Production tax credit scheme to encourage local critical minerals processing, hydrogen production

The federal government will pump $15bn into resource-rich states to encourage investment in hydrogen production and critical minerals processing.

Jim Chalmers’ 2024 budget includes key measures put forward by Australian miners keen to move up the value chain.

The federal government will pump $15bn into the resource-rich states critical to Anthony Albanese’s re-election prospects to encourage investment in hydrogen production and critical minerals processing, offering to lock in subsidies for more than a decade to back new producers.

The $15bn promise will be welcomed by the mining industry and resources magnates such as Andrew Forrest, who stands to benefit from both critical mineral and hydrogen handouts through both ASX-listed Fortescue and his privately owned Wyloo Metals.

Both the majors, such as BHP, and more junior critical minerals hopefuls could be beneficiaries of the tax incentives on offer for downstream processing of the government’s list of 31 critical minerals – which also offers the promise of life support for some parts of Australia’s beleaguered nickel sector.

Treasurer Jim Chalmers’ 2024 budget includes key measures put forward by Australian miners keen to move up the value chain, and matches generous hydrogen production subsidies on offer under President Joe Biden’s Inflation Reduction Act.

Both packages will be delivered through a production tax credit, refunding companies that enter production a portion of their operating costs.

As flagged by The Australian in early May, critical minerals processing will attract a general subsidy of 10 per cent of the cost of processing and refining critical minerals but not the mining costs, with the subsidy largely targeting new projects requiring an investment decision by 2030.

The government has not ruled out extending the subsidy to existing producers, however,

The mining sector for much of the past year has been pressuring the federal government for additional support for nickel, lithium and other critical minerals processing, after a sharp downturn in pricing – along with sharp cost inflation in the sector – took a toll in the mining sector, stalling plans for investment in value-adding projects.

In response, the government is offering $7bn over 10 years to support downstream processing initiatives, which add to the billions already offered up in cheap loans for companies such as Iluka Resources’ rare earth refinery in WA, Alpha’s high-purity alumina project in Queensland, and Arafura Rare Earth’s Nolans Rare Earth project in the Northern Territory.

The Association of Mining and Exploration Companies has led the push for the introduction of production credits, which have an advantage over direct grants or accelerated depreciation schemes because Treasury would only return cash if and when companies enter production, rather than taking the risk money could be lost on half-finished construction projects.

While the scheme won’t take effect until the 2027-28 financial year, later than industry had initially hoped, AMEC CEO Warren Pearce said the budget measure was a welcome one for miners hoping to move Australia’s mining industry beyond its “dig and ship” reputation.

“A production tax credit is a proven mechanism that would reward those willing to take a risk in establishing new and costly industries, that if successful, will deliver a significant return on investment for Australia,” Mr Pearce said.

In addition to companies that have already been offered up direct support through cheap loans, AMEC says its members have as many as 25 projects where a final investment decision could be made by 2030. Another 65 projects across the country are considering adding downstream processing facilities.

For hydrogen the subsidy will equate to $2 a kilogram, available to companies that make a final investment decision before 2030 – a clear enticement to Dr Forrest, who has previously put on hold ambitious promises to build hydrogen production facilities in Tasmania and at Gladstone in Queensland over high domestic energy pricing and a dearth of other direct support in Australia compared to the United States.

Originally published as Production tax credit scheme to encourage local critical minerals processing, hydrogen production