It also contributes to Australia being a politically stable jurisdiction with a strong rule of law and a longstanding alliance with the US.
The United States is pursuing similar relationships with other countries (some, such as Indonesia, whose labor, environmental, or legal standards do not meet those of our economy) in an urgent effort to diversify the reliance of the United States and the Western world on the strategic resources China needs to achieve its carbon reduction goals.
China’s iron fist
China dominates lithium, cobalt, graphite and rare earthsThese industries are the foundation not only of clean technologies but also of 21st century military and commercial applications, and are scrambling to secure dominance through investment and access arrangements with developing economies where many of the world’s untapped resources are located.
It not only has resources of many key minerals, but also has a dominant position in the entire value chain of many of these minerals. It sources more than half of the metals needed for batteries such as lithium, cobalt and manganese, and has almost all of its dominance in rare earth processing.
Australia, for example, holds more than half of the world’s lithium resources, but more than 90 percent of them are processed in China, which has in the past been willing to weaponize its dominance in a territorial dispute with Japan.
Before the Putin regime invaded Ukraine, the EU’s reliance on Russia for core gas needs was a wake-up call for the United States and others. It highlights the vulnerability created by excessive reliance on third parties for strategic resources, especially geopolitical adversaries.
An Australian company has benefited from heightened U.S.-China tensions as the U.S. seeks to distance, though not decouple, from China. Lynas wins $120 million contract Last year, the U.S. Department of Defense (DoD) built a heavy rare earths separation facility in Texas.
The Biden administration has heralded allowing DoD to fund processing plants outside the US as part of a strategy envisioned in the compact with Australia to not only increase the supply and processing of strategic minerals and metals within the US, but also to complement them through “friend outsourcing” This should be supplied and processed.
The Albanian government, which is about to release an outline of its key minerals strategy, has made it clear that it sees deepening ties with the US as an opportunity to increase domestic processing of Australian resources to extract more value and generate more jobs.
Whether this is the best use of corporate and state capital – which would require substantial financial incentives – is at least debatable. Australia is a world leader in mining and mining technology, but is generally uncompetitive in processing.
Loading
Furthermore, due to the capital intensity of moving up the value chain, the highest returns to financial capital in the resources sector come from the transportation of raw materials, not processing.
Exceptions tend to be where a company’s social license to develop a resource depends on value addition, or where there are geopolitical or environmental barriers to offshoring processing, as is the case with the rare earths refinery being developed in Western Australia.
It’s not just the US that offers opportunities for Australian miners. Europe, like the United States, has been belatedly aware of its vulnerability because it relies on China for critical materials needed to meet its own environmental goals.
While it was initially alarmed by the Lower Inflation Act — it feared the U.S. would attract investment from its own companies and called it a form of protectionism — it has since been working on its own critical raw materials bill to protect making it easier to obtain permits and finance new mining and processing projects, and has been in friendly discussions with the United States over its own compact.
check the box
Shortages of critical minerals and processing capacity outside of China mean that neither the US, Europe, nor their key allies can afford to go it alone. They need a close alliance of allied countries, preferably (but not necessarily exclusively) with similar environmental aspirations and labor standards as their own.
Australia ticks these boxes with our vast resources, demonstrates expertise in utilizing them, and a reliable position as a reliable supplier, not only with the US but also with other key US allies such as Japan and South Korea with close and long standing Relationship.
Given the global supply and even resource shortages of some of the key materials needed to meet projected demand – the International Energy Agency says global lithium supply will have to increase 42-fold by 2040, with lithium supply set to quadruple. Minerals needed for clean energy technologies – Our resources sector is critical to the aspirations of advanced economies working to decarbonize.
Loading
Forging closer ties with countries that are alienating and trying to escape the risk of dependence on China will inevitably create some awkward moments.
The Australian government has to decide not only how to treat new investment proposals, but also existing Chinese investments in strategic minerals, as China makes it clear by scrambling for resources in Africa and South America that it will not relinquish its rule willingly.
Americans and Europeans will be keenly aware that it will take years for them to wean themselves off their dependence on China for critical resources, and at the same time they are very vulnerable.
The breakdown of trust and increased friction between much of the West and China is creating some chaotic, delicate and potentially damaging strains on a relationship that until recently was quite strong and productive. The “compact” between Australia and the US will not ease these tensions.
The Business Briefing newsletter features breaking stories, scoops and expert opinion. Sign up to get it every weekday morning.
