23 May 2017
Lithium, cobalt, rare earths, manganese, magnesium, tantalum, vanadium and titanium (from rutile and ilmenite) and a few other lesser known minerals are “critical”.
These critical minerals are “metals and non-metals considered vital for the economic wellbeing of the world's major and emerging economies, yet whose supply may be at risk due to geological scarcity, geopolitical issues, trade policy or other factors”.
"Reliance on one or a few countries for raw or processed critical minerals carries risks, exposing supply to changes in trade or domestic policy, geopolitical tension and internal political instability.”
They also present an opportunity for Australia.
The production of many critical minerals is geographically concentrated. Although geological scarcity is a factor, in many instances production is concentrated in countries with less stringent environmental and social regulations, which reduces the relative private cost of mining and processing, increasing profitability.
The capacity to recover critical minerals can also be a supply constraint. Rare earth elements are not in fact ‘rare’, they are relatively abundant in the earth’s crust. However, they tend be both widely dispersed, rather than concentrated in mineable deposits, and difficult to separate.
Downstream processing and manufacturing capabilities are also geographically concentrated for many critical minerals. China produces 62 per cent of rare earths while also controlling most of the global processing and refining. China is also the world’s largest producer and consumer of refined cobalt and it dominates lithium processing and refining.
Reliance on one or a few countries for raw or processed critical minerals carries risks, exposing supply to changes in trade or domestic policy, geopolitical tension and internal political instability.
When China reduced its rare earths exports in 2010, prices spiked.
Japan - the largest importer - faced an undersupply of the rare earth elements crucial to its technology supply chains. More recently, China considered the control of rare earth exports as a way to retaliate against the US’s introduction of tariffs and other trade barriers. The situation is more settled at the moment, with China agreeing to purchase scandium and yttrium (two rare earth elements) from the US earlier this year, but tensions could flare again.
Australia may benefit from the uncertainty around critical mineral supply chains.
In 2019, Australia and the US agreed to work on an action plan to improve the understanding, supply and security of critical minerals in both countries. Plans are now in progress for Australian company Lynas to contribute to the development of a rare earths processing plant in the US and for Arafura Resources, another Australian company, to export rare earth ore from the Northern Territory to the US for processing.
Australia and Japan have also committed to further cooperation on 5G technology and critical minerals.
Australia’s stable political environment and mining expertise make it a reliable place for businesses to invest. The Perth USAsia Centre notes Australia has bilateral free trade agreements in place or under negotiation with several major critical mineral consumers - China, Japan, Korea, the US, India and the EU - as well as relevant regional agreements.
New energy economy
The global move away from fossil fuels towards renewable energy relies heavily on the availability of critical minerals like lithium, cobalt, manganese and rare earth elements.
These are used in the solar panels, wind turbines, energy storage, charging infrastructure and electric vehicles that enable a lower carbon footprint.
The World Bank estimates demand for these minerals could rise up to 500 per cent by 2050, while ANZ Research’s calculation (based on the Bloomberg New Energy Finance scenario) suggests even higher growth rates for lithium, graphite and rare earths.
Diversifying exports and destinations
Along with the renewable energy sector, many high-end and new technologies, including 5G, are mineral-intensive, representing significant demand not only for major metals like copper, aluminium and nickel, but also for critical minerals. This presents an opportunity for Australia to diversify its commodity export basket, in terms of both product mix and country of destination.
Australia is a leading producer and exporter of resources. In 2018-19, resource exports accounted for around 60 per cent of its total exports of goods and services ($A281 billion). Three commodities - iron ore, coal and natural gas - made up around 70 per cent of total resource exports, leaving export revenue exposed to price volatility in those markets. And with the shift to lower carbon fuel sources, coal’s share is set to fall.
Investments in critical mineral production could diversify Australia’s commodity export basket. The market size of these minerals is growing. Western Australia’s lithium production alone has grown 35 per cent year-on-year, from $US92 million in 2010 to $US1.345 million in 2019, according to the Department of Mines, Industry Regulation and Safety in Western Australia (DMIRS).
Another reason for Australia to invest and focus more on critical minerals is to diversify its export destinations. Nearly 80 per cent of Australian iron ore exports are destined for China, along with around a third of liquefied natural gas (LNG) and more than 20 per cent of coal. Japan is the largest importer of Australian coal and LNG.
Other major mineral resource export partners include South Korea, India, Indonesia, the US and the UK. Australia exports 35 per cent of its copper to China, followed by Japan (12 per cent), while gold exports are mainly destined for the UK (39 per cent), Hong Kong (39 per cent) and China (15 per cent). China is also the largest importer of Australian mineral sands, followed by the US and the UK.
Australia’s reliance on Chinese and Japanese demand for its commodity exports makes it vulnerable to changes in trade policy or geopolitical tensions.
Investing in critical minerals - not only in exploration and extraction, but also in processing - could support diversification of Australia’s export markets.
Catherine Birch is Senior Economist and Soni Kumari is Commodities Strategist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
23 May 2017
01 Jul 2020