OPINION - TIME TO DIVERSIFY & ADD VALUE

By Matt Keogh MP

07 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 are not 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 per cent of Australia’s GDP, amounting to more than $250 billion in exports in 2018–2019 (DFAT 2020). China is Australia’s top export market, valued at $153 billion, or 33 per cent 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. 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 liquefied 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 WA, 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.

Conversely, our iron ore industry has been almost completely unaffected through this global pandemic, and demand (predominantly from China) has remained strong.

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.

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. 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.

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.

Unfortunately, China’s control of between 80 per cent and 90 per cent 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.

“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.

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

State governments 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 WA 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.

Creating higher value-added products is the key to opening new markets, fostering more jobs and facilitating secure and sustainable economic growth.

Published in The West Australian Newspaper on Monday, 7 December. This is an edited extract of an article first published by the Australian Strategic Policy Institute’s After Covid Volume 3 series on Tuesday, 1 December.