Early 2024 has not been kind to investors in critical minerals. Media outlets across Australia have run with headlines talking of ‘crash’, ‘crisis’ and ‘collapse’, with many blaming China and Indonesia for the slump— especially in nickel prices. This is in stark contrast to the extreme bearishness in 2022 and 2023.

Alarmingly, some players are using this ‘crisis’ to call for government bailouts and softer regulation. Others, including Minister for Resources and Minister for Northern Australia Madeleine King, are pushing for global green mining standards and a premium price for nickel produced with higher environmental standards.

Since January 2023 the spot price of nickel on the London Metals Exchange has fallen by over 50%, while the price of spodumene (the raw mineral containing lithium) in China has fallen by almost 70% from all-time highs. However, the story here is more about the exceptional prices of both nickel and lithium, through 2022 and into 2023 when global demand outstripped supply and stockpiles dwindled.

Benchmark Minerals Intelligence analysts argued recently that we have witnessed a classic commodity bubble bursting—this is more of a correction than a crash. Lithium is still priced at more than double pre-pandemic levels, while nickel is up 28% on 2019 prices. Likewise, Adamas Intelligence point out that long term demand driven by growth in EVs remains strong. Of course, this is cold comfort to workers being laid off in WA’s nickel mines and refineries.

The fortunes of lithium and nickel—along with all other critical minerals—are entwined with intersecting geopolitical and security strategies of states and multinational corporations.

Before making knee-jerk reactions like reducing regulation or providing corporate bailouts—which would undermine the social licence to operate—it is worth considering the geo-strategic context and particularly the rise of Indonesian nickel and the US Inflation Reduction Act.

Indonesian nickel has been the standout success of ‘down-streaming’. Through a series of export bans alongside Chinese investment in smelters, Indonesia went from exporting unrefined ore pre-2014, to becoming the second largest producer of steel grade nickel products by 2019. In 2021, the government created the mega state-owned enterprise, the Indonesia Battery Corporation (IBC), which aims to control 51% of nickel mines and smelters and 25-40% of cathode and battery production. The IBC has partnered with Chinese and Korean investors to build a new generation of H-PAL (high pressure acid leech) smelters to produce battery grade nickel products.

However, there are serious concerns about labour standards, deforestation and deep-sea tailings placement around Indonesian nickel projects.

With massive state coordination, economies of scale, lax regulations, and massive investment from Chinese and Korean capital, Indonesian nickel products are always going to be cheaper than anything Australia can produce.

However, complaining about ‘cheap’ and ‘dirty’, Indonesian nickel ‘flooding’ the global market won’t achieve anything—except alienating our neighbour with borderline racist language.

Australia’s advantage in nickel is our ESG (environmental, social and governance) reputation, as clearly identified in every state and commonwealth government strategy on critical minerals. While Indonesia sells its low-cost nickel products to China, Australian companies and governments should double down on our existing advantage. However, our research shows that governments are not upgrading environmental or social regulation at the same time as they seek to upgrade the industry.

Australian nickel does have a crucial advantage over competitors in its eligibility to supply North American manufacturers attracting subsidies from the US Government.

The US Inflation Reduction Act provides subsidies of US$7,500 for each electric vehicle produced in North America, using critical minerals sourced from mines or refineries in countries with which the USA has a free trade agreement and where those projects are not controlled by a ‘foreign entity of concern’ (FEOC). Australia has an FTA with the USA, while Indonesia does not yet have an agreement.

Proposed US guidelines on FEOC definitions rule out critical minerals produced by a mine or refinery with 25% or more ownership by any Chinese company. Notably, if applied as proposed, the definition will exclude lithium sourced from Greenbushes, including the lithium hydroxide from WA’s two most advanced refineries. This is because Chinese company Tianqi owns 51% of a joint venture with Australian firm IGO that then owns 51% of the mine.

As things stand the big winners from the FEOC definitions are other lithium projects in Australia—mitigating the impact of the recent price correction. Pilbara Minerals, in particular, which runs a joint venture with Korean giant POSCO to refine its spodumene in South Korea, stands to benefit.

For Indonesian nickel operations to sell into US IRA compliant supply chains, the Indonesian government would need to sign a limited FTA with the USA and, even then, only projects with less than 25% Chinese equity would be eligible (currently none exist). Such a prospect is hypothetically possible in the longer term, of course.

The ultimate impact of US IRA subsidies on critical mineral prices is debated, it is but one mechanism that could facilitate a premium price. The EU’s battery passport is another. There are also investor led initiatives. Australia should continue to support all such initiatives.

As mentioned, Indonesia does have ambitions to continue building out downstream battery manufacturing. To do this at scale, it may well need Australian lithium. The Western Australian Government has already signed an MoU with Indonesia to work towards lithium supply and cooperation on research, and the Commonwealth government has begun similar talks.

Given this latest price correction, some WA nickel miners have criticised this cooperation, failing to recognise that Australian lithium could stand to benefit from closer ties. Of course, there will be difficult questions about how best to engage with Indonesian nickel producers given their environmental and social impacts, but this should be done in collaboration with Indonesian civil society and community advocates.

Cooperation with Indonesia could be even more attractive if the US FEOC definitions in the IRA do exclude lithium from WA’s Greenbushes mine. Indonesia could be a destination for WA’s battery grade lithium hydroxide and cooperation between the two nations’ industries could help downstream development on both sides.

In Australia we must upgrade our competitive advantage—our environmental, social and First Nations outcomes to ensure stable, sustainable projects. High ESG standards may eventually provide potential price differentiation, and access to US and EU markets. But more importantly, a genuine social licence to operate facilitates in a secure, ‘de-risked’ investment for capital and supply for downstream producers and our strategic allies.

Different critical minerals have different geopolitical realities and demand different approaches. As the world’s largest lithium producer, we can pursue multiple simultaneous strategies. Until 2020 we only exported spodumene concentrate, 98% of which went to China for processing. Now, 10% is refined into lithium hydroxide domestically. Australia can export multiple differentiated products to general and niche markets.

In sum: for nickel, Australia should sell premium product into North American and EU supply chains, and advocate on the global stage for a ‘sustainable’ price while upgrading the social and environmental outcomes in regions to ensure a genuine social licence to operate.