilities in Australia’s traditionally reliable trading relationships and supply chains.

This year began with plans for continued investment in liquified natural gas (LNG) export infrastructure across the world, as projected demand remained strong for years to come. But, as the coronavirus spread across the world, lockdowns aimed at halting its spread put such a dent in demand that experts predict it will take the industry years to recover. Gas prices have plummeted to historic lows, making it unprofitable for many companies to sell those cargoes that haven’t already been cancelled by buyers across Asia and Europe.

The future of major planned LNG projects in the Browse Basin off the coast of Western Australia, which were expected to drive the state’s economic development for decades to come, is now uncertain. Although demand for gas in Asia (mostly from China, Japan and South Korea) is expected to remain consistent until 2040, growth in developing countries is less certain. Infrastructure is an issue, as is affordability, as imported gas must compete with often less expensive domestic coal in such countries, as well as the increasing use of renewables (Flowers 2020; Seymour & Wilson 2020).

Conversely, our iron ore industry has been almost completely unaffected through this global pandemic, and demand (predominantly from China) has remained strong for Australia’s most valuable export. While current economic estimates suggest that Australia can sustain iron ore production for at least another 50 years, some experts predict that demand for iron ore from China and globally will peak (and the need for input materials with it) in the mid-2020s (McKay 2020). Further, the development of a high-grade iron ore province in the West African nation of Guinea looms as a threat to Australian miners. If China continues to develop other iron ore fields, then it will eventually secure alternative supply (DJTSI 2020). All of this puts pressure on Australian miners to find alternative export markets.

We’ve seen in recent months how easily once-strong export sectors can be crippled at the drop of a hat, as evidenced by China’s decision to place high tariffs on Australian barley. Now our wine industry is under threat, too, after China launched an anti-dumping investigation into Australia’s $1 billion export market in mid-August (Dziedzic 2020).

What these unexpected developments have in common is that they underscore the unplanned supply-chain and demand shocks that can result from unanticipated world events. Thus, we need to recognise the opportunity that this crisis has presented us to implement policy settings that future proof our economy, diversify our export markets and build our national resilience.

A key part of this is leveraging our endowment of critical minerals, which are becoming increasingly sought after for a wide range of military and technological uses, from powerful magnets to night-vision goggles, turbine blades and lasers, as well as the manufacture of different types of batteries.

Unfortunately, China’s control of between 80% and 90% of the world’s rare-earth mining, separation and downstream manufacturing, and the resulting lack of diversity of supply, presents a supply and strategic risk to Australia and our allies.

Global military supply-chain dependence on critical materials sourced from China will continue unless that changes.

A recent report by Perth USAsia Centre’s Jeffrey Wilson argues that the market alone won’t cure supply-chain vulnerabilities for many of these minerals because the business risks are too high (Seymour & Wilson 2019). ‘Integrated approaches, which adopt a whole-of-value-chain perspective and promote the development of both upstream extraction and mid-stream processing, will be needed to properly secure supply’, notes Wilson. To date, only the Japanese and US governments have been prepared to provide financial assistance to Australian companies seeking to overcome Chinese dependence.

In March, the Japanese Government announced plans to reduce its dependence on China for rare-earth minerals and diversify its supply chains. Japan has moved to increase its stockpiles of rare-earth minerals and will help domestic companies obtain stakes in overseas mines. It’s also supporting companies to build their ability to process raw materials into valuable materials required for communications equipment and other new technologies (Abe 2020).

The US has also been on the front foot, recognising the value of Western Australia’s critical minerals and the importance of controlling its own supply of these valuable elements. The US Department of Defense recently signed a historic contract with Western Australian critical minerals company Lynas to construct a heavy rare-earths separation facility in Texas. Lynas has a proven track record in the sourcing and processing of rare-earth elements and provides the only commercially viable rare-earth separation capacity outside of China.

State governments around Australia have already recognised the value in supporting this emerging sector domestically. In November 2019, the Queensland Government announced $13.8 million in funding for critical minerals to encourage new exploration, reinvestigate old mines and probe existing geological information. The Western Australian Government recently announced a $5.5 billion recovery plan, of which $66 million is going to renewable energy technologies. This is a great first step, but businesses in the sector are calling for support to make technology themselves, not just to install renewable energy systems using imported products (Chew 2020). Creating higher value-added products is the key to opening new markets, fostering more jobs and facilitating secure and sustainable economic growth (AVC 2020).

At the federal level, the Morrison government announced two rounds of research grants (in February 2019 and again in February 2020) focused on critical minerals projects through the Department of Industry’s Cooperative Research Centre (CRC) projects. However, the CRC projects only support short-term, industry-led collaborative research for up to three years (AVC 2020).

In October 2019, the Morrison government also announced the much-referenced US–Australia Critical Minerals Action Plan. It has made a handful of re-announcements since, but nearly a year later we’re yet to see any material developments or any concrete plans for action. The Critical Minerals Facilitation Office, created following the announcement of the action plan, has been equally ineffective. Having recently celebrated more than six months of operation, its only achievements focus on planning to grow the industry, with little substance to show for it.

Thus far, the Australian Government hasn’t been prepared to sufficiently de-risk or provide financial assistance to dozens of companies with promising critical-mineral deposits to bring this to fruition. Now is the time to develop Australia’s capabilities in critical minerals, while geopolitical tensions are high, trade is unstable and our economic future is uncertain.

Australia has the capacity to de-risk the extraction of critical minerals and enable their downstream value-adding domestically through a range of financial support mechanisms. Options open to the government include supporting new emerging projects through concessional loans, loan guarantees or public–private partnerships or even taking equity stakes in projects, which could lower the financial risks to business investment that exist under current market conditions.  Many competitors to Australia in downstream processing benefit from direct government support to undertake such activities.

An alternative approach could be to leverage government procurement policy to de-risk investments in the sector, which wouldn’t necessarily require materially increased expenditure by the Australian Government. Australia has the potential to support the development of local critical-mineral processing and defence-focused specialty battery manufacture by mandating battery and source material requirements in defence equipment purchased by Australia. This could potentially remedy single-source reliance, especially for military use, and underpin the local supply, value-adding and manufacturing industries associated with critical minerals and rare earths for civilian purposes that Australia needs to develop truly advanced manufacturing.

Supporting emerging strategic industries domestically shouldn’t undermine our support for a strong rules-based global trading system. Australia is a trading nation, and our economy will continue to be powered by our high-quality exports. Relationships with key export markets such as China, Japan and Korea will continue to be important in the years to come—our regional security will depend on it.

In fact, this crisis has highlighted the importance of opening up new export markets in our region with rapidly developing countries such as Indonesia and India. The Indian Ocean is home to some of the world’s busiest trade routes—half of the world’s container ships, one-third of the world’s bulk cargo and around two-thirds of global oil shipments pass through its waters. The Indian Ocean rim alone is home to 2.3 billion people and plays host to the full spectrum of economic diversity. Its nations will require critical minerals for different purposes, including batteries, solar panels and wind turbines as, over time, they introduce and increase their renewable energy generation—not to mention the provision of crucial minerals for defence purposes. Western Australia’s and the Northern Territory’s proximity to these new and established trading partners creates an opportunity to be a key regional hub for critical minerals, value-added products and related services.

Supply-chain shocks exist for many reasons, be they increases in demand not being met by supply production, disruptions to transport logistics, or suppliers that prioritise other customers’ demands. We’ve experienced all three of those during the Covid-19 crisis.

This isn’t the last global disaster we’ll face, so now is the time to consider how we’ll respond to the next one. It’s incumbent on our state and federal governments to consider ways to minimise such dramatic shocks in the future, as our strategic circumstances become increasingly complex.

The opportunity for national industry in the national interest must be grasped to develop strategic domestic industries. We must leverage Australia’s natural advantages not only to facilitate much-needed economic development but to diversify trade risk and develop sovereign capability that will better protect our country in these uncertain times.

Matt Keogh MP is the federal member for Burt and the federal shadow minister for defence industry and WA resources.

References

Abe S 2020. Council on Investments for the Future, Prime Minister of Japan and his Cabinet, 5 March online.

AVC (Australian Venture Consultants Pty Ltd) 2020. A case for building resilience into Western Australia’s lithium industry, Chamber of Minerals and Energy and Association for Mining and Exploration Companies, June, online.

Chew M 2020. ‘Opportunity to power WA jobs growth’, The West Australian, 27 July, online.

DFAT (Department of Foreign Affairs and Trade) 2020. Trade and investment at a glance, Australian Government, online.

DJTSI (Department of Jobs, Tourism, Science and Innovation) 2020. The world iron ore market, Western Australian Government, May, online.

Dziedzic S 2020. ‘China launching anti-dumping investigation into Australian wine exports’, ABC News, 18 August, online.

Flowers S 2020. Decarbonisation and peak gas demand, Wood Mackenzie, 31 July, online.

McKay H 2020. BHP’s economic and commodity outlook (FY20 half year), BHP, 18 February, online.

Nally A 2020. ‘Australia–China trade stoush over coronavirus inquiry puts exports—and more—at risk’, ABC News, 15 May, online.

Seymour H, Wilson J 2020. Submission to Joint Standing Committee on Trade and Investment Growth (JSCTIG) Inquiry into Diversifying Australia’s Trade and Investment Portfolio, Perth USAsia Centre, 1 August, online.

Tang E 2020. Australia—A solid trade performance, Australian Trade and Investment Commission, 16 March, online.