IS INVESTMENT IN CRITICAL MINING AND PROCESSING WORTH IT AND WHAT ARE THE BENEFITS?

By Alexandra Colalillo – Economist

As the Reserve Bank of Australia (RBA) continues to navigate the challenge of reducing inflation – which now sits at an annual rate of seven per cent – while maintaining low unemployment, the aftermath of hefty monetary policy tightening is yet to be felt through the economy.

The rising cash rate set at 4.1 per cent has successfully engineered a fall in consumer spending through lifting standard variable mortgage rates to 6.5 per cent and leaving less disposable income in the household budget for monthly expenses. However, bond markets are now starting to factor in recessionary risks due to recent slow growth, with the March quarter recording just a 0.2 per cent GDP increase as struggling households continue to cut back spending and businesses struggle to maintain their employees.

Historically, Australia’s mining sector has played an important role in shaping the national economy and enhancing resilience to such recessions. The sector continues to make a significant contribution to the economy as the largest industry share of output (14.6 per cent according to the RBA) and driver of higher living standards.

More recently, it has been recognised that critical minerals such as lithium, nickel and cobalt are fundamental to many renewable energy technologies including batteries, wind turbines and EV motors, and are crucial for future growth.

What distinguishes this present situation to that of the pandemic where Australia experienced a small recession? The luxury of abundant government spending across industries took place in 2020 to boost the economy given that inflation was low. However, in the present environment, excessive government spending in an effort to create jobs would only perpetuate the existing inflationary circumstance.

Government spending is now required to be targeted towards initiatives that will create both a short and long term economic advantage for Australia. Experts speculate that a focused investment in industries that rely on critical minerals could act as a solution to combat the short term risk of a recession while also contributing to long term economic stability.

Focused investment in critical mineral-reliant industries

Critical minerals are defined as metals and non-metals that are considered to be essential to modern technologies, economies and national security, and whose supply chains are vulnerable to disruption. In order to keep pace with the projected growth of demand to support the global energy transition, supply will need to expand rapidly.

Global demand for lithium is expected to increase four-fold by 2030 to two million tonnes annually, however mining capacity will fall short by 700,000 tonnes at its current pace. Similarly, copper supply is projected to fall 4.7 million tonnes short of demand by 2030.

Australia's mining sector, accounting for the largest share of national GDP, is vital to the nation’s economic sustainability. Despite there being a historical focus on the mining of iron ore, coal and gold, Australia is well positioned to capitalise on both the mining and processing of critical minerals.

The country is already the secondlargest producer of cobalt, the fourthlargest producer of rare earth elements, and supplies approximately 55 per cent of the world's lithium. However, the nation only holds a small share of the processing industry, and no share of the battery precursor, cell production, or pack assembly industries.

Australia’s 2022 Critical Minerals Strategy was in favour of capitalising on the country’s geographical position, with the Federal Government seeking to grow the sector, expand downstream processing and meet future global demand.

The strategy included a $50 million investment into research and development funding, $4 million to scope investment proposals for regional critical minerals hubs, and international initiatives to cohere new global supply chains running through Australia to attract new foreign investment in the mining sector.

Analysing short term actions

If Australia were to enter a recessionary period, government stimulus injections into the economy will be a likely policy response. If these injections were to focus on industries that rely on critical minerals to support global decarbonisation targets and enable Australia to reach net zero targets by 2050, it will not only reduce short term unemployment, but simultaneously serve a purpose to build capability that will support future jobs.

However, it can be difficult to apply a case for investment into these industries if current revenue from coal production is ten times larger than revenue from energy transition minerals. According to the International Energy Agency, revenue from coal equated to US$431 billion as opposed to critical minerals (US$38.8 billion) in 2020.

Coal is still forecast to derive more revenue than critical minerals by 2030, projected at US$294 billion compared to critical minerals (US$129.2 billion). Therefore, a short term compromise exists, as investment into coal is likely to derive greater employment benefits than investment into critical minerals.

Making it worthwhile in the short term

Among other risks, a high geographical concentration of critical mineral production and processing perpetuates threats to the reliability, affordability and sustainability of mineral supply.

In 2019, the Democratic Republic of the Congo (DRC) and People’s Republic of China were responsible for 70 per cent of cobalt production and 60 per cent of rare earth elements.

China’s share of processing is approximately 35 per cent for nickel, 50-70 per cent for lithium and cobalt, and almost 90 per cent for rare earth elements. High levels of concentration, compounded by complex supply chains, increase risk exposure to physical disruption, trade restrictions or other developments in major producing countries. Continuous reported human rights breaches in the DRC, such as violations to the prohibition of child labour in mines, further perpetuates concerns regarding the high proportion of minerals produced and processed in these locations.

These risks present an opportunity for Australia to become a prime destination for critical mineral processing and foreign direct investment with low sovereign risk. Australia already contains significant reserves of these minerals which drive the modern global economy and can be used to manufacture advanced technologies such as electric vehicles, mobile phones and renewable energy systems.

However, given the majority of primary ores are shipped overseas for processing, Australia derives a small share of the overall potential benefit and the economy is more vulnerable to changes in global commodity prices.

If the supply chain pinch point for critical minerals sits at the processing and early manufacturing stages, moving further downstream will not only diversify global supply chains, it will generate new high-paying jobs and manufacturing activity across Australia.

Australia’s 2023-2030 Critical Minerals Strategy aims to “increase investment from, and collaboration with, like-minded partners to grow Australia’s downstream processing capability and build diverse, resilient and sustainable global supply chains”. This in turn will extract more value onshore from domestic resources, creating jobs, economic opportunity, and serving as a purpose to maintain and grow Australia’s sovereign capability.

Increasing exports to maintain Australia's market position for critical and other energy transition minerals is predicted to add $71.2 billion in GDP and increase employment by 115,100 from 2022 to 2040. However, building downstream refining and processing capability and securing a greater share of trade and investment could generate far more value, projected to add $133.5 billion in GDP and increase the number of jobs by 262,600 from 2022 to 2040.

Australia hosts prominent global critical minerals firms who are currently exploring opportunities to develop cost-competitive processing operations across the country.

Lynas Corporation Limited currently supplies up to 30 per cent of global rare earth elements and acts as a prototype for downstream processing. Lynas’ AU$575 million processing facility on the outskirts of Kalgoorlie-Boulder has entered its final stage of construction as demand for its products outside of China continues to grow.

Meanwhile, Core Lithium opened its Finniss Lithium Project just south of Darwin’s port in October 2022, with intentions to operationalise processing facilities in the near future and Iluka Resources, a heavy mineral sand company, operates as a major supplier of processed zircon and titanium minerals.

Further, the delivery of Australia’s state-owned mineral processing facility – Queensland Resources Common User Facility (QRCUF) – for critical minerals is progressing from the inception phase, focused initially on vanadium processing, with capacity to expand over time to encompass processing other critical minerals including cobalt and rare earth elements.

QRCUF will accelerate the development of commercial mining projects, promote investment in advanced mineral manufacturing opportunities and support supply chain and industry development.

Shaping the long-term outlook

There are, however, a few things that Australia will need in order to process these chemically-complex raw materials competitively and commercially to effectively scale operations, drive productivity, and improve sustainability across the resources value chain in order to make these investments economically worthwhile in the long run.

Targeted Federal Government investment and support will be required first to propel a skilled workforce. Australia’s labour market largely relies on STEM and vocational skills to support emerging technologies and relies on the advanced manufacturing skills needed for downstream critical minerals processing.

Australia still has a large challenge ahead to close the skills shortage and is already heavily dependent on foreign engineers. Recent figures indicate 70 per cent of engineers in the country have migrated from overseas.

Access to capital will also be required to bring projects to full-scale production and improve access to debt and equity finance. In addition to this, ethical certifications will need to be a priority to strengthen Australian manufacturers’ ability to boost export markets. Finally, Australian manufacturers will need to demonstrate reliable processing viability and the ability to scale in order to remain competitive and attract investors.

However, a key barrier the Australian resources technology sector faces in achieving scaled operations is the initial investment required to establish processing facilities in Australia. This is a costly exercise as there are substantial investment overheads to develop domestic capabilities. Australia’s capital markets are often reluctant to lend to this sector and end users are slow to adopt new technologies. As a byproduct, companies struggle to commercialise or resort to heading offshore to raise capital, develop opportunities to attract finance, and build resilience to market fluctuations in the absence of public funding.

Further barriers to entry include technical risks associated with highly complex and custom processing, paired with commodity price volatility in markets that lack transparency, and high product qualification thresholds, making it difficult to compete in the market.

A bottom-line perspective

Public and private investment into downstream processing and industries that rely on critical minerals will be a financial compromise in the short run as Australia continues its journey to achieve economies of scale and improve sustainability across the value chain. However, communities will benefit in the long run. The growth of the critical minerals sector will not only serve to cushion Australia's economy from a recession in the short term, it will support future growth and resilience.

In a future state, this will limit exposure to commodity price fluctuations through adding value along the value chain, create new industries, and support secure jobs with skill pathways for future generations.