Mission critical: Can Australia’s supply of critical minerals meet global demand?
By Marc Upcroft and Conrad Mulherin
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Australia is a global go-to for critical minerals at a critical time. We’re already the world’s number one producer of lithium, and we are a globally significant producer for many critical minerals like nickel, cobalt, manganese ore, rare earth elements, tungsten, and vanadium.
In fact, the International Monetary Fund (IMF) says Australia’s in prime position to benefit from a forecast sixfold jump in demand for critical minerals over the next two decades – worth a staggering AUD$17.6 trillion – as the energy transition gathers pace and the world strives for net zero emissions.
The question is: Can Australia meet the coming demand?
Currently, Australia’s pipeline of development projects falls short of the expected surge in demand in the coming years. Factoring in development lead times, we need greater exploration and pre-production today to match demand growth in the future. Unchanged, Australia is 1) at risk of missing out on capturing the full value of the generational opportunity the energy transition presents, and 2) at risk of falling short of the expectations of our allies in supplying the critical minerals required for energy independence and secure, reliable supply chains.
The good news is there’s time to address the shortfall. But like so much associated with the race to net zero emissions, it’s only possible if we think differently and act now.
Rethinking supply
Australia is facing a ‘critical moment’.
The scenario continuing on the current path sees the industry rely on the same pools of capital, the same financing models, the same permitting process and development time horizons - perhaps with a few tweaks. While it’s a system that has worked in the past, we will likely see shortfalls in supply. Moreover, we could see enormous value left on the table.
The energy transition presents an incredible opportunity for Australia and its resources industry. But it requires us to think differently and do things differently.
There is a different scenario – one in which Australia emerges as a global superpower in clean energy supply chains, grows its market share in critical minerals production, fosters value-add capabilities in minerals processing and energy technology manufacturing, reorients supply chains and develops ‘ally-shoring’ agreements with our global allies and trading partners.
This is a scenario that transforms our industry from the legacy ‘dig and ship’ mentality, and opens the possibility for whole-of-nation economic benefit and the creation of new energy economy jobs and skills. And we help the world get back on track in decarbonising the global economy.
It’s promising to see green shoots in the shift from scenario one to two - with lithium chemical projects the stand out here. But there is still a significant gap between the two. In short, we have a chance to rethink our supply of critical minerals and it’s difficult to overstate the opportunity for Australia.
The size of the opportunity
Australia’s critical minerals are key to the technologies required for the global energy transition. Take the battery mineral industry, for example. Australia currently accounts for around 50% of the total amount of minerals required for the battery value chain1. Similarly, Australia produced half the world’s lithium in 20202.
Thanks to our inherent strengths (think: an incredible natural endowment of critical minerals; well-established, ESG-compliant operating standards; and a reputation as a reliable supply chain partner), Australia is “better placed than any other country” to benefit from the push for clean energy3. In fact, the IMF found Australia is one of only four nations that could see an extra 1% growth in GDP by building on critical mineral exports4.
Meanwhile, the World Bank says production of critical minerals could increase by nearly 500% by 20505. And the market for critical minerals is expected to top $400 billion6.
All while supporting the shift to net zero.
The size of the shortfall
Many forecasters are expecting shortfalls in critical minerals in the short- and medium-term as demand growth continues in lithium, nickel, cobalt, graphite and rare earth minerals.
The looming shortfall is clear in the copper market.
Copper prices - a pacesetter for the global economy - have softened in 2022 reflecting macroeconomic factors like rising interest rates, weaker short-term growth expectations and increased geopolitical risks. But copper’s role in the energy transition is unchanged - it is arguably the most important metal given its role in the electrification of the future economy.
Like most critical minerals, copper and its supply chain is exposed to geopolitical risks. The London Metals Exchange has restricted delivery of copper from Russia’s second largest copper producing company, and is considering a ban on metal from Russia altogether7. Russia is the world’s 8th largest copper producer, of similar size to Australia. Chile, the world’s largest copper producer, is on track for a 6% drop in copper production in 2022 due to ongoing labour issues, water scarcity and declining ore grades8.
Yet copper exploration rates are below those for comparable years (down 51% in 2021, compared with 2012), and exploration spend in copper lags behind other critical minerals. Moreover, exploration has shifted to mine site assets. Where previously grassroots exploration made up the lion’s share of copper exploration, now it’s barely a third (34% in 2021). Further, announcements of new copper discoveries or new resources are often in jurisdictions with riskier operating environments than Australia, with complex deposits and high capex requirements.
Exploration for copper in Australia is slightly better and elevated in recent years. However, still not enough for what is needed.
Three steps to take right now
What do we need to do?
1) Act now
If we’re serious about maintaining, or potentially growing our market share, we need to be making early-stage investments and developing our project pipeline.
True, exploration is broadly increasing globally9. But Australian company exploration budgets are still not where they could be, given we are on the cusp of a critical minerals boom. We need to be making the investment now to set us up for the decades to come.
The industry needs greater incentive mechanisms for supporting early-stage exploration work. To this end, the government’s Junior Minerals Exploration Incentive credits for greenfields mineral exploration and the 2022 Critical Minerals Strategy to assist small and medium-sized miners, are steps in the right direction.
We also applaud the federal government’s commitment to value adding in the resources industry via their National Reconstruction Fund10. But to add value, first we need the raw materials – and that means expanding exploration.
2) Leverage our strengths
When it comes to critical minerals, Australia must really leverage our strengths and do more of what we do best (namely, mining) and take the opportunities to move further down the supply chain. To continue fostering the development of value-add processing industries, critical mineral companies must demand that offtakers and end-users (the beneficiaries of our minerals) share in project risk and invest in Australia.
However, it's not about mining in the same way. As they seek to expand, miners will need to put even more effort into meeting community expectations and building trust, forming genuine partnerships that truly respect and benefit local communities and the rights of Indigenous Peoples.
3) Better storytelling
Capital markets will only fund exploration if they’re convinced of its value, and that means miners need to tell their story better. The scale and pace of critical minerals production can’t happen without attracting investment from a range of capital providers.
Companies that clearly communicate the merits of a project – including plans for high ESG performance and outcomes – are more likely to raise capital. We therefore need to educate the investment and finance markets (particularly new and alternative sources of capital) on the importance of critical minerals for the energy transition. For example, lithium’s role as a battery metal is now fairly well understood. However, markets need a bit more help to better understand the vast potential of some of the emerging flow battery solutions and lesser-known parts of the periodic table.
There’s enormous opportunity for Australian mining. It’s mission critical that we get it right.
1 www.abc.net.au/news/2022-08-25/can-lucky-country-australia-become-a-battery-mineral-superpower/101358050
2 www.csis.org/analysis/safeguarding-critical-minerals-energy-transition
3 www.9news.com.au/national/jobs-summit-australias-energy-superpower-transformation-could-reduce-global-emissions-by-7-per-cent/f40e9036-3b57-465f-9df9-7c637a3fed78
4 www.afr.com/companies/mining/australia-urged-to-add-value-to-critical-minerals-bonanza-20211013-p58zo8
5 www.worldbank.org/en/topic/extractiveindustries/brief/climate-smart-mining-minerals-for-climate-action
6 www.csis.org/analysis/safeguarding-critical-minerals-energy-transition
7 www.ft.com/content/dd2e97c0-9376-45b6-8ec8-a2783bee233f
8 S&P Capital IQ, Market Intelligence, 4 October 2022, Chile on track for 2022 copper slump but could rebound in 2023
9 www.abs.gov.au/statistics/industry/mining/mineral-and-petroleum-exploration-australia/latest-release#release-n
10 www.alp.org.au/policies/national-reconstruction-fund
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Marc Upcroft
Partner, Assurance, Australian Mining Leader, PwC Australia
Tel: +61 419 629 803