Researchers from the University of Wollongong have explored how Australia can remain competitive in the evolving global critical minerals market.
The global economy is experiencing an unprecedented increase in demand for critical mineral resources that will far outpace supply amid the deepening of the net-zero economic transition.
Mineral demand for clean energy technologies is expected to almost triple by 2030 and quadruple by 2040, according to the International Energy Agency. The availability of critical mineral resources therefore remains a key factor in sustaining the ongoing green economic transition and transformation.
How large a role can Australia play as a major producer of critical mineral resources in facilitating a global net-zero economy and mitigating climate change?
The answer, in a nutshell, is “immense”.
In 2021 alone, Australian resources and energy exports earned a record export revenue of $349 billion.
Australia is endowed with some of the largest recoverable critical minerals deposits on the planet, including cobalt, lithium, manganese, tungsten, vanadium and rare earth elements, and is the world’s top producer of lithium.
Australia also produces its minerals to appropriate environmental, social and governance (ESG) standards, with a local mining sector that is highly regulated.
Therefore, with a robust supply chain, the future direction of the global energy transition is undoubtedly charted in Australia as this small, open economy remains a pivotal player in ensuring a reliable, secure and resilient supply of critical minerals.
Critical mineral supply chains involve all segments of the industry, such as processing, refining, purifying, manufacturing and recycling of minerals, as well as all the enabling infrastructure required to support the extraction, supply, and eventual use of the minerals.
Disruption to any segment can result in a supply shock, implying decreased ability to meet demand at every price level, thus raising the prices of critical minerals across all quantity levels.
Most critical minerals are sourced far away from the consuming economy, making them more vulnerable to external shocks along the value chain.
The sources of supply chain disruptions Australia faces can be broadly classified into three major categories:
- Accidental and malicious
- Market-related
- Political
These highlight the need for developing robust supply chains of critical minerals.
Accidental and malicious disruptions can include factors like social unrest, natural disasters, mine accidents, pandemics and war affecting the supply chain. For example, the COVID-19 pandemic led to mine site closures and caused many processing facilities to close or suspend operations.
Market-related supply disruption can include factors such as concentrated production making critical mineral supply vulnerable to trade disruptions, as well as susceptible to oligopolistic behaviour.
China, Russia and Chile are the three top producers of critical minerals. China, in particular, controls around 58 per cent and 65 per cent of global processing capacity for lithium and cobalt, respectively.
Pricing uncertainties for critical minerals in the form of commodities price ‘supercycles’ also make it difficult to establish new supply chains, contributing to the closure of some Australian nickel processing and lithium refinery facilities in Western Australia.
Political decisions can also impact the supply chain of critical minerals. They can lead to changes related to where industrialised states such as Australia secure much needed raw materials or determine whether a country explores potential avenues for increased supply of critical minerals through alternative sources like deep sea mining. Political decisions also shape development of domestic policies and engagement with international agreements and partnerships concerning supply chain development and management.
Despite the potential for these disruptions within Australia, there has been progress in creating policies aimed at strengthening critical minerals supply chains for Australia that are vital for ensuring sustainable energy transition.
The Australian Government’s ‘Future Made in Australia’ plan aims to secure much needed investment in critical minerals projects and build supply chains by increasing the processing and refining in Australia, which will aim to reduce the risk of market-related disruptions.
The combination of production tax credits, trade enhancement initiatives, investment in common-user processing facilities, and significant investment in critical minerals exploration will enable Australia to improve the resilience of supply chains.
In the absence of government support, Australian companies cannot compete with US and Chinese counterparts due to the high cost of mining and processing minerals.
Australia’s participation in the Minerals Security Partnership (MSP), a US-led plurilateral partnership that is an attempt to delink with China, will reduce geopolitical risks by promoting responsible growth across the critical minerals sector among trading partners.
The MSP aims to accelerate public and private investments in the global development of responsible minerals supply chains. However, changing supply chains as envisioned under the MSP is complicated and time-intensive.
Australia also suffers from the high cost of establishing supply chains as compared to its counterparts. For example, building a lithium processing plant in Australia can cost nearly $1 billion, making it unsurprising that the country sends out 97 per cent of its lithium to China for processing. This practice can no longer continue if the aim is bolstering minerals supply chain resiliency.
What are the other options?
The Quadrilateral Security Dialogue (the Quad) regional alliance among the US, Australia, India and Japan is another signature geopolitical strategy to secure supply chains for Australia and reduce the over reliance on China.
One of the Quad’s economic strategies in the Indo-Pacific region is to amalgamate available critical mineral resources to achieve mineral security and help build a more robust supply chain. The importance of bilateral agreements that don’t include China in the development of future supply of sustainable critical minerals is ever more important in minimising the supply chain risks towards net-zero economic transition.
Within this context, Australia’s bilateral agreements on minerals development with the European Union, research partnership on critical minerals with the import-dependent India, and memorandum of understanding with Indonesia on electric vehicles cooperation as Indonesia focuses on downstreaming critical minerals are powerful examples of cooperation to combat supply chains uncertainty.
When it comes to securing supply chain in critical minerals against increasing geopolitical risks, ‘friendshoring’ – selecting partners that are geographically and politically adjacent, as opposed to simply the cheapest supplier – must be a norm and not an exception. This will help ensure countries like Australia are able to manage their supply chains and production by shifting production and trade away from countries considered to be geopolitically risky.
Friendshoring will, therefore, allow a continual access to international critical minerals markets and supply chains.
However, derisking the pricing uncertainties of critical minerals should be the name of the game for developing resilient supply chains, because investment in mineral extraction and production is primarily driven by price signals. This means commodity price volatility can deter large and long-term capital commitments required to develop upstream mineral extraction projects.
The importance of financial derivatives markets that allow for the trading of different contracts such as futures, options and swaps markets to hedge against unprecedented price risks grows significant within this context.
But future markets for critical minerals like lithium and cobalt account for less than one per cent of their respective annual production as compared to more traditional metal markets like for nickel, zinc and copper, which have trade volumes that range from 10–30 per cent. The derivatives market for critical minerals must grow large enough to play a price-stabilising role for critical minerals amid the growing price uncertainties.
Australian Prime Minister Anthony Albanese once said that “critical minerals are the building blocks for a clean energy future, and we are determined to seize this economic opportunity to support local businesses and local jobs”.
Little wonder – some of the key solutions to tacking global climate change by transitioning to a net-zero economy are indeed made in Australia. The local economy can capitalise on that situation by supporting an environmentally and socially responsible critical minerals and rare earths industry and advocating a clean global energy technologies revolution as a superpower facilitator.
By Professor Rabindra Nepal and Dr Rachel Nichols, University of Wollongong.
