Hazards in the critical minerals strategy

Nov 17, 2023
Chunks of copper ore mineral rocks in an iron barrel.

Demand is exploding for materials used in clean technology and IT. Amid worries that China dominates supply of many of these, Australia is developing a $4 billion program to expand their mining and processing. In Washington, our PM and the President announced a joint “Compact” on critical minerals. There are hazards here, including possibly tying us too much into US plans to thwart the growth of China.

A global revolution is happening in energy, as the world opts for renewable power and electric vehicles. It is too slow and too late to stop us passing 1.5 degrees of global warming, and possibly even two degrees. But it will help, and it is very big.

The energy revolution is creating new demand for certain raw materials. Steel and concrete for wind farms, of course. These plus copper and aluminium for a vast new electric grid. High purity forms of silicon for solar panels, and much more. Lithium is vital for the present generation of batteries. Cobalt and nickel are important. So are “rare earths”, obscure elements used in magnets and motors.

The supply of many of these is dominated by China. Not only is China a very big country, but it has been planning for a decade or more to dominate lucrative new industries like the equipment for wind and solar power and batteries and electric vehicles.

As further background, a new kind of low-intensity trade war has broken out. The Economist reported on October 28th that America has taken steps to stifle the growth of Chinese tech companies such as Huawei. It has blocked supply to China of the most advanced chips, such as the Nvidia’s state-of-the-art models used in applications like AI. For its part, China has embargoed supply of graphite, evidently to slow the progress of green industries in Sweden and perhaps elsewhere. China refines 90 percent of the world’s graphite, used in lithium-ion battery anodes. China has also restricted the export of the uncommon metals gallium and germanium, of which it produces 80 percent of global supply. These are used in small quantities in chip-making and other high-tech applications. Back in 2010, China caused a stir by holding back exports of rare earths to Japan during a dispute over territory.

Against this background has arisen the idea of “critical” minerals. These are materials you must have if you want to progress in green technology. Many have constrained supply. Australia has good resources of many, as well as excellent potential for big-scale wind and solar power. For instance, we are the world’s largest primary producer of lithium, accounting for more than half of the total. But all but a tiny proportion of our lithium goes to China for processing into the form used in batteries.

Australia, along with other countries, has established government programs to help build new or expanded industries and increase the world supply of critical minerals. The Morrison government set up a $2 billion loan facility within Export Finance Australia to boost growth in this area. This was timely: our fossil fuels exports are bound to decline over the next couple of decades, and we need new export industries. On his recent visit to Washington, Prime Minister Albanese announced he would double this facility to $4 billion.

This is all well and good, but there are hazards that must be avoided.

One hazard is lobbying or pressure to favour certain projects or sectors, or just to expand the pot, which could come from foreign sources or from political or commercial ones at home. Australia has a long history when public coffers are opened of people swarming to seek help for their projects, no doubt worthy in their eyes. Economists call them “rent-seekers’, a term of serious disparagement.

The newsletter RenewEconomy carried an article on October 27th by Tim Buckley and Annemarie Jonson of Clean Energy Finance. It complained that the $4 billion Critical Minerals Facility is “a pittance”. Maybe it is, compared to the mammoth US Inflation Reduction Act (which is all about boosting investment in clean energy technology, not inflation). But we are a different country from the USA. Back where I come from, $4 billion used to be quite a lot of money.

Economists also love to disparage “picking winners”, on the presumption that politicians and bureaucrats are nowhere near as good as investors with skin in the game at deciding which projects to back. I have never wholly accepted this. Singapore would never have made itself rich without a lot of astute picking of winners. Nor would China be taking over the world automotive market with its electric cars. When it comes to projects seeking support from the Critical Minerals Facility, I am confident that Export Finance Australia will avoid most duds by doing competent analysis (I was a director back in the days when it was the Export Finance and Insurance Corporation). If a project would have gone ahead anyway, without support, the loan contract should specify rapid recovery of the funds to make them available for recycling to more projects.

Peter Ker of the Australian Financial Review, wrote on October 2nd that Australia may revise the list of critical minerals drawn up by Geoscience Australia and the Department of Industry, Science and Resources to include basic commodities like coking coal, bauxite, iron ore, copper and nickel. In part, he was quoting the Resources Minister, Madeline King. Referring to the list, she said “We also have to consider our region and our partners because they’re an important part of our prosperity. That’s always going to figure in it.”

Critical? where does it stop? The more the definition is diluted, the less there will be to spend on what really is critical.

What might be of greater concern is that we could be letting ourselves be drawn even further into America’s struggle to stop China emerging as a superpower and hegemon of our region. Already, our defence policy puts us too deep in this for my comfort. In another article on April 13th, Peter Ker and Elouise Fowler quoted Minster King saying only “like-minded” foreign investors will be welcome to invest in Australian critical minerals projects. This was interpreted to mean not Chinese.

When he was in Washington, Mr Albanese and President Biden made a joint announcement of a “Climate, Critical Minerals and Clean Energy Transformation Compact”. This will start with inter-governmental discussions and forums among officials and ministers (or the American equivalent). It is hard to know how far this will go, but the government is talking big. Madeleine King said “The Compact affirms the position of climate and clean energy as the third pillar of Australia’s alliance with the United States”.

By all means have a pragmatic and careful policy, but we need to be careful not to poke the dragon unnecessarily.

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