This is the second part of a two-part article on coercive threats to critical minerals supply chains and what Australia and its critical minerals partners are doing and should do to counter them.

 

China’s use of coercion to control critical mineral mining and processing projects, their output and even whole supply chains has motivated Australia and its strategic partners to take increasingly strong measures to secure alternative supply chains. Meanwhile, China’s state-linked companies continue to use multiple channels to manipulate markets at scale.

Australia and its partners need to apply more concerted action.

These actions must focus on ways to mine, process and transport mineral resources from developed and developing nations in a manner consistent with national values and sustainability standards. New supply chains are needed to meet demand for manufacture of energy and high technology products and reduce reliance on China-controlled supply. These measures are not aimed at trade bifurcation, but about setting up alternatives that promote resilient, competitive markets for investment and production.

Australia has begun to take action. In May, Canberra announced stricter criteria on foreign investment, signalling strengthened intent to counter coercive influences on Australia’s minerals projects and supply chains. Similarly, the divestment order ^[1] issued in June to China-linked entities with shareholdings in rare earths company Northern Minerals demonstrated the government’s commitment to applying rules strictly and fairly.

While Australia recognises that investment by China-linked companies is essential to its mining industry, it now has the opportunity to entice other partners to invest capital and diversify the market.

This is because industrialised nations that have traditionally confined themselves to domestic mineral projects have moved to friendshoring—facilitating supply from allies as a way to reduce reliance on China and some other dominant suppliers. Both the United States Inflation Reduction Act of 2023 and the European Union’s Critical Materials Act, which came into effect this May, provide the same level of support to critical minerals projects in Australia and other allied nations as domestic projects.

Investment from allies is already starting to flow. In May, the Canadian government conditionally approved US$300 million loan funding ^[2] for the Nolan’s rare earths project in the Northern Territory, adding to the Australian government’s US$553 million debt finance. The project will supply mineral resources to Canadian renewable generation manufacturing. Japanese-supported, ASX-listed Lynas Rare Earths is developing a processing facility in Western Australia and another in Texas, United States, which is part funded by the US government.

And just this month, an Australia-US joint venture was announced to develop the Donald Rare Earth and Mineral Sands Project ^[3] in Victoria. Processing of rare earths will take place in the United States, while heavy minerals sands output will be processed in China.

In order to attract more investment, Australia may need to offer better incentives. While the 10 percent production tax credit aimed at reducing the costs of critical minerals processing in Australia is a positive step, Australia’s national and state governments need to offer a comprehensive package that also delivers efficient approval processes, better infrastructure, effective labour market initiatives and competitive energy supply.

Furthermore, critical mineral deposits in developing countries also must be tapped in order to meet future global demand. While Australia can tighten control of foreign investment in domestic projects, it is much more challenging to engage resource-rich nations in Africa, Asia and Latin America in well-governed supply chains that counter those controlled by China.

This can be achieved by fully implementing recent initiatives. The US-led Minerals Security Partnership ^[4] and other agreements involving Australia help improve mining industry governance in  developing nations with minerals essential to supply chains. Australia’s Mining for Development capacity-building program was wound back in 2016 but has maintained some activities and networks.

The United States, South Korea, the European Union and others are also seeking to friendshore critical minerals projects in developing countries. For example, the United States is providing loan funding to an Australian company to establish a graphite mine in Mozambique to supply a US-supported, Australian-owned refinery in Louisiana.

The United States has been particularly active in countering Chinese influence in Africa. Australia should support it. Washington has attempted to broker the sale of two Canadian-operated copper mines in Zambia to friendly parties, to prevent them being controlled by China-linked interests. It is also backing a trans-Africa rail project ^[5] to link the Zambia copper belt with the Atlantic coast of Democratic Republic of the Congo. Meanwhile, China is backing another rail project from Zambia to Tanzania, where Australian companies have extensive interests, including a proposed graphite mine to supply a refinery in Western Australia.

Other allies have also been active. This month, South Korea signed agreements with many African nations to boost cooperation on trade, with a focus on  critical minerals. This will be facilitated by US$10 billion in development assistance over six years and US$14 billion in export financing for Korean companies.

The European Union and several African countries ^[6] have signed strategic partnerships on raw materials that aim to integrate value chains, promote sustainable mineral production and build infrastructure needed for mineral development.

Australia has continued to extend its partnerships to build critical minerals supply chains that are ethical and sustainable. In May, it signed a memorandum of understanding ^[7] with the European Union that included objectives to develop open, fair and competitive markets, closely cooperate on environmental, social and governance standards and promote their market recognition, and cooperate in third countries to grow minerals output and improve outcomes.

Effective action to achieve these objectives will be crucial, as will close cooperation with other countries to build alternative supply chains.

It will be more difficult to have the market for critical minerals and related products favour supply chains with strong ESG standards and associated higher prices. If achieved, full cost pricing will help to marginalise minerals that are produced less responsibly.

Overcoming China’s market manipulation across a range of critical minerals will be just as challenging, but pathways are being explored. China’s current near-monopoly in rare earths and domination of lithium processing and cobalt production enables it to influence prices at will to stifle competition. Industry figures propose international price floors ^[8] for certain minerals to underwrite new, alternative supply chains. Japan and Korea have established strategic reserves of certain critical minerals to insulate their industries from market perturbations and supply disruptions.

The overall priority for Australia, as both a key critical minerals producer and a global minerals investor across developed and developing countries, must be to implement and leverage the 27 cooperation agreements it has now signed. Australia must further develop its own production, strengthen supply chain relationships with allies and work with third countries to support their entry into supply chains.  It helps that Australian minerals companies are very active in most global regions.

But perhaps Australia should also reconsider how these many agreements can be appropriately serviced. At the very least, it needs a single implementation plan that articulates agreements into domestic and international action. In doing so, priority should be given to working with partners like Japan, Korea, the United States, Britain, the European Union and Canada in a minilateral way that leverages each country’s interests and strengths.