Tag Archive for: supply chain

How Australia, with friends, can secure its place in critical minerals

Australia’s critical minerals sector is at a crossroads. As the United States recalibrates its industrial policies under President Donald Trump, Australia’s role in securing non-Chinese supply chains for critical minerals has never been more important.

To secure its critical minerals industry in partnership with friends such as the US, Australia must ensure US trade policies actively support its push to move up the value chain. It also needs a strategy to sustain key production during downturns, must better align critical minerals, defence and industrial policies, and it should push for stronger reciprocal investment from allies, especially in processing and refining.

While Australia is at the centre of such initiatives as the US’s Minerals Security Partnership and AUKUS, practical outcomes such as viable new supply chains depend on targeted investment and policy coherence. The 2024 suspension nickel mines in Western Australia and ongoing challenges in rare earth and lithium processing expose serious vulnerabilities. Australia risks becoming a weak link in the supply chain, rather than a strategic powerhouse.

Established in June 2022, the Minerals Security Partnership was designed to promote responsible mineral production and processing among partner countries. Joe Biden considered Australia a key part of this vision, but Trump’s return adds uncertainty. While his administration is pushing for reduced dependence on China, his inward-looking trade policies could unintentionally harm Australia’s contribution.

If tariffs extend to processed or refined critical minerals, as they cover aluminium, Australia may be discouraged from moving up the supply chain. As of 2023, Australia supplied about half of the world’s raw lithium but lacked the processing capacity to realise the material’s full value. Mineral refining remains a weak point; China dominates the sector. Australia needs investment to compete, and the US is the partner of choice. Yet Australia supplies relatively few critical minerals to the US, limiting its leverage​.

At least five Western Australian nickel mines suspended operations in 2024 due to global oversupply and falling prices. The closures resulted in major job losses and raised concerns about supply chain resilience.

Nickel is a strategic material, with uses in batteries and defence. Indonesia, the world’s top nickel producer, is aligning itself closely with China and has joined the BRICS. So declining production in Australia is a strategic misstep.

Rather than waiting for market forces to decide the fate of its nickel industry, Australia should have used its 2023 critical minerals strategy to stabilise production. More importantly, countries in the Minerals Security Partnership, particularly the US, should have stepped up and invested in Australia’s mining and processing capabilities. Friend-shoring needs to be more than just rhetoric.

Despite setbacks in nickel, Australia is making progress in rare earths. Lynas Rare Earths is expanding its processing facilities in Kalgoorlie, and Iluka Resources is developing Australia’s first fully integrated rare earths refinery at Eneabba. Federal funding supports these projects.

China controls more than 90 percent of the world’s rare earth refining. It also has used export restrictions and bans as a geopolitical tool.

Australia’s Critical Minerals Production Tax Incentive—a 10 percent tax credit for onshore processing—raises serious questions. Since Australia lacks a viable downstream industry, such as refining, alloy production, or manufacturing, these processed materials still go to China. Australian taxpayers are just subsidising the middle stage of the supply chain, only for China to capture the higher-value downstream benefits. Without a full industrial chain, this policy doesn’t create real resilience in supply; it just makes Australian critical minerals slightly cheaper for China.

Australia’s critical minerals strategy also affects its national security one. Nuclear submarines rely on more than a dozen critical minerals, including rare earths for sonar systems, cobalt for high-performance batteries and titanium for hull construction. Other advanced defence systems depend on stable critical mineral supplies.

Securing these materials requires a coordinated approach. The US, through the Defense Production Act, can prioritise domestic mining, refining and processing of key materials for defence and high-tech industries, reducing reliance on imports from potentially hostile nations. In 2024 Australia was designated as a domestic source for funding, showing the potential for deeper collaboration and greater supply chain resilience.

If the US and Britain see Australia as a long-term defence partner, they should be investing in its critical minerals sector. AUKUS should be a platform for strengthening Australia’s industrial base, including processing and refining critical minerals.

Australia’s approach to critical minerals is guided by a suite of strategic policies and documents that play a role in securing supply chains, strengthening Australia’s industrial base and strategic position, but better alignment is needed.

Closer coordination of critical minerals policy with its defence, industry and trade strategies can revitalise capacity in the industry while helping to diversify mineral supply chains away from China.

Australia can’t afford to take a passive approach. Global supply chains are shifting fast. If Australia wants to be a cornerstone of Western critical mineral security, it must act decisively and demand that its allies do the same.

Guidance for critical minerals policy from ASPI’s Darwin Dialogue 2024

Critical minerals are a focal point of international contention in an increasingly fracturing international system. These minerals underlie competition across civil and defence sectors and promise economic opportunity throughout their supply chain. Furthermore, they are vital to the clean energy transition, with minerals needed for electric vehicle batteries, solar panels and even wind turbines. Yet, their supply chains face extensive challenges.

Since ASPI’s inaugural Darwin Dialogue in 2023, Australian and foreign governments have begun implementing industrial policies to support domestic growth in critical minerals and downstream industries.

The Darwin Dialogue 2024 brought together high-level government representatives of Australia, the US, Japan and South Korea and senior representatives of other nations, academia and think tanks, held over two days in April 2024. It assessed the rise of industrial policies and discussed the next policy steps to achieve diversified supply chains, unlock investment in industry, protect industry from geopolitical risks, and deepen market environmental, social and governance considerations.

Australia’s critical mineral policy is principally shaped by the Critical Minerals Strategy, released in December 2023, and the Albanese government’s flagship industrial policy, Future Made in Australia, announced ahead of the Federal Budget 2024-25. It is further backed by close collaboration with state governments.

Implementing Future Made in Australia comes with significant costs, but industrial policies help navigate our geopolitical environment—especially in highly exposed sectors such as critical minerals.

In many respects, the rise in industrial policies is a targeted response to China’s dominance across supply chains. But it is also an attempt to stay competitive against policies implemented by allies—principally the United States’ dryly named Inflation Reduction Act (2022).

However, concerns remain around the strategic planning behind a Future Made in Australia. The government must stick to a clear, results-oriented strategy, making targeted investments to build a viable interconnected sector in collaboration with states and territories. Currently, there is a risk that investments could be process-oriented and perhaps disconnected.

Industrial policy is a double-edged sword: it protects and promotes domestic industry while also picking winners and potentially further fracturing the international trade order. It must be handled with caution. We must be careful about where we compete, where we cooperate and, importantly, with whom we do either.

Governments naturally focus on domestic industries and opportunities and selectively engage partners, but no single nation can build the necessary mineral supply chains alone. At the Darwin Dialogue 2024, there was broad consensus that national and transnational government interventions are unavoidable in the critical minerals sector—but they must be implemented carefully.

Overly focusing on domestic concerns instead of working internationally obscures pressing, near-existential challenges for the critical mineral sector. Current supply chains are insecure, and projected demand is likely to far outstrip supply of many critical minerals. This could constrain energy transition and building defence capabilities.

Rapid expansion of critical minerals production is needed. To achieve that, Australia and its allies must harmonise policies and build shared supply chains, rather than build domestic competitors that may cannibalise one another. Some competition is needed and unavoidable, but it must be proportionate.

Australia’s policy framework must work to attract new domestic and international investment sources, particularly since the Foreign Investment Review Board is rightly blocking Chinese investment into critical minerals on national security grounds. Policy options include unlocking superannuation fund investment, maximising use of free trade agreements and increasing demand by building joint stockpiles. We must also protect industry from politically driven price risks, noting that political risks are remarkably difficult to project or hedge against as they are external to the market.

Notably, unlocking new investment and developing new supply chains is not about bifurcating global trade or alienating any one nation from the supply chain. Doing so would be neither effective nor realistic. Rather, Australia and its allies must strive towards diversifying supply chains away from any singular, concentrated source or destination.

Furthermore, in developing these supply chains, Australia and its allies must maintain and extend high standards of environmental, social and governance performance. This means limiting harmful impacts of energy transition and building business models that are resilient to geopolitical or domestic social-licence risks over the medium to long term.

ASPI’s report from this year’s event, Darwin Dialogue 2024: Triumph through Teamwork, offers 11 key policy recommendations for government and industry to evolve Australia’s critical mineral policy framework.

It identifies ways to deepen minilateral cooperation with the US, Japan and South Korea across government and industry, secure new streams of funding for Australian industry, increase the number of graduates from Australian universities in fields related to critical minerals mining and processing, and improve market environmental, social and governance considerations.

Beijing’s ban on Australian coal is hurting China

Every million tonnes of coal has recently been costing China’s steel mills more than US$400 million, compared with around US$250 million paid by steel mills everywhere else. The difference is entirely explained by China’s embargo on Australian coal.

Since China’s mills use almost 2 million tonnes of coal every day, the premium it pays above coal costs in the rest of the world adds up to about US$2 billion a week.

If the embargo were dropped tomorrow, Chinese mills wouldn’t make that entire saving: world prices would rise once Australian coal started flowing to China, but Chinese prices would surely fall.

China’s ban on Australian coal purchases from around November last year has caused huge distortions in the global coal market, with separate Chinese and rest-of-the-world pricing developing for both metallurgical coal used by steel mills and thermal coal used by power stations.

The disruption has been greatest for metallurgical coal. Australian exports account for 58% of the global seaborne trade in metallurgical coal, compared with 21% in thermal coal. In 2019–20, China took a little over a third of Australia’s premium metallurgical coal exports and Australia supplied about 55% of China’s metallurgical coal imports.

As BHP expressed it in its annual results report, ‘Australia was both the largest seaborne exporter of metallurgical coal and the largest seaborne supplier to the clearing market, China. Therefore, this bilateral trading relationship was much more than just one of many in a vibrant and competitive global trade—it was the sun around which the other planets of the [metallurgical] coal solar system orbited.’

The ban caused immediate pain in both China and Australia. A queue of 46 ships carrying around 5 million tonnes of Australian coal developed off the Chinese coast by December as the Chinese owners of these cargoes tried unsuccessfully to get them landed and cleared through customs.

The price for Australian coal plunged, while prices inside China jumped, with an immediate gap of US$85 per tonne opening between the two (after allowing for freight). Suppliers from the United States and Canada that traditionally sold coal into Europe switched to China, where they could double their returns, while European mills turned to Australia, where they could get cheap supply.

China’s authorities assumed that the loss of Australian coal would be made up comfortably by other suppliers and by their own huge reserves. But they were hit by a succession of supply shocks.

Mongolia replaced Australia as China’s largest source of supply, but the Covid-19 pandemic forced the closure of the two main coal truck routes in May. BHP reported that the trade which had carried 720 coal trucks a day had slowed to a trickle. There was some recovery in July, but then another closure in late August.

There are limits to the volumes available from suppliers like the US. China’s total metallurgical coal imports slumped from 46 million tonnes in the first seven months of 2020 to 26 million between January and July this year.

China’s steel mills consume almost 700 million tonnes of coal a year and obtain 88% of it from domestic mines, but imports are crucial both for their quality and for their flexibility in meeting demand.

However, China’s domestic supplies have also been troubled. A series of fatal accidents has forced the closure of many Chinese coalmines. Last week, a 6-million-tonne-a-year coalmine in Shanxi province was ordered to close for a month after a worker was killed. This followed the closure of 22 coalmines in the province after three mining accidents in June.

According to the South China Morning Post, a quarter of production capacity in Shanxi—the province that produces the most coal—has been shut down for safety reasons. Coalmine closures for safety reasons have also been ordered in Henan and Hebei provinces.

Following last week’s closure, top-quality coking coal from Shanxi soared to ¥3900, equivalent to US$613, a tonne. Imported coal for steel mills rose to a record US$412 a tonne.

The increase in China’s prices has dragged Australian prices higher. Last week, coal was trading at US$274 a tonne, up from just US$100 a tonne after the Chinese embargo was imposed.

China’s steel mills have been able to pass the increased costs of raw materials on to their customers. With the Chinese steel industry under orders to keep production this year to no more than the 1.06 billion tonnes produced last year, there’s competition among customers to secure supplies, which is pushing steel prices higher.

The share price of the biggest producer, BaoSteel, has risen by 60% to a record level since June as the force of the government’s production limits has become apparent.

The cap on steel production is in pursuit of the government’s environmental objectives of improving air quality and capping carbon emissions before 2030, while authorities have also been keen to lessen their dependence on Australian iron ore.

Imposing trade barriers always causes some harm to the country responsible. There were pleas from China’s breweries not to impose tariffs on Australian barley as it was hard to replace with barley of the same quality. Chinese consumers are being denied Australian lobster, which they valued, and are now paying premiums to obtain it through contraband routes. The Chinese authorities have always thought such costs were minor relative to their broader geopolitical aims.

However, rising steel costs are now filtering through to inflation more generally. Chinese factory gate prices rose 9.5% over the year to August, the fastest rate in 13 years.

While China’s recent curbs on its technology companies, home-tutoring services and entertainment industry have been gathering global attention, it may be that the regulatory interventions in the steel industry, including the embargo on Australian coal, wind up causing the greatest dislocation to the Chinese economy.

Global trade has rebounded, but stresses remain

Globalisation is back with such a vengeance that the shipping lines are struggling to keep up, sending freight rates to astronomic levels.

The onset of the pandemic early last year slashed trade volumes and highlighted the vulnerability of the extended supply chains that are the hallmark of globalisation, with different elements of production located in various countries.

At one stage, 70% of the world’s ports were affected by Covid-19, leaving ships unable to dock and more than a million crew members stranded at sea.

Political leaders around the world started talking about strengthening the resilience of supply chains and repatriating production. The backlash against globalisation was itself global.

In the United States, Donald Trump went to last November’s election promising tax breaks for firms bringing manufacturing back to the US and tariffs on US firms shifting production offshore, while Joe Biden vowed to reserve US government procurement for US firms.

In China, Xi Jinping articulated the concept of a ‘circular economy’, which meant a shift in focus away from international trade and towards domestic consumption and production.

In Australia, Scott Morrison spoke about strengthening the nation’s ‘economic sovereignty’, with a new ‘supply chain resilience’ office established within the Department of the Prime Minister and Cabinet, and a dialogue established with Japan and India on the topic.

The mood of the moment was well expressed by one of the government’s advisers on the post-coronavirus economic strategy, former Dow Chemical chief executive Andrew Liveris: ‘Australia drank the free-trade juice and decided that off-shoring was OK. Well, that era is gone … We’ve got to now realise we’ve got to really look at on-shoring key capabilities.’

By May last year, world trade volumes had dived 17%, but then the fall stopped and by October, global trade volumes were back to pre-pandemic levels. The World Trade Organization, which had expected trade across the year to be down by 13%, instead recorded only a 5% fall.

The monetary and fiscal stimulus response, particularly in the US, shored up household purchasing power, while home-bound workers shopped online. Effective management of the pandemic in much of Asia, particularly in China, brought a quick recovery in economic growth.

However, imbalances in the recovery are bringing stresses. Comparing the three months to April with the last three months of 2019 before the pandemic struck, the volume of US imports is up by 8.6% while the volume of exports is still 4% lower. (Trade volume estimates are derived from the Netherland government’s CPB World Trade Monitor.)

China’s imports are up by 18.2% and export volumes are an impressive 23.6% ahead of pre-pandemic levels. Exports from other emerging nations in Asia, including India and Vietnam, are 11.8% above the last quarter of 2019, while exports from other advanced Asian nations with the exception of Japan (South Korea, Taiwan and Singapore) are up 9%.

In the wake of the pandemic, globalisation is not so much about the model of distributed manufacturing but rather a simple story of manufacturing shifting from Europe and the US to Asia, particularly China. The supply chains are having trouble adjusting to an increasingly lopsided distribution of production and consumption.

This has resulted in shipping containers piling up in the US and in Europe waiting for exports to carry back to Asia, and also to blockages at major ports. Shipping line Maersk has complained that it’s taking three weeks to turn around shipping at Oakland, California, and there are delays at Hamburg. Rotterdam—Europe’s largest port—is at capacity.

Shipping costs have soared. The global average shipping rate on the world’s busiest container routes, measured by the Freight Baltic Index, has risen from US$1,400 per container to a record US$6,500, with the cost of shipping from China to northern Europe now up to US$13,200. A logistics service reported last week that shipping quotes from Shanghai to Los Angeles have reached as high as US$32,000 per container.

The difficulties of the shipping industry in adjusting to the post-pandemic economic surge were brought home by the blockage of the Suez Canal in March this year by a giant container ship, the Ever Given. This resulted in congestion at ports throughout the Mediterranean and northern Europe that has never cleared.

There’s now a global shortage of shipping containers, which are only made by two Chinese companies, and there’s an acute shortage of shipping space. Ship owners haven’t invested in new capacity, because returns were poor for the years leading up to the pandemic.

The shipping problems are likely to have a material economic effect in Australia, which is heavily dependent on imported manufactured goods. The global troubles of the shipping industry are being made worse in Australia by industrial action targeting Maersk.

The shipping shortage is also evident in the bulk shipping affecting Australia’s exports, as well as the container shipping we depend on for our imports. Bulk shipping costs, measured by the Baltic Dry Index, have doubled since March.

The increase in bulk shipping rates reflects the strong growth in China’s demand for iron ore. While this increases Australia’s advantage in that market over Brazil, market analysts note that China is sending ships further afield in an effort to reduce its dependence on Australian iron ore. China’s ban on Australian coal has also led to increased demand for bulk shipping with other suppliers, including Russia, Indonesia, the US and South Africa.

Opinion is divided over the diagnosis of what looks like a case of sclerosis in the arteries of the global economy. Some argue that the post-pandemic supply bottlenecks, of which the shipping industry is the most important, will dissipate as the global economy restores its equilibrium, with more ships and containers being built and demand steadying as the world emerges from the pandemic.

Others suggest that the disruptions being seen now reflect a deeper problem of fiscal and monetary policy stimulus in the advanced world running ahead of the supply capacity of the global economy, with the risk of higher inflation becoming entrenched.