Australian challenges and opportunities in developing a critical minerals strategy

If Western economies want to ensure a steady and secure supply of critical minerals to satisfy modern industrial needs, they need to invest in the development of more operations in Australia.

Australia has 31 critical minerals, defined by the Critical Minerals Strategy 2023-2030, Australian Government Department of Industry, Science and Resources as “essential to modern technologies, economies and national security, and whose supply chains are vulnerable to disruption”.

Based on critical mineral lists of six of the world’s largest consuming economies aligned to Australian interests – US, EU, India, UK, South Korea and Japan – and a critical mineral market size of above US$5 billion, CommBank analysts identified a priority list of 10 critical minerals: nickel, lithium, titanium, graphite, manganese, cobalt, platinum group metals (PGM), silicon, rare earth elements (REE) and magnesium.

Top 2 (>$US30b+): nickel and lithium
Top 5 (>$US20b+): nickel, lithium, titanium, graphite and manganese
Top 10 (>$US5b+): nickel, lithium, titanium, graphite, manganese, cobalt, PGM, silicon, REE and magnesium

The larger critical mineral markets are typically more mature and liquid than the smaller critical mineral markets. The key advantage of more maturity and liquidity is multiple buyers and usually less reliance on the terms of an offtake agreement between a producer and buyer (price and volume) and the creditworthiness of the offtake party.

"Critical minerals are metallic or non-metallic materials that are essential to our modern technologies, economies and national security, and whose supply chains are vulnerable to disruption.”
- Critical Minerals Strategy 2023-2030, Australian Government Department of Industry, Science and Resources

China dominant

China’s comparative advantage in critical mineral processing and manufacturing means that China-dominant critical mineral supply chains are the quickest and cheapest pathway to deliver the energy transition, defence technologies and advanced manufacturing. However, the current landscape means a high level of ongoing dependence on China’s critical mineral supply chains.

Building supply chains outside China, especially in advanced economies, would likely mean a more expensive and delayed energy transition. However, it would mean Western economies have more control over supply chains.

In respect to the energy transition, Western economies need to consider the trade-off between the need for a low cost and quick transition and the need for secure supply chains, said Vivek Dhar, CommBank Executive Director of Mining and Energy Economics.

The optimal solution is to reduce China’s share in critical mineral supply chains deemed highly concentrated by the smallest amount such that the respective critical mineral or processed critical mineral market can be considered moderately concentrated by 2035.

In a report published and discussed at CommBank’s Global Markets Conference (GMC), held in Sydney and Melbourne over the week commencing 21 October 2024, CommBank analysts assessed a government priority project list, ranking 55 projects in the Australian Critical Minerals Prospectus by status – “operating” (ranked highest) to “scoping study” (lowest) – and then a post-tax Internal Rate of Return (IRR) estimate. The full report is available here.

This priority list gives a preliminary ranking to see the projects likely to attract capital, noting that the analysis is biased towards a government critical minerals strategy that maximises investment returns. This is how mining projects have typically moved forward historically, as projects with the highest investment returns usually attract the most capital.

With the Australian government keen to build secure critical mineral supply chains outside China, maximise jobs in the critical minerals sector and push further downstream in critical mineral supply chains, it is entirely possible that project status and IRR overlook the government’s multiple objectives, said Dhar.

In a GMC panel discussion of the analysis findings, Dan Smart, General Manager - Institutional Domestic at Export Finance Australia (EFA), explained that “critical mineral projects can be challenging, and while some critical mineral prices had skyrocketed in the past few years, others have since dropped”.

“If you leave it to the commercial funding markets alone, many of these projects won't get financed,” said Smart. “So you end up with less diversity.”

The federal government set up a facility to assist with financing through EFA because it saw the need to expand the supply of critical minerals and associated supply chains. But the course is a “marathon, not a sprint” and will continue to evolve, said Smart.

"If you leave it to the commercial funding markets alone, many of these projects won't get financed.”
- Dan Smart, General Manager - Institutional Domestic, Export Finance Australia

A role for private capital

However, EFA can’t be expected to do all the heavy lifting, so there is a need for private capital, said Adrian McCourt, CommBank Executive Director of Natural Resources, Energy and Carbon.

High energy costs are restrictive to the development of projects, said Dhar, explaining that in Australia, west coast gas is cheaper than it is on the east coast, but in the US, gas is even cheaper, so it can appear attractive to move business overseas.

“How do you keep building out projects when energy costs are high?” he asked. “This is a complex space that must consider carbon emissions and energy for cost competitiveness – and we must decide whether we are going to target a niche or will development be scattergun?”

Smart said Australia has played a positive role in getting critical minerals out of the ground, “but we also need to encourage the move downstream” if the industry is to evolve, grow and provide a secure and steady source of these commodities to the economies that need them.

“The development of ex-China (or investments outside China) supply chains will be costly,” said McCourt. “But if we accept that it is a strategic imperative, then we need to be thoughtful about how we develop as efficiently and cost-effectively as possible?”

Along with government initiatives, commercial funding and overseas export credit agencies can be part of the solution, said Smart, but with prices depressed, “often the commercial banks are not stepping up to take that risk”.

“Don’t just look at the short-term headlines and the price,” he said. “Look forward and at how long a project can continue. This may be the time to invest – when no-one else is investing.”

McCourt added, “We need to think beyond concessional debt and grant funding and look to other policy instruments that may accelerate the development of projects. For example, governments could offer long term commodity price protection in the same way renewable energy projects have been supported into the market.”

"The development of ex-China (or investments outside China) supply chains will be costly,” said McCourt. “But if we accept that it is a strategic imperative, then we need to be thoughtful about how we develop as efficiently and cost-effectively as possible?”
- Adrian McCourt, Executive Director of Natural Resources, Energy and Carbon, CommBank

Future investment landscape

Jeff Brunton, Head of Portfolio Management at HESTA, the Australian industry superannuation fund for workers in health and community service sectors, said there is no short-term solution for accelerating development. Australia’s superannuation industry total superannuation assets were $3.9 trillion at the end of the June 2024 quarter, according to the Association of Superannuation Funds of Australia Limited.

“We know we need to get moving,” said Brunton. “The future looks bright, given our exposures in this area, but we need to come together as an industry.” McCourt explained that some ways of solving for the future could be to focus on the approval processes – which “take too long” – and initiatives to lower energy and labour costs in Australia.