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Australia’s Critical Minerals Strategy amid US–China Geopolitical Rivalry

As tensions between the US and China continue to grow and efforts to ‘friend-shore’ supply chains gather pace, Australia is being forced to make a difficult choice when it comes to the future of its critical minerals strategy.

Sunset over Iron Ore mining machinery in Port Hedland Western Australia

The era when Australian top officials could declare that Canberra ‘can maintain a close strategic alliance with the US while also enhancing its friendship with China’ is disappearing. By joining the AUKUS (Australia–UK–US) security pact in September 2021, which had the strong appearance of an anti-China alignment, Australia has given up on maintaining a balance between its cooperation with China and its alliance with the US. According to former Australian Prime Minister Paul Keating, ‘we [Australia] are now part of a [US] containment policy against China’.

The intensifying US–China geopolitical rivalry spills over into the critical minerals realm, creating what some have called the ‘security-sustainability nexus’ – the linkage between state security concerns and the transition to green energy. Since the 2015 Paris Agreement, the world has seen an accelerated phasing-out of fossil fuel-based energy systems and a new race in producing and trading essential battery materials, such as lithium, cobalt and graphite. In these circumstances, curbing China’s dominance in critical minerals supply chains has become a priority for the US and some of its European allies.

Washington’s desire to break China’s dominance in critical mineral markets grew after White House and US Geological Survey reports in 2021 showed the US’s overwhelming dependence on China for the production and processing of 26 of the 50 minerals classified as critical by the US government. To deal with this predicament, the US government has introduced a flurry of legislative, executive, and diplomatic initiatives.

Domestically, it introduced the American Mineral Security ActExecutive Order (EO) 13953 Addressing the Threat to the Domestic Supply Chain from Reliance on Critical Minerals from Foreign Adversaries and Supporting Domestic Mining and Processing Industries, the Executive Order on America’s Supply ChainsAmerica’s Inflation Reduction Act (IRA), the Infrastructure and Jobs Act and other initiatives that commit significant resources to decoupling from China and securing alternative supplies of critical minerals.

The era when Australian top officials could declare that Canberra ‘can maintain a close strategic alliance with the US while also enhancing its friendship with China’ is disappearing

Internationally, the US has forged various minilateral partnerships, especially in Europe and the Indo-Pacific, to counter China’s dominance in critical mineral supply chains. In March 2022, US officials introduced the Quadrilateral Security Dialogue (QUAD) Critical Minerals Partnership Act (comprising the US, Australia, India and Japan) to tackle ‘the national security threat posed by the People’s Republic of China’s control over nearly 2/3 of the global supply of critical minerals’. In October 2022, Washington announced a plan to launch a $1 billion fund to invest in companies in QUAD countries in order to counter China’s dominance. In the same year, the White House rolled out an agenda for the Indo-Pacific Framework for Prosperity, aimed at assuring critical minerals access and countering China’s dominance. The Biden administration has also launched a multilateral Minerals Security Partnership (MSP) to ‘friend-shore’ critical mineral supply chains. The MSP includes Australia, Canada, Finland, France, Germany, Japan, the Republic of Korea, Sweden, the UK, the US and the European Commission, but excludes China and other countries of concern.

Unsurprisingly, Beijing is unwilling to cede its dominance in critical mineral supply chains and views the US-led initiatives, especially the new mineral alliances, as a containment strategy against China that requires an immediate response.

The increasingly binary geopolitical reality – China versus the US – is pushing Australia, which is also rich in many critical minerals, particularly lithium, to the frontline of great power rivalry, forcing Canberra to apply a zero-sum geopolitical logic to its role in global supply chains. Doing so often trumps economic rationality and green transition goals.

There has been significant complementarity in Australia–China cooperation: Australia is the upstream mineral supplier, whereas China dominates the refining and processing of minerals for the global market. China has long shown an interest in Australian mineral operations, and has consistently been the largest buyer of Australian raw minerals. Chinese investors like Tianqi and Ganfeng provided long-term capital to support and expand mining capacity in Australia. In this context, while Australia depends on China and is reasonably concerned about the lack of diversification of its economic bets in the sector, Chinese processors also depend significantly on Australia, which satisfies 60% of China’s raw lithium demand.

However, as the US targets China’s involvement in Australian critical minerals as a part of its strategy to de-risk its supply chains from China’s dominance, the sustainability of Australia–China cooperation is becoming increasingly questionable. The US has extended the application of its subsidies to ‘friendly’ and ‘like-minded’ countries, among which Australia has emerged as a critical country of interest due to its abundance of critical minerals. The Biden administration has promised to designate Australia as a ‘domestic source’ of minerals under the Defense Production Act, allowing Australia to benefit from the $369 billion IRA clean energy incentive. At the same time, to gain access to these funds, companies must not have more than 25% ownership, voting rights or board seats held by ‘foreign entities of concern’, which include North Korean, Russian, Iranian and Chinese investors. This measure locks Australian companies with significant Chinese ownership out of competition for US investments, forcing them to rethink their ownership structure.

Unsurprisingly, Beijing is unwilling to cede its dominance in critical mineral supply chains and views the US-led initiatives

These initiatives further the narrative that China is a ‘national security issue’ for Australia, pushing Canberra to restructure its mineral industry in line with US interests. Thus, Australia’s Critical Mineral Strategy 2023–2030 aims to address concerns about China’s dominance in critical minerals global supply chains by increasing collaboration with ‘like-minded partners’ such as the US, the UK, Japan, South Korea, India and the EU. Canberra’s practical steps in this direction include the allocation of $2 billion for miners and processors of critical minerals to reduce reliance on China and support supply chains led by the US; the inhibition of Chinese ownership of critical minerals mining projects by blocking proposed Chinese investments to create space for capital from the US and other ‘like-minded’ countries; promoting cooperation with ‘democratic partners’ by leveraging multilateral frameworks, such as the Supply Chain Resilience Initiative involving Australia, India and Japan, and the Australia–India Critical Minerals Investment Partnership. To Beijing, these initiatives signify a departure from complementarity in China–Australia relations, with Australia becoming a ‘pawn’ in the US’s strategic competition against China.

Recognising the strategic importance of diversifying mineral supply chains is an economically justifiable consideration that should inform government policies. From this standpoint, hedging economic bets and creating competitive tension by opening up to various foreign investors can help Australia achieve the highest possible value from its assets. However, a geopolitically driven, discriminatory approach will severely affect Australia’s critical minerals sector and national economy for a number of reasons.

First, the lack of trust in Australia as a reliable, independent partner will incentivise China’s clean energy giants, such as battery and electric vehicle manufacturers CATL and BYD, to aggressively develop critical mineral assets elsewhere. China’s recent mining initiatives in Africa, Latin America and Mongolia are cases in point. Russia – China’s de-facto strategic ally – also holds the fourth-largest global supply of critical minerals and can willingly replace Australia. China moving away from Australia to different regions could incur serious economic costs for Canberra, since finding alternative markets with processing capacity comparable to China will be challenging in the short term.

Second, the US’s measures to facilitate global decoupling from China might be more protectionist than they seem. There is a lack of clarity around how the IRA will apply to different critical mineral projects in Australia. Some analysts have argued that while it is strict towards many Australia-based companies with significant Chinese ownership, investors or processing arrangements, tapping into the subsidies and grants offered by Washington will most likely involve setting up shop in the US, as in the case of the rare earth processing facility being built by Australian Lynas in Texas. In this context, the IRA’s potential to facilitate Australia’s much-desired transition from ‘digging and shipping’ to a higher value-added processing model becomes uncertain.

Recognising the strategic importance of diversifying mineral supply chains is an economically justifiable consideration that should inform government policies

Third, a viable alternative to Chinese investments is hard to find. That is why the premier of the heavyweight mining state of Western Australia, Roger Cook, has repeatedly warned that Australia cannot afford to distance itself too much from Chinese investment and technology, stating that ‘It’s more a matter of accepting the fact that it’s not whether they [the Chinese] will come but that they are already here’, and that ‘We have to understand that China is our biggest customer and our biggest supplier of a lot of the elements of a critical minerals and battery supply chain’. While alternative investments in domestic processing are desirable, it will take years for any practical effect to become visible. For example, according to the most optimistic assessments, a new local lithium hydroxide plant would take five to six years to start operations.

Finally, from an environmental standpoint, China’s dominant standing in global critical minerals supply chains is the outcome of long-term investments in transitioning to clean energy and developing technologies and production know-how. Such a trial-and-error innovation process has allowed China to develop advantages in the scale of production and green technologies used in critical minerals processing. However, such progress comes with substantial environmental costs, and whether Australia or any other country should seek to replicate it remains questionable.

The near future of Australia’s critical minerals strategy looks ambivalent. The once convenient division of labour where economic cooperation with China could coexist with a security partnership with the US now faces significant challenges. The binary choice between decoupling from China and remaining dependent on it and the intensifying pressure on Australia to choose where it stands makes implementing nuanced policies that serve Canberra’s interests more difficult. This situation will continue unless there is a serious de-escalation in US–China global tensions – an unlikely scenario.

The views expressed in this Commentary are the authors’, and do not represent those of RUSI or any other institution.

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