Critical mineral projects will be favoured for federal government loans under its new critical minerals strategy ^[1], but there are to be no tailored tax breaks. Nor are there any plans to make downstream processing a condition of mining or export approvals.

The strategy, released ^[2] this week by Resources Minister Madeleine King, is more a description of what the government is doing than a charter for a bold new direction.

The government hopes that its provision of base funding for critical minerals projects will attract larger flows of private-sector investment.

Funding is being delivered through an array of public-sector funds. The headline ‘announceable’ in the strategy was the direction that the Northern Australia Infrastructure Fund would earmark an additional $500 million for lending to critical minerals projects, particularly those that involve downstream processing.

There is also the $2 billion Critical Minerals Facility, administered by Export Finance Australia, which was the vehicle used to provide a $1.25 billion non-recourse loan to Iluka Resources to build a plant to process its large stockpile of rare-earth-rich sands at Eneabba in Western Australia.

That facility has also funded two smaller projects—$185 million to Renascor Resources for a graphite mine and processing plant and a US$40 million loan to EcoGraf for a battery anode material plant at Kwinana.

The government’s new $15 billion National Reconstruction Fund, designed to stimulate domestic manufacturing, also sets aside $1 billion for ‘value-add’ resource projects and $3 billion for ‘renewables and low-emission technologies’, which can be accessed by critical industry projects.

The strategy paper also suggests that the $6.5 billion Clean Energy Finance Corporation could also be tapped by critical minerals projects. Across all funds, it says there have been nine loans so far to critical minerals projects totalling $2.3 billion.

The fact that only nine loans have consumed what must be a material share of the potentially available funding highlights the limits of this approach. The strategy paper mentions that there are 81 ‘major critical minerals’ projects underway, with an estimated value of between $30 billion and $42 billion. The Australian Securities Exchange has 87 lithium companies on its list worth $50 billion (excluding Rio Tinto) and 38 rare earths companies worth a combined $16 billion. Plainly, only a lucky handful will get a government loan. It is at risk of becoming a lottery.

There have been suggestions that the $1.25 billion non-recourse loan to Iluka for its rare-earths processing plant has made it more difficult for rival rare-earths aspirants to get the funding and offtake agreements they need. The strategy paper expresses confidence that its support for critical minerals projects will, to use finance jargon, ‘crowd in’ private-sector investment or make projects more attractive for private investment. The risk is that it will crowd out investment in rival projects.

The choice of the Northern Australia Infrastructure Fund as the vehicle for delivering a targeted additional $500 million to critical minerals illustrates the constraints under which the strategy was developed. The NAIF had the uncommitted funds that could be earmarked, although its investment mandate, which focuses on infrastructure, may limit the kinds of support it can provide to critical minerals projects. The Critical Minerals Facility’s remaining funds of about $505 million are already committed to the sector, and the need to avoid additional budget spending meant it wasn’t going to be topped up.

Some in the critical minerals sector sought investment tax breaks. The Minerals Council of Australia’s submission ^[3] to the critical minerals strategy review highlighted that both Australia’s corporate tax rate and the marginal tax rate on resource companies are uncompetitive by international standards and are retarding investment in Australia. But budget and political considerations meant that this idea was never a starter.

There have also been calls to mandate further processing in Australia. Namibia and Zimbabwe have both banned exports of unprocessed critical minerals, and Indonesia is also insisting on further domestic processing of nickel and other minerals. Chile has said it will nationalise its lithium industry in order to increase domestic processing.

Further processing in Australia remains an express goal of the critical minerals strategy. However, the only leverage to achieve that, beyond political endorsement, is the support of government loans.

The strategy paper emphasises the importance of international partnerships, particularly in the context of realising Australia’s ambition to advance downstream processing. It suggests that this will be achieved through ‘investment from like-minded countries and global companies’, a formulation that excludes China without saying so.

Discussions have advanced the furthest with the United States. Australian Prime Minister Anthony Albanese and US President Joe Biden concluded a ‘climate, critical minerals and clean energy transformation compact ^[4]’ in May that establishes a ministerial-level taskforce on critical minerals. It involves the US National Security Council and Australia’s Department of Industry engaging with industry on steps to strengthen critical mineral supply chains.

The extent to which industry takes up this opportunity remains to be seen, but there has been impressive follow-through to the Biden administration’s Inflation Reduction Act, which provides subsidies to energy transition projects.

Critical minerals have featured in negotiations for a bilateral free-trade agreement with the European Union, but those talks have stalled over Australian agriculture access to the European market.

One of the top priorities in the strategy paper is to ‘establish a process to update Australia’s Critical Minerals List’. At present, that list includes 26 minerals deemed essential for emissions reduction, advanced manufacturing and defence. It doesn’t include either copper or nickel, both of which are expected to face huge unmet demand as the global economy shifts from fossil fuels to electrons.

There’s a risk that the pursuit of the esoteric will lead to basic strengths being overlooked. Many of the critical elements gain their value from the properties they contribute when alloyed with steel, so iron ore remains a fundamental building block for the future economy. So too are aluminium and zinc.

The strategy paper draws on modelling ^[5] compiled for the Department of Industry by consulting firm PwC Australia. Its baseline forecast is that Australia’s share of global critical minerals output (including copper and nickel) will rise from a current 5.7% to 7.7% of a much bigger global market by 2040. That would add $71 billion to GDP over the next 17 years, or roughly $4.2 billion a year. The gains would be multiplied if Australia were able to build more downstream processing and if it were able to extract premium prices by virtue of good environmental, social and governance standards, the PwC report says.