Australia is limbering up for an important policy initiative on critical minerals. Prime Minister Anthony Albanese needs gifts to give substance to his meeting with President Donald Trump. There are opportunities here, but we should be careful what we promise.
China has used critical minerals (especially rare earths) as a foreign policy instrument for more than a decade, cutting off supplies to Japan in 2010. A new episode is underway now, as China responds to American trade measures by threatening further limitations on rare earth exports.
Trump’s interest in rare earths goes back to his first term, but has intensified in his second term. Australia has almost “the entire periodic table”, so has something to offer.
Ambassador Kevin Rudd made the sales pitch in a dialogue at the Centre for Strategic and International Studies (CSIS) in August. Australia not only has the minerals, it also has experience, expertise, technology, legal frameworks, and environmental safeguards. Australia has been digging up minerals for nearly two centuries and is home to the world’s two largest miners (BHP and Rio Tinto). As Rudd says, this is not a matter of shovelling ore onto ships; these large miners have world-beating technology and sophistication in exploration, assessment, efficient extraction and transportation at huge scale.
Shifting the local industry beyond the dig-and-ship stage requires not only time but significant government support.
What he didn’t say was that foreign ownership dominates the minerals sector (estimated at more than 80%). Australians invest in residential houses and risk-averse superannuation funds rather than risky resources. Local investors are the risk-lovers and the very rich. The foreign investor is often the end-user of the product, with off-take contracts and a firm supply chain reducing investment risk.
Moreover, the rare earth projects are of a different scale and character to the giants of iron ore, coal, and LNG. With just a single exception, they are at the “dig-and-ship” end of the supply chain. Foreign investors are often Chinese, interested is shipping ore to be processed under lax Chinese environmental laws, often funded with risk-tolerant state capital. Lynas, Australia’s sole processor, currently does this in Malaysia, with its more lenient environmental requirements.
Answering the current Chinese restrictions requires processed product, not ore. Shifting the local industry beyond the dig-and-ship stage requires not only time but significant government support. This is provided via Export Finance Australia, the Northern Australia Infrastructure Facility, the Clean Energy Finance Corporation, the National Reconstruction Fund and the Critical Minerals Facility. Iluka, with processing facilities under construction, has the unique advantage of a huge residual stockpile from other processing, but has still needed a $1.25 billion government loan.
To add further incentive, a Critical Minerals Strategic Reserve is under discussion. This promises a floor price, which would add price certainty for investors. The industry is, understandably, enthusiastic (perhaps explaining the current surge in share prices). But floor support prices have an unhappy history, with the taxpayer being the fallback funder when the market equilibrium price remains stubbornly below the floor price. Are subsidies for foreigners and our richest investors the best use of taxpayers’ money? An equity stake or a floor-plus-ceiling price band would give the taxpayer some up-side. In any case, any incentive would be better directed at processing rather than digging ore.
What have we got to offer that would appeal to President Trump? The CSIS assesses that Australia is second only to the United States in potential for processing and equal to Canada in key investment criteria. These are still just prospects, and it is final product, rather than ore, that is needed to counter the current China restrictions. But our potential may be the best that Trump can find.
We should, however, avoid any sort of preferential deal just with America, with China excluded. Such exclusivity is implicit in the Rudd speech, with its talk of “providing long-term security of supply to the free world”. This is also the clear intent of the Quad critical minerals discussions and the proposal of former Defence Minister Kim Beazley to make critical minerals the third pillar of AUKUS.
Our longer-term interests are best served by remaining open to all investors, including China.
Australia should avoid joining the arm-wrestle with embargoes and restraints to trade. We are a middle-sized economy heavily dependent on international trade in general, and trade with China in particular. Free trade is our lifeblood. The most useful thing we could do is to push as hard as we can for a return to unrestricted international trade, which means we should seek an effective modus vivendi with China.
Our longer-term interests are best served by remaining open to all investors, including China. Our mining history suggests that our comparative advantage is in extraction. China has the processing technology. As our processing knowledge grows (thanks to the CSIRO, and through requiring Chinese investors to share technology), we can move up the supply chain. But this will take time and careful nurturing.
The Foreign Investment Review Board guidelines were tweaked in 2024, including limitations on Chinese ownership. But it would be a mistake to exclude Chinese ownership. Australia might, however, require firms using Australian-sourced ore to undertake to sell the final product on the open market, without embargo or discrimination between buyers. Would this be enforceable? If Australia offers consistent conditions to all investors, it will be in their individual interests to play by the rules.
When Deng Xiaoping made his oft-quoted comment that “OPEC has oil, we have rare earths”, the implication was not trade embargo. OPEC may try to control price, but its income depends on selling to the world. China’s interests are the same.
