Australia’s Paydirt Volume 1, issue 325
When putting this issue together, it felt inevitable that the discussion we charted last month – the turbulence being experienced by the Australian critical minerals sector – would also be at the heart of this month’s conversation.
And, so it has proven, but not along the lines that would be expected. Lithium prices and therefore equities stemmed the bleeding quicker than expected and the nickel industry was granted royalty relief and critical mineral status.
In this column last month, I said that Australian nickel could never be cost-competitive with Indonesian producers because Australia has higher labour costs, higher energy costs and higher ESG standards.
Some “free market thinkers” argued with me that it is our standards which are holding Australia back, suggesting that if we lowered our standards, we would be more competitive.
There may be a kernel of truth in the assertion and it may provide some short-term relief –but in the longer-term it would only hold the industry.
There is no value in taking on a race to the bottom with China and its partners. Firstly, because the Australian public might not acquiesce to lowering ESG and labour standards sufficiently to change cost structures, and secondly because those very standards will eventually be one of the industry’s biggest advantages.
For now, Australian miners can probably forget about the carrot of a “green premium”, as called for by Andrew Forrest in February. The executives I have spoken to have seen plenty of talk, but no real appetite among customers to pay a premium. However, they should be positioning themselves to benefit from the stick the US and EU are about to wield.
Both the US and EU are gearing up for a major offensive against China’s dominance of the supply chain and if Australian companies get everything in place – the right partners, the right customers, the right ESG standards – they will be among the biggest beneficiaries.
The rhetoric from US Government officials against China has been getting louder and more brazen in recent months.
Where previously, officials used euphemistic language to describe the need for a more assertive mineral security policy – “let’s build diversity into supply chains”, etc – there has been nothing implicit about recent comments.
At the Mining Indaba in Cape Town in February, Amos J Hochstein, senior adviser to the US President for Energy and Investment, spoke directly about the negative influence China could have on critical minerals supply chains.
“I would never say only trade with the US and not anybody else, I think that is the difference between the US and at least one of the other countries mentioned. We want this to be a diversified energy system. Let’s call a spade a spade, if 95-97.5% of graphite processing happens in only one country, that’s not good, not only geopolitically but from a markets perspective. If there is a natural disaster, then I can’t buy graphite. And you can extrapolate that to other metals.”
Similarly, when I spoke with US Assistant Secretary for Energy Resources, Geoffery Pyatt recently, he was equally direct in explaining the reasons for the sudden US interest in critical minerals.
“The real measure of our success is delivering energy security for our citizens and de-risking our vulnerability to countries that would use their energy assets for malign, purposes, led by Russia and China,” Pyatt said.
Having witnessed the energy crisis caused by Europe’s dependence on Russian gas, the US (and EU) is determined to avoid the same situation in the energy transition.
“We need to figure out, as my European colleagues put it, how to ensure that an era of European vulnerability to Russian energy coercion is not followed by an era of collective vulnerability to China’s domination of these clean technology supply chains,” Pyatt said.
These comments reflect the impending activation of the more restrictive parts of the IRA. From last April, to qualify for the full clean energy vehicle tax credit of $US7,500, new EV batteries must be made from “critical minerals… extracted or processed in the US, or any country with which the US has a free trade agreement”.
Given China’s complete dominance of battery inputs, there is no vehicle on the market currently which would qualify, but as the US builds midstream and downstream capacity, 100% domestic (with friends) batteries will attract the credit.
It is at that stage miners will have to start making choices over where to place their product. If there is any semblance of Chinese componentry in the supply chain upstream, they will be disqualified, putting their customers at a disadvantage. The stick which is the tax credit will start having an effect.
It is similar in Europe, if not quite as drastic. There, Chinese companies are participating in the domestic supply chain, but will only be able to use locally sourced product. Like the US, Europe will never meet its own raw material needs so will inevitably grant Australian product “domestic” status, but only if it doesn’t pass through China before reaching Europe.
How it will actually play out is still open for the debate, but the US is undoubtedly committed to the strategy (even if it does change slightly in the case of Donald Trump winning back the presidency) and if they play their cards right, Australian critical minerals miners will benefit… eventually.