WHY CRITICAL MINERALS ARE NOW CRITICAL TO AUSTRALIA’S SOVEREIGNTY

As National Secretary of the Australian Workers Union, Daniel Walton has a special interest in the role of mining in the Australian economy.  And with the ongoing investment in new energy sources and reliable power, he sees the availability of critical minerals from Australia as a new frontier in the expansion of investment, trade and innovation for Australian industry. But time is of the essence and without positive leadership in this, Australia might be left behind. To discuss how critical minerals are vital to Australia’s future, Daniel Walton addressed The Sydney Institute on Wednesday 17 May 2023

WHY CRITICAL MINERALS ARE NOW CRITICAL TO AUSTRALIA’S SOVEREIGNTY

DANIEL WALTON

Firstly, I want to acknowledge the Traditional Owners of the Country on which we meet today, the Gadigal people of the Eora nation, and recognise their continuing connection to land, waters and culture. We pay our respects to their Elders past, present and emerging.

Thank you for inviting me back to the Sydney Institute. I think it’s the perfect forum to lay out, for the first time, what I believe is an important new position for our union.

Ever since we were formed, in 1886, the Australian Workers’ Union has had the view that to truly advocate for our members interests — and indeed for Australian workers in general — we must be active in the policy debate. And although we are historically intertwined with the Australian Labor Party, we are certainly not one and the same.  And so, when we believe a Labor government is at risk of taking the wrong path, we believe we have a responsibility to speak up.

It is for this reason I want to speak to you today. Our union is the most diverse in the country. We’re lucky to have members across a huge range of industries. From airports to hospitals – fisheries to factories. And a very significant portion of our members are engaged in mining.

Traditionally the bulk of this mining has been iron ore, along with bauxite, gold, nickel, copper and uranium. Our members also drill for natural gas both offshore and onshore.

More and more however the focus of mining is shifting to so-called critical minerals.

Now critical minerals is a term you hear bandied around lot, but few stop to actually consider the definition. You probably know they include rare earth elements, lithium, cobalt, and other strategic metals. But the reasons they are accurately described as “critical” is for two reasons:

1. because they are critical and irreplaceable to key industries – especially new green industries like battery manufacture, solar panels, and wind turbines
2. And two that their supply chain is at risk due to limited geographic distribution and geopolitical tensions.

Few nations have them. But if a nation does not have access to them – or the products they create – it’s in big trouble. This makes critical minerals critical to global security. And Australia is a critical mineral stronghold.

I don’t think we’ve internalised this properly as a nation. My fear is that we are miscategorising the critical minerals boom as just another mining boom, like our last one. My fear is that our government sees its role as just setting basic terms for multinationals to dig these minerals up as fast as they please so they can ship them to wherever they want. Now during the most recent boom that focused on iron ore and coal and gas – that kind of lazy approach was misguided. But it will be catastrophic if we take that same approach with critical minerals.

Catastrophic not just to our economy and to our national interests. But catastrophic to global security. That’s why today I want to argue we cannot fiddle around the edges of policy here.

If we are to truly recognise the importance of our critical mineral wealth. If we are to truly understand Australia’s opportunity and Australia’s responsibility here. Then we need to square up to the fact that a major shift in policy is required. And it’s required now.

So, I want to lay out my case today for why change is necessary and present the major shift in policy I think is necessary to drive it. Obviously, the idea of getting more economic boom for our buck from our mineral wealth is not a new one. Indeed, it’s an idea I’ve spoken about here before. But since the 1980s it’s an idea has faced fierce criticism from free marketeers. They claim Australia’s decisions should just be guided by the market.

If the market wants Australia to dig materials up here, but wants China to make those materials into manufactured goods, well then you focus on the bit the market says you’re good at. Now for the past 40 years, with the US in unquestionable ascendancy as the sole global superpower, you could position yourself on either side of that divide on economic and social justice grounds. But in recent years some very important geopolitical pieces have begun to shift that change the equation entirely.

I was in the US earlier this year meeting with a range of fascinating people connected to manufacturing. I was curious to learn how the economy was recovering post-Covid.

And having heard so much about the Biden Administration’s Inflation Reduction Act I was eager to see how it was working on the ground.

I was astounded at the transformation taking place. Companies and investment and jobs are now flowing back into US manufacturing at an incredible pace.  Companies that fled during the 1980s and 1990s are now rushing back in. The likes of Volkswagen, Samsung, Siemens, have all recently announced plans to manufacture things like equipment for clean-power facilities and car batteries for EVs inside the United States.

Brookfield and Intel have announced they’ll be building two chip manufacturing facilities worth $30 billion. These companies are now able to plan ahead. They know the tax incentives they find attractive will be broadly available, they will be long term, and they will be technology neutral.

So it’s really not the government “picking winners.” It’s the government laying a foundation. It’s the government very consciously selecting the rules of the game to suit the national interest. As a result, companies producing green tech are popping up everywhere. The core of the Inflation Reduction Act is an ambitious industrial policy.

Its purpose is to strengthen manufacturing, hasten a green energy transformation, create well-paid jobs, and ensure American technological leadership over China.

To be reductionist, the policy essentially consists of federal tax credits, government grant programs, and infrastructure projects for hydrogen, for critical minerals, for high-tech renewables products, and for electric cars. In terms of ambition it’s not quite the New Deal – but it has created a fundamentally new way of using the government’s muscle to shape, prod, and mobilise the economy in certain directions.

It’s clearly Joe Biden’s baby. He could have appointed a single “industrial czar” to oversee things, but instead he’s taken the initiative himself, leading what he refers to as his “Invest in America cabinet”.

The rationale for the Inflation Reduction Act has been driven by three key factors — and they are factors that every Australian minister should have stapled to their wall.

Number 1: the rise of China, and the extent to which it has used non-market practices to strengthen its competitive position in key economic areas. Number 2: the COVID pandemic, which illustrated the supply-chain vulnerabilities that the U.S. economy faces after decades of offshoring. And number 3: climate change, which demands a rapid transformation of energy production and transportation. The policy aims to drive economic growth. And so far, that seems like it’s working.

It also isn’t cheap. The Congressional Budget Office forecasts the IRA’s energy and climate provisions would cost $391 billion between 2022 and 2031.  But this is likely to be an under-estimate. The tax credits it provides aren’t capped. And they’re not exactly being tightly administered either. But it’s clearly a cost the United States believes is worth it.

Now nothing is certain in the crazy world of US politics. But you would have to be very brave to confidentially predict that that a Republican administration in 2024 would necessarily be rushing to dismantle the IRA. Trump-style protectionism was deeply popular with the Republican base. The IRA is far more sophisticated, but it also pleases a lot of the same voters.

Of course, the US has faced criticism for the IRA. Although the Biden Administration insists it does not constitute protectionism, many in the EU disagree. Europe has even sought to report the US to the WTO. Although it is worth noting that the EU is now considering a similar IRA-style initiative itself. But although what the Biden Administration is doing certainly does not fit the picture of free trade envisioned in the 1980s, it would be wrong to think of it as isolationist.

The resurgence of American manufacturing is not a zero-sum game. By fostering a robust and competitive domestic market, opportunities are created for international collaboration and mutually beneficial trade. Yet no matter where you sit — booster or detractor — it is clear the Inflation Reduction Act is a fundamental game changer. The US has signalled it is willing to use its unparalleled might to start driving manufacturing investment onshore. When the 800 pound gorilla in the global room switches tack like this, everyone else is compelled to recognise things have changed.

Which brings me to Australia. Here we sit on the verge of a major economic shift ourselves. For a generation our economy benefited from an unprecedented mining boom — primarily coal, gas, and iron ore. But just as feared we might be coming to the end of one mining boom, demand for critical minerals suddenly shot sky high, and is predicted to only get higher.

We are the world’s largest producer of lithium which is crucial in batteries. Processed lithium compounds are crucial for virtually all batteries. It is lithium that moves from the cathode to the anode of the battery through a lithium salt electrolyte while the battery is being discharged.

Putting electricity back i to the battery moves the lithium ions back the other way, charging it back up. These are the batteries that go into our phones, into our electric vehicles, and into our stationary mass community batteries.  So, lithium exports have been growing at incredible rate. $1.1 billion in 2020-21 to almost $14 billion in 2022-23. And more of that growth is forecast over future years.

In a 2021 report the International Energy Agency forecast world lithium demand to grow 14 times over its current sizes in the next twenty years – from 73,000 tonnes today to 1.16 million tonnes in 2040. We also have the third largest reserves of cobalt,

fourth largest for rare earth elements, and fifth largest reserves of nickel. Although they are not officially deemed critical minerals in the government’s new “National Critical Minerals Strategy” we are also global leaders in the mining of copper, bauxite, and zinc. Both copper and bauxite are deemed critical minerals by the European Commission, while bauxite and zinc make it onto the US list.

Technological advances and military expansion will drive booming demand for battery minerals, rare earth elements and the materials essential to high-end electronics. Indeed, the demand for some of these materials is forecast to increase more than ten-fold, creating new multi-billion global industries.

A global deployment of large-scale battery systems will be needed to manage the growing reliance on intermittent energy sources. Consequently, the future opportunities in critical minerals supply are enormous. Without Australia’s resources, the world will not reach net zero. Renewable energy is dependent on critical minerals. Wind turbines need copper, rare earth elements and nickel; solar panels use large amounts silicon, silver and gallium; and battery storage technologies are reliant on lithium, nickel, cobalt and manganese.

The emerging hydrogen industry is also mineral intensive and will require large amounts of platinum, copper, nickel and rare earth elements. Small wonder then that mining companies, and governments hungry for royalties, are licking their lips.

Flick through the business pages any given week and you’ll see no shortage of folk getting breathless and excited about the windfalls that await us with these minerals. But simply digging these precious material up and loading them on ships is an incredibly limited way to view the opportunity. Because historically it is manufacturing capability that is a hallmark of all successful modern economies.

Manufacturing supplies a nation with advanced goods, creates greater employment opportunities, and stimulates innovation. It makes an economy more robust and resilient to shocks. And Australia has been falling further and further behind on this metric for generations. This decline is borne out by Harvard University’s Country and Product Complexity Rankings. These rankings measure the ability of a country to make products and deliver it to customers – or put another way, the complexity and sophistication of a national economy.

In 1995 Australia was ranked 55th, by 2019 it had fallen to 86th – the lowest ranked and biggest fall of any G20 country. Over the last 45 years, rather than protect and build our manufacturing capabilities, Australian policy left it to “market forces”. But even with our very inefficient methods of taxing the profits being generated by mining companies, governments were still able to collect so many billions that it glossed over all the opportunity cost.

So, we allowed our manufacturing base to decline. We outsourced that work to regions paying the lowest wages. We lost jobs, a critical source of productivity-driving innovation, and with some business closures, a source of national pride. As a result, our workforce has become more focused in major metropolitan centres. Jobs in the services industries tend to be more concentrated in major cities while the manufacturing industries they have replaced were more dispersed across regional Australia.

This has had a secondary effect of reducing economy diversity in regional Australia with many areas now more reliant on agriculture and mining than before. And while mining was undeniably driving growth in GDP, it failed to provide a proportionate boost to employment. It didn’t have to be this way of course.

Australia could have still expanded its mining industry in response to the rapid growth in world demand for resources, but used the same minerals produced to drive expansion in downstream industries that processed the minerals in Australia. That would have created new jobs for thousands of workers and business opportunities across regional Australia. Instead, these value-adding opportunities were exported to other nations.

For example, Australians invented much of the technology used in solar panels. We were an early leader. But China took the global lead position in manufacturing from us, which now looks unassailable. Essentially, every tonne of unprocessed ore exported from Australia creates revenue, but it also comes with an opportunity cost.  A job in metal manufacturing that wasn’t created, a downstream supply opportunity not provided, an energy sector not expanded, and an innovation ecosystem not supported.

Now, I represent a national union. My core interest is the quality of Australian jobs. So, this alone would be motivation to care about doing better with critical minerals than we did with our last mining boom. But the fact is there is actually more than jobs to worry about.

The situation in the 2020s is very different from the 1990s.  Because while we may be the world’s biggest supplier of lithium, we only have, pretty much, one customer. 96 per cent of Australia’s lithium is going to China. There it is being used to make components, which, in turn, is being used in batteries, solar panels, and military equipment.

We assume that China will always be happy to sell us and our allies those components at a reasonable price. But we do that at the same time as we openly canvass the potential for tension. It’s an awkward dynamic to say the least.  And while the mining execs in the C-suites may tell us there’s nothing to worry about… everyone else seems to understand there’s a potential problem brewing here.

A few weeks ago, the Resources Minister, Madeline King, announced that the government would be shifting position so that only “like-minded” foreign investors would be welcome to invest in Australian critical minerals projects. Ms King stopped well short of suggesting Chinese investment would be outright banned. But she did signal that Chinese investment in Australian critical ministerial mines was something the government very much had its eye on. Indeed, Treasurer Jim Chalmers went a step further in March when he prevented a major supplier of minerals into China from taking a bigger stake in Australian rare earths aspirant Northern Minerals.

But here’s where I think the government may be missing the bigger point. Our primary concern should not be who is investing in our mines. Our primary concern should be where the products of those mines are going. And how that is affecting the world.  Should Australia really be using its dominance in global lithium to boost China’s dominance in battery tech?

Although we all hope that relations between China and the US will remain peaceful, we also have to recognise the possibility that things could turn hot. And if that were to happen the global supply chains on which Australia relies are suddenly all in jeopardy.

We got a taste of this during Covid. We realised how completely reliant we had become on imports from China to function.

Now we managed to escape that situation relatively lightly. But it should certainly prompt the question: how much do we trust China to keep supporting the Australian national interest? And if push comes to shove do we seriously expect they’ll put our national interest ahead of theirs?

Think about the assumptions in the way we’re approaching things right now.

The federal government, for example, has talked a lot about its ambitions for Australia’s   manufacture batteries at scale. Great. But to make those batteries in Australia, you need to import a lot of componentry that is made in China. That componentry is made from Australian critical minerals.

Now if Australia starts making batteries that rival China’s – do we think China will be happy to keep selling us the components we need? Do we really want to assume that we can keep digging up critical minerals, shipping them to China for processing, and China will just keep shipping them back to us to manufacture batteries?

It’s not a bet I’d feel confident about. We know how China operates. They do, and will likely continue to, take a long-term view about dominating markets. That’s their prerogative. But we should not be blind to it. There’s no “free market” here. And Australia certainly can’t wish one into existence through our example.

The solution, of course, is not Australia becoming self-sufficient. But nor is it resigning ourselves to being impotent. A change in perspective is necessary. We should stop looking at critical minerals as just a cash pinata. They are a critical global resource which we need to steward not just in the national interest but in the interests of global security. If we continue to just “let the market rule” it will mean only one thing: Australia’s raw materials will be shipped off to China and China will be the only player in our region with the sovereign capacity to turn them into anything useful.

The Inflation Reduction Act in the US has fundamentally changed the equation. If America is not lashing itself to the mast of free trade orthodoxy why should anyone else? So, should we simply copy the US approach and introduce an Australian version of the IRA?  We should recognise that the United States is uniquely placed here.

As the world’s largest economy, it can use its raw economic heft and scale to force investment in manufacturing capacity through subsidies.  Australia is not in the same league to call the shots like this.  But what we do have is a big chunk of the world’s critical minerals within our sovereign soil. That’s our leverage.  And we would be absolute fools not to use it.

We know demand from the world for our critical minerals is astronomical. We have the power to create the rules under which they can have them. So, if we have this hand, what should we be aiming to achieve?

I think it’s relatively straightforward. We want our critical minerals to deliver:

1. Tax revenue
2. Hundreds of thousands of quality jobs
3. A safer world in which Australia and its friends have the capacity to manufacture the products we need to survive and thrive

Our business as usual approach, as it stands, would deliver only the first of these three. How do we get the trifecta? Well, what we can’t do is simply ask nicely and pump some modest incentives into the market. That, we know, will 100 per cent end in failure.

I know the government has a stated goal of building more critical mineral processing and battery manufacturing capacity on Australian soil. And they’ve committed $2 billion to a Critical Minerals Facility administered by Export Finance to Australia, not to mention a $1 billion to value-adding in the broader resources industry under the National Reconstruction Fund.

But this is nowhere near enough for a domestic investment in what will probably be the most important resources and manufacturing play this country will make – not just this decade, but all the way up to 2050 and beyond.

I know those ambitions will be a major part of the critical minerals strategy due for publication later this year. But let’s be clear: we won’t just need an incremental change here. Treasury doesn’t have access to enough carrots to encourage the change we need here. We need to get out the stick.

I’m actually pretty amazed that no one else has called this – but I’m happy to. We need to apply a significant, punitive tax on the export of raw critical minerals from Australia.

And we need the revenue raised to be pumped directly back into subsidies for the manufacturing and processing on critical minerals onshore. Basically, we need to be using our sovereign ownership of these minerals to apply pressure from both ends.

The tax needs to be big enough that it gives multinationals pause. A flat volumetric tax of $1/ tonne, for example, would probably be sufficient to encourage a shift from export to domestic processing at the margin.  It would accept that we are a price-taker for our commodities, but it would encourage companies to stop and think about whether they could save by doing domestic processing, especially if that processing is subsidised by government. The pay-off could be massive.

Based on the International Energy Agency’s forecasts for critical mineral demand, if we could process and refine just half of critical mineral ores we already take out of the ground here in Australia we could more than double the number of people employed in the sector – going from 18,000 today, to 48,000 in 2030 and over 90,000 by 2040.     If we aimed for 100 per cent, as a number of other countries are seeking to do, then direct employment could be more than 50,000 in 2030, and over 100,000 by 2040.

We will have thousands of workers leaving the coal power generation sector in the coming decade. We don’t want to throw these workers on the scrap-heap – and we know that manufacturing can provide stable, secure, well-paid quality jobs that make use of their trades and skills. Simultaneously, we need to bring up thousands of new engineers, fitters and other tradies to get these plants off the ground and operate them.

If we want to sustain the job growth we anticipate in areas like aged care, we need to boost our GDP. We need these kinds of jobs. If we do this well there is no reason we couldn’t be looking at Australia becoming a manufacturing powerhouse for a range of fundamental components. For example, we can and should be expanding cathode material production which involves mixing lithium compounds with other metals like cobalt, manganese, or iron, followed by high-temperature calcination.

China is the largest producer of cathode materials, while Japan and South Korea also have significant production capacity. In turn, cathode materials, along with other components like anode materials, separators, and electrolytes, are used to assemble battery cells. This process basically involves precise layering and engineering of components to create a functional battery cell.

China, South Korea, and Japan are the dominant players in battery cell manufacturing, while the United States and Europe are working to expand their production capabilities. There is zero reason we could not be a big player in this space.  And if we do that there would be opportunities to expand into battery pack assembly, where battery cells are assembled into battery packs or modules, which are then integrated into electric vehicles.

Right now, this stage of the supply chain is distributed across various countries, with automakers assembling battery packs in their manufacturing facilities.  China, the United States, and Europe are major players in battery pack assembly. Australia should bite off a piece of the action.

I know if the government did the right thing and adopted this as policy they would encounter all the usual arguments from all the usual quarters. “You can’t tax your way to prosperity.” “Governments will always fail when they interfere in the market. ” “If you raise this tax you will drive all investment offshore. ”

I say let these arguments come — they are yesterday’s arguments. Many US trade partners are viewing the IRA’s new approach as an opportunity to make the most of “friendshoring”.  And early signs are that the US will negotiate with their trade partners to permit the use of similar approaches in their own countries. For example, the European Union has negotiated that vehicles manufactured in its country will be permitted to access the tax credits without supply chain changes, and subsequently announced its intention to establish its own production incentives similar to those in the IRA.

Australia can be part of this – we can be smart about it and boost our own economy without alienating ourselves from our friends around the globe. We recently signed the Minerals Security Partnership, which includes Canada, Finland, France, Germany, Japan, the Republic of Korea, Sweden, the United Kingdom, the US and the European Commission.

There is ample room to work within this alliance instead of blithely allowing third-parties to just dig up our lithium and sell it to a non-group member in China. In fact, what I am suggesting today – a significant tax on critical mineral export – is not even remotely extreme by global standards.

Joko Widodo in Indonesia for example, recently just straight up banned exports of Indonesian nickel. Widodo recognised that nickel is critical to EV battery production. But he wanted the manufacturing jobs – not just the royalties.  And it’s paying dividends, with growing foreign investment in downstream processing and refining. Tax holidays and other incentives are also aimed at luring car makers and turning Indonesia into an EV manufacturing hub.

South Korea’s Hyundai announced this month it was stepping up production of its best-selling all-electric vehicle in Indonesia from its assembly plant in West Java, with plans to export around the region, as EV sales in South-East Asia and Australia take off. If you’re lucky enough to have critical minerals this century you would have to be completely foolish not to try and leverage it to help your economy — and your strategic interests.

The task of getting this right has fallen to the Albanese Government. That’s lucky – I would have had very little faith in the previous government to get this right. But we’re a long way from where we need to be. I will be urging my friends in the government that they need to move boldly here. And the AWU will be putting forward further amendments to the ALP Platform at the next National Policy Forum at the end of June.

The amendment would formally commit Labor “imposing a tax on unprocessed exports of critical minerals and establish a production subsidy scheme to foster domestic refining, processing and component manufacturing from critical minerals.” The government should embrace this change.  And they should ignore the bleating of vested interests and outdated ideologies.

I have no doubt the current government will make a range of pivotal decisions in the years ahead that will define its legacy. But I don’t think any will be more significant than the approach it decides to take with our special critical mineral wealth.