Government support for Australia’s rare-earths sector needs to factor in market risks
23 Oct 2019|

The Australian government could soon outline a package of measures to support the ‘critical minerals’ industry that may include assistance with base project funding.

Department of Industry, Innovation and Science chief Heather Smith told a recent conference that ‘the time is right’ for the government to look at supporting financing vehicles in collaboration with private partners.

‘From a national-interest perspective, we want to be the source [of critical minerals] and have a value-adding role while making sure we’re fostering a multiplicity of users across countries’, she said.

‘We understand that project finance is a problem if we are to de-risk the existing pipeline of projects’, she told the conference on critical materials organised by the Perth USAsia Centre.

The government established an interdepartmental taskforce led by the Department of the Prime Minister and Cabinet early last year to develop a strategy for minerals that are essential for defence purposes and have vulnerable supply routes.

This was in response to concerns of US President Donald Trump about his country’s dependence on China and Russia for critical supplies. ‘The United States must not remain reliant on foreign competitors like Russia and China for the critical minerals needed to keep our economy strong and our country safe’, he said in late 2017.

While the list of critical minerals is long (two-thirds of the periodic table is included in the lists of the US, Europe, Japan and Australia), there’s a particular focus on rare-earth minerals—a set of 17 elements that have a wide range of strategic uses, from powerful magnets to night-vision goggles, turbine blades and lasers.

China controls between 80% and 90% of rare-earth mining, separation and downstream manufacturing and authorities in Beijing have openly canvassed using the country’s dominant position as leverage in its trade and technology conflict with the United States.

After the US banned technology exports to China’s tech giant Huawei in May, the Chinese economic agency, the National Development and Reform Commission, warned that the US could not expect China to continue exporting rare earths for use in products that the US refused to sell to China.

In 2010, China slashed its rare-earth export quotas, partly, it was believed, to punish Japan over its claim to disputed islands. The resulting astronomic price rise caused major disruption to users.

In response to that crisis, the Japanese government funded the development of the Australian rare-earths company Lynas, which has a rich rare-earths mine in Western Australia and a processing plant in Malaysia. It now accounts for about 8% of global supply.

However, Australia has about half a dozen other listed rare-earths companies with good prospects that have been unable to line up binding offtake agreements and project finance.

Smith told the conference that the underdevelopment of the market was a ‘conundrum’, given the ubiquitous use of the minerals. She suggested it may be due to customers focusing excessively on lowest cost without paying regard to the risk of supply chain disruption.

She said the supply chain vulnerability raised both economic and strategic issues.

‘If the issue was only economic, we’d give more weight to market solutions, perhaps assisted by competition policy and minor government interventions that would facilitate the development of alternative processing and extracting operations, while we’d put emphasis on greater market transparency.

‘But if the issue is predominantly strategic, the case for government intervention within and across countries becomes stronger. It raises a question about how government fosters particular sectors.

‘The emergence of a more diverse and secure market does require integrated action on both supply and demand sides in order to mitigate the risks that can alter market dynamics.

‘This requires focusing on how we can secure long-term offtake arrangements to underpin that bankability and to attract capital, both debt and equity.’

It is understood that in-principle cabinet decisions have been made about the shape of the government’s support package. The issue was discussed with US Commerce Secretary Wilbur Ross during his visit to Australia earlier this month. Announcements are likely to be made after ministerial discussions in Washington in November.

There is understood to be some frustration within the Australian taskforce on critical minerals about the lack of a clear strategy on the part of the US. The Pentagon knows what it wants, but aligning the viewpoints of the various US government agencies has been difficult and their Australian counterparties have been left in the dark.

Trump has made declarations under the Defense Production Act for rare earths which enable government financial support. However, the amounts are relatively small, typically below US$50 million. The Australian government is likely to be looking for US to underwrite offtake agreements to support its defence needs.

West Australian governor and former ambassador to the United States Kim Beazley, who also addressed the conference, gave voice to that frustration, saying the US had a ‘long road ahead’ to overcome its supply vulnerabilities.

‘Big tech and strategic producers, including the defence industry, are understood to have often modest stockpiles of critical minerals—amounts they keep classified. It appears they are insouciant when it comes to supply contingencies. This is a significant risk. There are some 3,300 items of US military equipment that do not work without rare earths. This includes everything from nuclear weapons to night-vision goggles.

‘You cannot simply ramp up production and effectively process rare earths from scratch within six months or recycle them in suitable quantities to meet strategic needs spanning economic and defence interests’, he said.

The Australian government has already flagged that the Northern Australian Infrastructure Fund is available to support critical mineral projects. While several rare-earth project promoters have held discussions with the fund, take-up has been hampered by the requirement that firms put in matching funding. The government has also flagged the possibility of funding from Export Finance Australia.

As the author of a new report on rare earths from the University of Sydney’s United States Studies Centre, I have argued that while there are national security reasons for the government to support the sector, it would need to go into any financial underwriting with its eyes open to the possibility that taxpayers’ funds will be lost.

A key reason why private investment has been lacking is that prices for these minerals have been very low for much of the past decade. Although analysts predict that shortages will be generated by demand from electric motor vehicles and wind turbines, the recent history is one of frequent oversupply.