Rock on: big opportunity for Aus minerals

Global demand for critical minerals is forecast to grow exponentially in the coming decade, as the use of complex and sustainable technologies which rely on such resources rises.

Australia is already the world’s largest producer of lithium and rutile and a top-three producer of manganese, ilmenite and rare earths. The country has a significant share in the global reserves of these minerals, along with tantalum, cobalt and vanadium, among others.

Coupled with the numerous projects in development related to these resources within its borders, Australia has a huge opportunity to capitalise on the growing demand in the long term.

According to Geoscience Australia, critical minerals are metals and non-metals “considered vital for the economic wellbeing of the world's major and emerging economies, with supply that may be at risk due to geological scarcity, geopolitical issues, trade policy or other factors.”

Investment and production in this area could help Australia support its economy through post-COVID recovery, diversify its commodity export basket (in terms of both product and destination) and contribute to and benefit from the global shift towards sustainable technology.

Many renewable energy technologies rely on critical minerals as components, including wind turbines, solar panels, energy storage and electric vehicles. Demand will rise as countries work towards emissions reduction targets and environmental standards and regulations are strengthened.

Sustainable producers will lead demand and early movers in this area will benefit.

Essential

Critical minerals are essential inputs across a range of economic sectors, including energy storage, renewable energy generation, transport, electronics, communications, pharmaceuticals, construction, defence and other manufactured goods.

Geological scarcity is a factor in supply risks, but in many instances production is concentrated in countries with less-stringent regulations, reducing the private cost of mining and processing, and increasing profitability for producers in those countries.

The capacity to recover critical minerals can also be a supply constraint. Rare earth elements are not in fact ‘rare’ but relatively abundant in the earth’s crust. However, they tend be widely dispersed, rather than concentrated in mineable deposits, and difficult to separate.

Reliance on one or a few countries for raw or processed critical minerals carries risk, exposing supply to changes in trade or domestic policy, geopolitical tension and internal political instability.

Australia may benefit from the uncertainty around these 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.

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 US Asia Centre notes Australia has bilateral free trade agreements in place or under negotiation with major critical mineral consumers including China, Japan, Korea, the US, India and the EU, as well as relevant regional agreements.

New economy

The move 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 still higher growth rates for lithium, graphite and rare earths.

Sustainable production is another clear opportunity. According to the CSIRO, in small-volume, high-value, tech-metal markets, “green and ethical credentials and a stable supply can out-perform [competitors on] price”.

The CSIRO is working with industry to reduce the environmental footprint of mining and mineral processing.

Critical minerals are non-renewable. In the traditional linear economic model, minerals are extracted, processed, inputted during the manufacturing process, used as a component within a product, and discarded at the end of the product’s life.

In contrast, in a circular economic model, minerals are recovered and reused. Critical minerals are well-suited to this approach given their durability and high value. In Australia, for example, there are three facilities that recover antimony from lead acid batteries, such as car batteries, producing antimonial lead.

There are several benefits to this model. It improves the security and longevity of critical mineral supply, is less resource-intensive than mining, reduces waste and can improve competitiveness.

Diversifying

Renewables growth represents 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.

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 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. 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.

Over 2018 and 2019, prices dropped for some critical minerals such as lithium and cobalt. Supply ramped up in response to higher prices in the mid-2010s while the deterioration in the global economic outlook and policy factors had a damping effect on demand. The COVID-19 shock has exacerbated the situation, keeping prices subdued so far this year. But over the longer term, prices are expected to improve.

Some COVID-19 stimulus measures, such as those in China and Europe, have targeted the EV sector and renewables, which should boost demand for these minerals. For some minerals, supply disruptions are emerging which could tighten the market and see prices start gaining ground later this year.

Critical

Among Australian states and territories, Western Australia has the highest number of projects in development. Queensland and the Northern Territory also have projects in progress across a range of minerals.

There are also mineral sands and rare earths projects underway in Victoria and New South Wales, graphite projects in South Australia and tungsten projects in Tasmania.

In the wake of COVID-19, businesses in Australia have heavily downgraded capital expenditure plans. Bringing forward investment in permitted and shovel-ready critical minerals projects could help to fill this hole.

However, some of the risks around investing in critical minerals tend to be a lot higher compared with more-established metals. The market for critical minerals is still relatively small, and there are technical challenges around extraction and processing. Bigger players in the market can influence the price and therefore viability of projects.

Substitute materials can divert demand, and political risk is a factor. Consequently, it can be very difficult to secure financing, particularly as many projects have high, up-front capital costs. Public sector funding or support could bridge some of that gap.

Catherine Birch, Senior Economist & Soni Kumari, Commodity Strategist at ANZ

This story is an edited version of an ANZ Research report. Registered clients can find the full report on ANZ Live HERE.