Chinese-owned Tianqi Lithium last month argued that it was a ‘like-minded’ foreign investor in Australia. This invited close consideration of the somewhat contradictory aims Australia is currently pursuing in the critical minerals sector. It should make us better examine how we might resolve them.

The notion that a Chinese company fits the ‘like-minded’ bill is obviously at odds with how Canberra and other governments increasingly apply that term. This typically argues for greater pursuit of trade and investment with politically aligned countries at the expense of mere economic expedience. It particularly seeks reduced Chinese engagement, to create ‘trusted’ global supply chains.

Advancing commercial ties with strategically likeminded countries—otherwise known as ‘friendshoring’—has become central to Australia’s critical minerals policy in the past few years. This is clear enough in our having joined initiatives such as the US-led Minerals Security Partnership (MSP), which aims to build new trade and investment ties among an exclusive group of advanced democracies.

It is, on the other hand, possible to see how Tianqi’s interest at least satisfies a concurrent expectation government and industry have placed on Australia’s critical minerals activity: that we derive increased returns from our geological endowment, especially via greater processing and manufacturing. Tianqi has delivered on this value-adding imperative through its lithium hydroxide plant in Western Australia, which started producing battery-grade product last year.

The context in which Tianqi invoked likemindedness is also vital. It came as the company was mulling a potentially enhanced takeover bid for Australian lithium interest Essential Metals. It also came shortly after Australia’s Foreign Investment Review Board (FIRB) blocked a bid by China’s Yuxiao Fund to increase its stake in rare-earths company Northern Minerals on national security grounds.

There is a more intense strategic rationale for increased FIRB scrutiny of rare earths over other critical minerals: China has a broader and deeper value chain presence, and rare earths are particularly vital to defence applications. It is, however, also easy to see the tide shifting in favour of the FIRB limiting further Chinese interest in lithium, or other minerals vital to the economic sectors Australia is eager to grow.

Cutting off a source of capital would be less a problem if Australia were assured of reaping an alternative bonanza from friendshoring. There was good news on that front this week, with US-based Albermarle (Tianqi’s partner in the world’s largest lithium mine, at Greenbushes in Western Australia) announcing its own expanded lithium hydroxide investment.

Yet continued progress will be hard won. Politically aligned countries agree on the general principle of creating trusted supply chains. They are, however, actively positioning themselves to fight over the economic spoils of reshoring activity from China.

Australia’s most intense concern in this regard continues to stem from its most politically likeminded partner of all, the US. Washington’s Inflation Reduction Act (IRA), introduced in 2022, is already helping to unleash American clean energy potential. It incentivises US manufacturers to invest in Australian critical minerals. Its massive subsidies for largely downstream activity may, however, also draw investment from our own processing and manufacturing ambitions. This could help confine us to a familiar role as the quarry to more diversified major economies.

One part of Australia’s response to this quandary must be to lobby Washington, and other friends, for concessions that encourage their companies to invest more in our onshore value-adding activities. Another may need to be maintaining a tight definition of what constitutes a national security threat to the critical minerals sector, at least while interest from other partners grows.

Yet Australia must also take on much of the responsibility for ensuring we attract beneficial international partnerships. We should significantly improve the incentives we offer domestic industry to work with counterparts in politically aligned partners, particularly where it supports value-adding.

Canberra has so far been content with raising the spectre of further FIRB crackdowns and urging Australian companies to seek partnerships in trusted countries, even where these companies see little commercial incentive to do so. We have elsewhere liberalised access to our critical minerals—as with the recent India-Australia trade agreement—without particularly thinking about how this will translate into investments downstream from mining.

Australia can’t easily replicate something like the US IRA in scale. We also can’t directly copy its friendshoring mechanism of subsidising ties with free trade agreement partners, because we have an FTA with China. We can and should, however, adopt the general approach of offering tangible rewards for industry members that form politically desirable cross-border ties. We also shouldn’t shy away from seeking a greater share of the economic pie while doing so.

Canberra should make more support to domestic industry contingent on meeting its cross-cutting goals for the critical minerals sector. Mechanisms such as the Critical Minerals Facility have already prioritised investments that advance value-adding. They could provide further funding incentives for Australian companies to do this at the same time as working with partners in MSP countries. This, indeed, would directly accord with the MSP mantra of ensuring activity ‘supports the ability of countries to realise the full economic development benefit of their geological endowments’.

A growing number of strategically aligned countries are looking to work with Australia on creating trusted critical minerals supply chains. Yet we need to ensure our participation in this process remains in the broader national interest. Applying greater vigilance to Chinese investment in the sector is prudent. Yet it is potentially counterproductive without commitments that can ensure alternative partnerships are economically as well as strategically likeminded.

The geostrategic scramble to reduce supply-chain dependencies for critical minerals has overshadowed opportunities for Australia to use its resources to provide major benefits for the nation. There are clear and achievable pathways for downstream processing of critical minerals to contribute substantially to meeting Australia’s aspirations for net-zero emissions.

As it stands, Australia’s critical minerals sector is shaping as a primary exporter of insignificant scale. ‘Dig and ship’ remains the path of least resistance, and extracted volumes, actual and forecast, won’t make a meaningful imprint on the balance of payments. While some work is being done to change this, it’s mainly at the start of the value chain. The travails that Lynas Rare Earths is experiencing in relocating its processing capability from Malaysia illustrate the challenges Australia faces in developing downstream processing.

There’s no shortage of ambition, however. The Export Finance Agency’s $1.25 billion loan to Iluka Resources to construct a rare-earths refinery at Eneabba in Western Australia marked a renaissance of interventionist industry policy. The decision raised eyebrows in industry and project-finance circles: private capital markets were seen as capable of facilitating a well-established player and the government had until then been broadly averse to picking winners.

The Labor government’s October budget earmarked major initiatives, including significantly increased funding for the Northern Australia Infrastructure Facility and the creation of a ‘value-adding in resources fund’ as part of the $15 billion National Reconstruction Fund. The 2022 critical minerals strategy, developed by the previous government, established a $200 million accelerator initiative and provided $50 million over three years for a virtual research and development centre.

A refresh of the minerals strategy is underway that aims to tie these efforts together. The discussion paper released last year by the Critical Minerals Office, while heavily informed by the strategic direction of the US, did a good job of identifying national priorities and outlining the challenges confronting the sector. Its central goal is to move Australia beyond its role as a feedstock for trusted partners that have become deeply dependent on China and Russia.

The government’s agenda for rare earths and critical minerals is being repositioned as part of the transition to clean energy, rather than simply a by-product of fractured global supply chains. Facilitating the electric vehicle revolution via offtake agreements for lithium and rare-earth elements used in batteries has a desirable green tinge. Yet the themes behind this shift go further back, running through the West’s rejection of Huawei’s 5G network, the Donald Trump administration’s ‘America first’ platform, the rise in nationalism during the pandemic, and Russia’s invasion of Ukraine.

This is where clear eyes and steady hands are required, as risks of unilateralism abound. The US Department of Energy’s 2021 strategy to support domestic critical mineral supply chains is an exemplar of strategic coordination across government, industry and research. It clearly defined the US national interest and served as a precursor to the vast subsidies provided under the Infrastructure Investment and Jobs Act and the Inflation Reduction Act. Those policies directly challenge Australia’s economic interests and are a salient reminder of the need to build productive capabilities that can both complement and compete with US companies.

Concurrently, significant pressure is being applied on Australian companies to sell directly to the critical minerals buyers’ club that’s emerging in the West. The message is that building reliable, competitive and diverse supply chains means not exporting to China. This represents a de facto limitation on access to Australia’s largest trading partner. It heralds a third phase of the post-war trading system and warrants close attention.

In the first phase, directly following World War II, the global industrial base centred on the modular design of multinational corporations. Efficiencies were extracted through deep integration across countries and trading blocs, scaling the factors of production, and exerting direct influence over standard setting. The economic and legal landscape reflected US hegemonic leadership and the West’s design of multilateral organisations and frameworks.

The resulting surge in purchasing power, particularly in the East, along with a series of financial and banking crises, dimmed the appeal of modular design and paved the way for a second phase of complex vertical interdependence. Interdependence allows corporations to understand and be drivers of the values and concerns of governments, stakeholders and shareholders. The range of concerns has broadened significantly to include the sustainability agenda.

The third phase seeks to delimit globalisation, if not interdependence, by imposing barriers to trade and capital mobility, principally based on national security and supply-chain sovereignty. Australia’s comparative advantages—abundant critical minerals, industrial capability, jurisdictional stability, robust capital markets and close proximity to the Indo-Pacific—are effectively harnessed by trusted partners.

Only time will tell how this grand experiment plays out. For now, there are two initiatives that Australia can and should embrace that are agnostic to the rapidly shifting global landscape.

First, a sober reassessment is required of the state of Australia’s critical minerals expertise and research and development capacity. Levels of know-how and intellectual property are relative weaknesses, not the strengths often advertised. R&D in Australia has been trending down for decades, including at the CSIRO, the national scientific research agency. Brain drain has contributed to the broader decay, as have disparate incentive structures between research and industry.

Breaking down these silos and promoting alignment is a critical interim objective. R&D is where Canberra can have the most impact per dollar spent, while remaining technology-neutral and avoiding the pitfalls of corporate welfare.

Second, where sovereign capabilities can be defined, scaled and deployed locally, they should be facilitated and even championed. Look to Darwin’s Middle Arm Sustainable Development Precinct, which is shaping as Australia’s most strategically important industrial zone. Supported by billions of dollars of federal funding and neighbouring key defence capabilities, the precinct is a critical gateway for landlocked Northern Territory industries and an opportunity for common-use infrastructure to be designed and optimised at scale. It’s also a test for the NT government in terms of implementation amid high community expectations, particularly in relation to the energy transition and inclusion of First Nations peoples.

The Middle Arm precinct is set to emerge as the starting point for the nationwide deployment of large-scale solar resources and highly engineered water infrastructure. This, along with the proximity of a large, urbanised workforce, will facilitate the emergence of new industries that will certainly involve critical minerals.

My company, Tivan Limited, plans to produce two critical minerals, vanadium pentoxide and titanium dioxide, at Middle Arm, using technology developed in conjunction with the CSIRO. Tivan’s Speewah resource in Western Australia has the potential to produce more than half of the global vanadium supply outside China and Russia, with a project life in the hundreds of years.

The project is sufficient to develop a large-scale, modular vanadium redox flow battery (VRFB) sector in Australia to progressively transition industrial facilities, towns and cities from coal and gas as primary sources of electricity. These sources represent around one-third of Australia’s carbon emissions, so abatement can make a significant contribution to reaching net zero.

While the consolidated efforts of government, industry, research and community will be required to ensure cost-competitiveness in the emerging grid battery sector, there’s no engineering or know-how constraint. We continue to collaborate with the CSIRO in the field of critical minerals processing, and the original patent for VRFB was secured by the University of New South Wales in 1986. The VRFB sector is now taking shape rapidly in China, reflecting the technology’s superiority for long-duration grid storage compared to lithium-based alternatives and pumped hydro.

ASPI’s upcoming Darwin Dialogue is a welcome opportunity to introduce key stakeholders to these initiatives and to highlight Australia’s capabilities in defining projects that are unambiguously in the national interest, central to the climate transition, and entirely sovereign in design and capability.

On 12–14 April, ASPI, with the Northern Territory government’s ‘Investment Territory’ program, will host the inaugural Darwin Dialogue. The 1.5 track dialogue will bring together government, industry and academia representatives, including delegations from Japan and the United States, to discuss establishing secure supply and value chains for mining, processing and refining critical minerals outside China.

As one of Australia’s most experienced past defence ministers, Kim Beazley has strategic issues still front of mind. He brought this strategic lens with him when he became governor of Western Australia and used the weight of that position to drive discussion on the strategic importance to the nation and its allies of the rare earths and other materials being mined in Australia.

He’s alarmed about China’s near global monopoly over the processing of these minerals that are becoming increasingly crucial for both the manufacture of military equipment and the efficiency of green technology, such as electric vehicles, to reduce emissions in the face of climate change.

Beazley notes that advanced weapons systems that nations such as Australia will rely on to give them an edge in deterrence or in conflict can’t be manufactured without rare earths.

The well over 3,000 items of US military equipment requiring rare earths include crewed and uncrewed aircraft, satellites, nuclear weapons, missiles, surface warships and submarines, advanced radars and combat systems, and army vehicles such as tanks.

Next week, ASPI and the Australian National University will co-host a conference on rare earths at which the minister for resources and northern Australia, Madeleine King, will be a keynote speaker. Developing critical resources is a strong focus of the minister’s portfolio.

Beazley tells The Strategist that a guaranteed supply of processed rare earths will be vital to manufacture the high-end capabilities to be developed under the AUKUS security partnership involving Australia, the UK and the US. Those capabilities range from nuclear-powered submarines to cyber capabilities, artificial intelligence, quantum technologies, hypersonics, standoff strike weapons and undersea technology.

A key Australian contribution will be providing those critical minerals, Beazley says, but Australia is placing too much emphasis on opportunities to export the raw materials and not enough on its own needs.

The rare earths comprise 17 elements that can dramatically enhance the magnetic properties, luminescence, catalytic characteristics and strength of metal components. Processing them is much more complex than dealing with iron ore, gold or uranium.

As Beazley gathered information from local and international experts, scientists described these minerals as the ‘vitamins of technology’ and the oxygen of our age.

Among the better known examples are neodymium and praseodymium used in magnets. The hydrogen industry uses lanthanum.

Rare earths are not necessarily rare, but they are considered to exist in concentrations too low to be mined economically. Beazley says vast amounts are already being mined in Australia, but processing here is limited so far. To ensure supply to the defence and environmental industries that depend on these minerals, the mined material must be processed. That’s a strategic imperative, he says.

Beazley says Beijing is well aware that Australia is the world’s only major producer of rare earths independent of the Chinese Communist Party–controlled supply chain. ‘Beijing has made offers for Western Australian mineral businesses well above market value to try to maintain its monopoly, and add to its arsenal of possible choke holds on increasingly vulnerable nations. Western Australia is perhaps ground zero in an apparent critical minerals war lying ever so eerily under the gaze of the public eye.’

China dominates world supplies of rare earths and long ago recognised their strategic significance. Former Chinese leader Den Xiaoping observed in 1992 that while the Middle East had oil, ‘China has rare earths’.

In 2006, China limited its rare-earth exports to ensure it had enough of the materials for its own needs.

In 2010, in a taste of what could come, China stopped rare-earth exports to Japan during a territorial dispute. That provided the world’s industrialised nations with an overdue wake-up call on just how dependent on Chinese production they had become. The global need to diversify provides Australia with a great opportunity, says Beazley.

It’s extraordinary, he says, that vital parts in the F-35 joint strike fighter rely on rare-earth magnets made by a Chinese company. China’s export-control laws allow Beijing to ban exports of strategic materials to specific companies, and that could leave defence manufacturers without crucial components for badly needed weapons, says Beazley. ‘I think there’s a little bit of unreality in the US about how dependent they actually are.’

In February 2021, the US launched a major review of it supply-chain security and it’s working to rectify the situation.

Its dominance of rare-earth production and processing means China can pull industry away from many nations while selling them back manufactured products. Western defence companies would be easy targets.

Beazley believes Australia is ahead of its US ally, but establishing the processing and manufacturing capacity to lessen dependence on China will require considerable government support. That can be done in cooperation with Japan, which has the technical capacity to process rare earths, and with the US, he says.

As WA governor, Beazley made the bold statement that WA industry was about 10 years ahead of NASA in key areas of dual-use technologies. ‘Australia is integral to the effective functioning of our allies and the world economy. Look no further than WA resources that feed supply chains—whether they are rare earths, lithium, titanium, iron ore or other resources spanning virtually every identified critical mineral—not to mention world-leading innovation born out of the resources sector, including those related to remote operations and autonomous systems,’ he said.

The Pentagon’s recent decision to freeze small grants to Australian rare-earth miner Lynas and its US rival MP Materials highlights the difficulty of breaking China’s stranglehold on the global supply of critical minerals.

Despite years of angst-driven US government reviews and presidential directives aimed at securing vulnerable defence supply chains, the US political system has had enormous difficulty in delivering targeted investment support to anything but the very largest of businesses.

Long-established firms like Boeing, Lockheed Martin and Raytheon gain vast public backing for defence-related projects, but support for smaller firms is seen as ‘picking winners’ and best left to the market and venture capitalists.

The Pentagon only announced its grants in late April, declaring they would ‘mitigate US reliance on China for rare earth minerals’ in line with the wishes of Congress and President Donald Trump.

But the Pentagon beat a hasty retreat at the first sign of political grapeshot, telling the firms that the grants had been ‘put on hold until further research can be conducted’.

Reuters reported that the funding was suspended after the US Department of Energy expressed concern about Chinese influence in MP Materials and discontent arose among Republican senators about support being offered to Lynas, as a non-US company. The group of senators has proposed legislation that would restrict any future funding solely to US-owned firms.

Congress is a broking house for vested interests and no proposal ever comes to fruition on the floor without horse-trading and deals. Support for small ventures is perennially vulnerable to being picked off by individual constituencies. The intervention of a Wyoming senator who wanted backing for a rare-earth start-up in his own state may have helped to cruel the Pentagon grants.

MP Materials and Lynas are the only non-Chinese rare-earth miners of any scale. China controls 80% of global rare-earth production and up to 100% of many of the stages of downstream processing and manufacturing. It also has a large share in global production of other critical minerals, including tungsten, graphite and vanadium.

China’s Shenghe Minerals has a 9.9% stake in MP Materials and an offtake agreement to process its raw materials. It was seeking Pentagon assistance to restart processing in the US.

Lynas wanted Pentagon support for a joint venture with Texas chemicals firm Blue Line to establish a processing plant for ‘heavy’ rare earths, which are crucial for permanent magnets operating at high temperatures, such those used in guidance controls for missiles. There is currently no processing capacity of any scale for these minerals outside China.

The size of the grants wasn’t disclosed, but the offer was small for both firms, intended simply to help establish feasibility. Lynas told the ASX that the suspension of funding wouldn’t have a material impact on its result.

It’s possible the program will resume—the Pentagon has proposed legislation which would increase the available funding for rare-earth projects to US$1.75 billion. However, US officials continue to point to the need for ‘market-led’ solutions to the national security concerns created by China’s hold on critical minerals.

A new report by Perth USAsia Centre’s Jeffrey Wilson argues that the market will not cure the supply-chain vulnerabilities for many of these minerals because the risks are too high.

Rare earths raise extreme technology risks, as each deposit requires a bespoke approach to extraction. Because pilot plants don’t necessarily reveal the problems that occur in full-scale operation, full development funding is required before a technology is proven. But that funding is hard to obtain without a secure offtake agreement and it’s hard to lock in customers before the technology is established.

Project promotors must also deal with elevated political and market risks. Because supply is monopolised, there’s a danger that any new entrant can be driven out of the market by predatory pricing. The potential for minerals that are critical to defence supply lines to be used as a political weapon introduces a level of uncertainty for investors.

Prices for many critical minerals have been highly volatile, soaring at times of tension or shortfalls in supply but then languishing for decades at unprofitable levels. China’s production is dominated by state-owned enterprises which are less responsive to market forces.

Wilson says there’s also a social risk. Much global production of critical minerals has had damaging environmental effects and, in the case of several nations, used child labour.

While critical-mineral strategies intended to overcome dependence on China have been developed by governments in the US, Europe, Japan and Australia, the only tangible result has been the Japanese funding of Australia’s Lynas in 2010.

Wilson argues that too much attention has been given to information-sharing and not enough to tackling the barriers to investment and providing material financial support. He says there has also been excessive emphasis on the supply of raw materials, rather than on the integrated value chain that includes processors and manufacturers.

There’s no point being able to produce non-Chinese rare-earth oxides if they still have to be shipped to China to be turned into metal and then into magnets. It’s also the case that to get a rare-earth project going requires not only capital funding but also committed customer support. Customers may need financial incentives to switch to a non-Chinese supplier.

‘Integrated approaches, which adopt a whole-of-value-chain perspective and promote the development of both upstream extraction and mid-stream processing, will be needed to properly secure supply’, Wilson says.

The biggest stumbling block, as has been shown by the Pentagon’s timidity, is that governments are no more willing to take on elevated financial risks than the private sector.

In 2010, the Japanese government was prepared to risk US$250 million backing Lynas and has stuck with the company through torrid times as it tried to get technology working and fended off attempts to force the closure of its Malaysian processing plant.

But no other government has been prepared to help any of the dozens of companies with promising critical-mineral deposits bring them to fruition. The dependence of military supply chains on China for critical materials will continue until this changes.