By Andrew Pickford
April 19, 2022
Introduction
The emergence of “critical minerals” is forcing a rethink in foreign investment, defence strategy, industry policy and global supply chains throughout the Western world. While numerous white papers and strategy documents have been developed, national approaches vary depending on institutions, national priorities and, most importantly, natural resource endowment.
The classification of critical minerals varies in each country, but they generally fall under what has been traditionally understood as strategic commodities. Contemporary interest in critical minerals is driven by two main trends. First, the transformation of the energy and industrial sectors that requires a different mix of inputs than traditional manufacturing. Second, the increase in trade barriers and autarkic policies that create vulnerabilities and new choke points.
Dealing with critical mineral vulnerabilities is challenging and confusing, not least due to the alphabet soup of categories and abbreviations only fully understood by metallurgical experts. Responding to this new reality in an open, free-market economy is difficult as it requires a recalibration of trade and industrial policy. Australia may offer insights for Canada given their common cultural and political heritage and similar economic structures based on bulk commodity exports.
Strategic commodities
Before considering critical minerals, it is helpful to understand a broader concept of strategic commodities.[1] Ever since the first human society produced a surplus of grain, control over the extraction, production and consumption of a commodity became a competitive advantage over other groups and societies. It should be no surprise that grain production in Mesopotamia gave rise to the first cities and civilization. Those dominating grain used the surpluses to support larger bureaucracies and armies.
A strategic commodity offers several benefits for the society that controls its extraction, production and consumption. It provides an advantage to those controlling the commodity above the direct economic benefit; becomes critical during a period of conflict or anticipated conflict; and there is often a military application, while in peacetime it usually has wider societal applications. Wheat and salt fit this definition in pre-industrial societies. Crude oil is the most obvious example in the modern era. Aluminum and steel could also be categorized as strategic commodities.
In Against the Grain, James Scott (2017) describes how grain production contributed to the formation of the first states and the governing cohort. Over time, the specific commodity changes. However, the society that controls the strategic commodity had an advantage over others. Since the emergence of grain, there has always been a mix of public, private and individual involvement in strategic commodities. In a crisis scenario, the state and central government will generally take control and manage. Before a true crisis emerges, the coordination of private and semi-private entities becomes a matter for discussion. We are at this point for critical minerals.
Critical minerals
In 2021, Canada listed 31 critical minerals that are linked to the transition to a “low-carbon and digitized economy” (Natural Resources Canada 2020). This is a more comprehensive list than the 24 critical minerals that Australia listed in 2019 in a similar strategy document (Australia, Department of Industry, Science, Energy and Resources 2019a). The stated driver in the case of Australia was “technological change,” which indicates a slightly different emphasis. Generally, lists include rare earths, cobalt, lithium, nickel and manganese. These are inputs into the booming battery market, but also wind turbines, solar panels, screens and other high technology goods. In countries such as Australia and Canada, there is much commonality in terms of sentiment, concern over supply chains, and attempts to work closer with partners or like-minded nations and expand research and development.
Another common feature of a critical mineral strategy is that they are generally premised on an accelerated energy transformation away from fossil fuels. As events in Europe during March 2022 indicate, oil and natural gas will likely remain strategic commodities for some time. The other feature of a critical mineral strategy is its linkage to what used to be called industry strategy and a return to government involvement in the economy. As a practical example, if electric vehicle (EV) demand does not grow as forecast, who carries the costs? This linkage to industry policy and direct and indirect subsidies means the stakes are high, and it requires sober thought to find a suitable approach.
In mid-March 2022, Australia updated its critical mineral strategy with the addition of two new minerals to the list: high-purity alumina and silicon. It also signalled a more active government role in the direct investment of processing critical minerals. Given the change in the security environment, it is worthwhile noting that several international partners were listed in the strategy document. In an associated speech, the prime minister also stressed the Quadrilateral Security Dialogue (or Quad) grouping of Australia, Japan, India and the US.
Security threats
While breaks in supply of critical minerals are not yet at the importance of oil supply shocks, there are a few leading indicators. Security analysts began raising concerns in 2010 after China imposed export quotas on rare earth. China’s actions were premised on attempts to reduce pollution and preserve natural resources. The export quotas were viewed as a reaction to an ongoing territorial dispute between China and Japan, with the quotas intended to hurt Japan’s technology and automobile sector. The US, along with its allies, were successful through the World Trade Organization in forcing China to remove some of the export duties (World Trade Organization 2015). From this point on, western countries with similar open economies began to analyse how critical minerals supply chains could be de-risked.
By 2022, there was much greater awareness and sensitivity of access to critical minerals. As supply chains have been stretched and stressed due to COVID-19, we have seen a shortage of semiconductors necessary for a wide range of technologies, from cars to mobile phones. When sanctions began to be imposed on Moscow after its invasion of Ukraine, new vulnerabilities became quickly apparent; for instance, Russia’s MMC Norilsk Nickel PJSC supplies 5 percent of the world’s annual production of nickel and 40 percent of its palladium, two minerals essential to the production of semiconductors and catalytic converters (Macdonald 2022). This vulnerability is one of many that are now emerging, further highlighting the necessity for a critical mineral supply chain. The unanswered question is how to achieve this after an era of deregulation in an open market economy.
Australia’s governance framework
Critical mineral extraction, refinement and production require significant capital investment. Generally, prices are volatile, making revenue highly uncertain. Any attempts to de-risk supply chains must consider the governance framework for investments.
Australia and Canada are comparable jurisdictions with similar systems of government (based on the Westminster model) with open economies and listed commercial entities driven by shareholder returns. The two jurisdictions approach government investment slightly differently. Whereas Australian governments have generally leaned towards the free market, and been non-interventionist, Canadian governments have shown far more comfort playing a more direct role in investment through the use of government-owned entities known as Crown corporations.[2] These typically include electricity utilities but extend to other sectors of the economy, such as telecommunications in Saskatchewan (SaskTel) and passenger railway services like Via Rail nationally. Australian involvement in the economy is more limited, with deregulation and privatization removing most direct involvement during the 1980s and 1990s. Other nations, such as China, have even more substantial state-owned entities that allow for a greater level of central control.
In both Australia and Canada, mining and resource development is predominantly conducted by private companies, which operate under a mix of provincial and federal legislation and regulation. Traditionally, this has been at the state level in Australia, with federal involvement accelerating over the past decade. The mining jurisdictions of Western Australia, South Australia and Queensland generally rank high on the Fraser Institute’s Annual Mining Survey. In the last two decades, Western Australia has become the most important mining jurisdiction with significant iron ore production and exports as well as an expanding array of critical minerals. This has been aided by a bipartisan, pro-development approach to resource projects and relatively streamlined regulatory processes. However, the approval process for a major new project in Australia has now reached five years. Canadian approval times have become much longer. Investor uncertainty and sovereign risk is an increasing concern. This has been reinforced with actions of the Trudeau government and involvement in high-profile energy projects. This can be seen with the recent internal Cabinet debates over the Bay du Nord oil project located about 500 kilometres east of Newfoundland, resulting in elongated approval processes.
Even with access to Crown corporations, Canada has fewer public institutions that can undertake the associated mining activity required for critical minerals when compared to state-dominated countries such as China. Similar to Canada, Australia also has had a political preoccupation with being limited to being “hewers” of raw products. Such concerns have been met by attempts to “value add” natural resources which have had a chequered history of success. Similar tools and policy responses have been applied to critical minerals, although while the security imperative is driven at the national level, practical policy levers generally lie at the state level in Australia.
Australia’s experience with critical minerals
Australia has significant critical mineral resources and a proven record as a reliable supplier of natural resources. The emergence of sensitivities in supply chains has caused countries like Australia to debate how value can be added to these commodities in-country and to look at refining and processing instead of the traditional mine and export model. The federal government and Australian states have prioritized developing and implementing critical minerals policies outlined below, which seek to diminish the private sector’s high level of investor risk by introducing arms-length government investment.
Federally, the Australian government has created the Critical Minerals Facilitation Office that resides within the Department of Industry, Science, Energy and Resources. The office provides national policy and strategic advice on critical minerals and attempts to connect Australian critical minerals projects to investors, government financing facilities, and strategic partners. It is also responsible for Australia’s Critical Minerals Strategy (Australia, Department of Industry, Science, Energy and Resources 2019b), which promotes investment in critical minerals and downstream processing, provides incentives for innovation and connects critical minerals projects with infrastructure development (Australian Government 2019).
The Australian government has also established the Critical Minerals Facility, which is managed by Export Finance Australia. The facility is backed by $AU2 billion to provide loans, guarantees and bonds to projects aligned with Australia’s Critical Minerals Strategy and deemed to be in the “national interest” (Export Finance Australia 2021). Such facilities allow the government to essentially de-risk and support critical minerals projects without the government undertaking mining itself.
Following the 2022 Critical Minerals Strategy, Australia committed an additional $AU50 million over three years to create a virtual National Critical Mineral Research and Development Centre. This investment will continue to build the Australian intellectual property in the critical mineral space, target strategic supply chain and drive breakthroughs in collaborative research.
The loan facilities provided by the Australian federal government are complemented by a mix of state and territory policies that are influenced by the national Critical Minerals Strategy. These are outlined below:
- The Government of Western Australia’s Future Battery Industry Strategy prioritizes investment attraction, project facilitation, research and technology sector development and new opportunities through the adoption of battery technologies (Western Australia, Department of Jobs, Tourism, Science and Innovation 2019).
- In New South Wales, the state government has implemented the Critical Minerals and High-Tech Metals Strategy that seeks to establish Australia’s first critical minerals hub in the central west part of New South Wales, promote exploration for critical minerals resources, activate the industry through proactive development of supply chains and attract critical minerals investment, downstream processing and recycling (NSW Government 2021).
- The Northern Territory has drafted a plan that intends to position the region as strategically important in the production, processing and manufacturing of critical minerals. The Territory Critical Minerals Plan will accelerate exploration for critical minerals, support critical minerals projects to commence production and grow the refining, processing and manufacturing of critical minerals in the Northern Territory (Northern Territory Government 2019).
The cumulative effect of state and federal policies is starting to result in success, with governments of all levels in the country turning their next pursuit to a local processing industry.
Case study: Australia
From a deliberate approach to securing supply chains, China has cornered the rare earth market globally. Many Western companies have tried and failed to enter the market. One Australian exception is worth reviewing. Lynas Corporation has achieved commercial success in the extraction of rare earth materials that are currently unmatched in the Australian market and now supplies around one-sixth of the global market for rare earth oxides (Perth US Asia Centre 2020). Lynas operates an integrated extraction and processing model with a mining and processing plant for rare earth concentrate in Mount Weld, Western Australia and a refining facility at its processing plant in Kuantan, Malaysia (Kerr 2022).
Lynas Rare Earths is a lesson to the West in how government support can assist the development of critical minerals projects in competition with China. The first hurdle is often financing and the commitment of future critical minerals or rare earth customers. During the 2010 rare earth dispute between China and Japan, Lynas secured debt financing backed by Japanese authorities and a sales agreement with Japanese buyers (Uren 2019). Lynas leveraged the Japanese financial support to develop a rare earth deposit in Western Australia. It should be noted that there has been long-term Japanese investment into Western Australia and this success builds on these previous resource transactions.
Most of the processing of rare earth materials takes place overseas, where a great deal of the value and economic gain is generated. The Australian government has recognized the potential for value adding and manufacturing with rare earth minerals in Australia and provides different loan facilities to “de-risk” what is otherwise considered a risky investment. Hastings Technology Metals has made use of a $AU140 million loan through the Northern Australia Infrastructure Facility, which has paved the way for a mine and hydrometallurgical plant near Onslow, Western Australia.
Iluka Resources, also based in Western Australia has benefited through a $AUD 1.25-Billion low interest loan to further develop the first rare earths separation facility in Australia (Newell 2022). The Australian government has also provided loans to graphite miners Renascor Resources and Ecograf through the Critical Minerals Facility (Bennet 2021).
The delay and uncertainty in any resource project has implications for the entire sector.
In Western Australia, the use of state agreements – contracts between the state and a company seeking to develop a major project, which are then ratified in Parliament – have historically provided certainty and attracted a significant level of investment for major resource projects. State agreements were historically used in facilitating large-scale developments (Reinmuth et al. 2020). In the future, critical mineral projects could use state agreements in conjunction with federal loan facilities to demonstrate certainty to investors and widespread support for projects to boost investor confidence in an area that is notoriously associated with risk.
In considering Australia, and the Lynas Rare Earths project, it is important to note the overall context for approvals, red tape and the approach of respective governments to resource development. Many companies in critical minerals face not only volatility and a need for secure offtake agreements, but also the same regulatory and approval processes as other mining projects. The delay and uncertainty in any resource project has implications for the entire sector. Actively encouraging critical minerals through targeted policies, while at the same time running parallel, lengthy approvals and discouraging other resource developments, is akin to training for a race with the aim to win but then tying your arms behind your back just before the competition begins. On paper this may make sense to a bureaucrat due to the stove piping within government.
To achieve the funds required for an expansion of the critical minerals supply chain, the private sector needs to be deploying capital, even if it is supported by loans. As soon as it becomes evident that the government seeks to pick winners or deem some commodities as “good” and others as “bad,” it will become an impossible task to facilitate an expanded critical minerals sector.
Economies of scale with partners
The policy response from Australian governments, using a mix of federal loan mechanisms and state level supportive frameworks, has led to a positive result. For both Australia and Canada, the question is how international economies of scale can be achieved with greater collaboration of partners.
There is increasing discussion amongst like-minded nations to create a larger market and capital base for critical minerals. One idea that has already been floated is for the Quad to create a battery supply chain amongst Australia, India, Japan and the US (Wilson 2021), an arrangement that has some similarities with the ill-fated proposal of the US-led 2006 Global Nuclear Energy Partnership (GNEP) (United States, Department of Energy 2006). This latter proposal, promoted by US President George W. Bush, sought to create a new framework for nuclear fuel cycle arrangements that include the supply and processing of uranium through to the deployment of nuclear technology.
The GNEP initiative included a few core members, including the US and Japan, with involvement by France, Australia and Canada; it was expected to provide a cradle to grave arrangement. It had a geopolitical overlay in that it was US-led, and proliferation was a factor as well. When looking at critical minerals, such a structure involving like-minded countries could enable more of the supply chain to be kept within friendly countries and provide scale if offtake and volume agreements could be struck.
New geopolitical realities
Forming a cohesive structure for a cradle-to-grave critical minerals supply chain may be linked to other security initiatives. As a result of the economic sanctions on Russia, Moscow will likely seek to embed similar arrangements with Iran and China. This reversion to security and trading blocs will be resisted by those seeking to maintain traditional international trading arrangements. However, that era is finishing with a premium on access and control of commodities rather than the lowest cost option.
As evidence of a new geopolitical reality, Germany came to a belated realization that its defence budgets must increase. Other western nations are starting to make similar changes to their defence sector and supply chains. Canada will no longer be able to underfund defence while remaining in leading security forums. Emerging geopolitical structures are premised on the growth and expansion of defence assets in a range of groupings and agreements. For example, while AUKUS is a defence agreement between Australia, the US and the UK for submarines, it is becoming evident that it is also an important vehicle for greater scientific and industrial collaboration. It is possible AUKUS may become the basis for critical minerals arrangements, especially if it links to key defence production items.
While Canada has historically been a core partner in Western defence and intelligence institutions, its drift towards becoming a second-tier player, akin to New Zealand, may limit collaboration in strategic commodity arrangements. New Zealand, under the leadership of Prime Minister Jacinta Ardern, has continued to degrade its now very limited defence and intelligence functions. While the label of the “West’s woke weak link” over Ardern’s reluctance to sign joint Five Eyes statements criticizing China is perhaps an exaggeration, Canadian defence analysts are drawing comparisons between Ardern and Trudeau on national security policies (Agnew 2021). Defence, mineral supply and science and innovation may sit in different ministries; however, national leaders are increasingly treating them as interconnected.
Conclusion
Internationalists may be aghast at these trends and the relinking of trade and security. However, even under the left-leaning Biden administration in the United States, access to North American EV production chains has been limited by protectionist subsidy policies (Radwanski 2021). Canada was successful in securing a seat at the table at many institutions that shaped the post-war world. It should be remembered at the end of this conflict, the Royal Canadian Navy was the fourth-largest fleet in the world. With Russia’s actions in eastern Europe, new institutions will be created. Separating out commodity supply with expanding defence arrangements may sound good in practice, but not play out in reality.
In light of conflicts worldwide, such as the China and Japan rare earth dispute or the current conflict in Ukraine and sanctioning of Russia, the need to secure global supply chains for critical minerals has never been greater. Australia provides a learning opportunity for Canada – a place in which federal and state governments have used a mix of federal loan mechanisms and a supportive state-level framework to incentivize the development of critical minerals deposits. Canada could further pursue similar policies with an eye to the developing conflicts that impact global supply chains.
The world has solidified the new reality of linking defence and trade. Shifts in global defence policy have re-emphasized a shift in thinking and have placed Canada outside new alliances like AUKUS. Whether Canada becomes less relevant like New Zealand or follows a path that remains an integral part of the western alliance is yet to be determined. At a domestic level, this also requires an agreement within and between Canadian governments as to their overall view and approach to resource developments.
About the author
Andrew Pickford works between North America and Australia in the areas of strategy, economic analysis, and energy with a range of organizations, both private and public. He has particular expertise with natural gas markets, electricity utilities, industry-driven applied research, and the reform and transformation of businesses and governments during periods of turbulence. Andrew maintains a mix of appointments and engagements in both Australia and North America, working with decision-makers in corporate, government, academic, and civil society settings. His initial training within KPMG in internal audit and risk management results in an understanding of business and management realities. From traversing grand strategy to long-term economic trends, he has been fortunate to work with some of the world’s most distinguished strategists and experienced company directors. This background and experience produces insights and advice that are easily understood and actioned by directors, government ministers and CEOs, while at the same time maintaining a deep and unique approach to rigorous analysis.
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[1] For a full description of contemporary strategic commodities, see: https://academic.oup.com/jogss/article-abstract/6/1/ogaa008/5803373.
[2] Similar structures exist in Australia and are referred to as Government Trading Enterprises.
