Mission critical: Can Australia win from the clean energy arms race?

In July last year, two powerful but very different Democratic politicians in the US were locked in secret negotiations. Unbeknown to Washington’s elite, they hatched a $US391 billion planet-saving spending plan that would help revive President Joe Biden’s wavering political fortunes and open a pathway to ending China’s worldwide dominance of new energy technologies, rapidly accelerating America’s journey towards net-zero emissions.

The deal struck by Democrat fossil fuel-supporting Senator Joe Manchin and powerful Senate majority leader Chuck Schumer, the Inflation Reduction Act, is supercharging America’s clean energy economy, setting the scene for a global race to control critical minerals, rare earths and other new energy resources that has vaulted Australia’s mining sector onto the world stage.

The Inflation Reduction Act has revitalised the political future of US President Joe Biden.Credit: AP

Rare earths and critical minerals – elements such as copper, lithium, nickel and cobalt – are essential to the electrical conduits, batteries, magnets, circuitry and other components that power electric vehicles, defence applications and modern energy networks.

Like their name suggests, they are hard to come by.

“We have been a dig and ship country for 50 years,” says Tim Buckley, a director of the think tank Climate Energy Finance. “Fifty per cent of the entire world’s lithium supply came from Australia last year. We have the opportunity to play at world scale, as we do in iron ore, as we do in gold, and as we do in thermal coal.”

While Australia digs and ships lithium – a key ingredient in EV batteries – China dominates the production and refining of nearly all the world’s rare earth oxides, about 90 per cent globally. For some rare elements, such as the dysprosium and terbium used in high-performance magnets, China is the only major source of supply.

‘We have the opportunity to play at world scale: As we do in iron ore, as we do in gold, and as we do in thermal coal.’

Tim Buckley, Climate Energy Finance

When Biden signed the Inflation Reduction Act into law last August, companies and politicians around the globe sat up with a jolt. America’s new energy stimulus may stretch into the trillions. Credit Suisse thinks the end-spend will hit $US800 billion ($1.22 trillion), Goldman Sachs estimates it at $US1.2 trillion.

Beijing’s dominance of solar technologies and the batteries, magnets and other transition materials needed to curb planet-heating greenhouse gas emissions and help arrest climate change – three quarters of the world’s solar panels are made in China – has long worried Western politicians.

That worry has now crystallised into action.

Europe is following America’s lead. It’s pushing ahead with Euro-wide requirements that will mean it sources at least 10 per cent and processes at least 40 per cent of its annual consumption of critical minerals within the EU. It wants to limit supply from any single country outside the EU to no more than 65 per cent of any strategic raw material. Japan, too, has announced a huge “green transformation” policy and Korea, Canada and India are also getting in on the action.

The sheer scale of Biden’s subsidies is creating a global vortex, sucking resources towards the US.

Automakers with US factories are re-tooling local supply chains to source critical supplies domestically or from free-trade partners. Korean companies are investing heavily in battery factories on US soil. But only Australian miners with operations in the US or Canada can gain access to tax credits or preferential treatment, cutting out some key minerals refined or mined elsewhere.

“We’re shipping the critical minerals to China for refining and then China reships them to Korea. That doesn’t work under the Inflation Reduction Act,” says Buckley.

Erwin Jackson, policy director at the Investor Group on Climate Change, whose members manage more than $30 trillion in assets, says the act has also fundamentally changed how investors think about allocating capital.

“The United States has a very large economy. Even small things it does cause big global impacts,” Jackson says. About 70 per cent of the group’s investors in Australia are committed to net zero targets. “To meet those targets, they have to reallocate capital, and they are going to reallocate that capital to where they get the best returns. The subsidies in the US are substantial, so they’re already starting to preference clean energy projects in the US over Australia,” he says.

The distortions are worrying Australia’s leaders too.

“The big risk with the Inflation Reduction Act … is that you would see capital leave Australia to go to the United States,” Australia’s Prime Minister, Anthony Albanese, told reporters on the sidelines of the G7 meeting in Japan this week.

To pre-empt that, and recognising that the US will struggle to meet demand for critical materials on its own, Albanese and Biden, while in Japan, announced a climate and clean energy partnership to share information and co-ordinate investment, making it the “third pillar” of the Australia-US alliance. Biden said he would ask Congress to define Australia as a domestic source – a privilege afforded only to Canada – under the US Defence Production Act.

That potentially gives Australian companies access to subsidies to invest and supply goods and services deemed so essential they are prioritised as having a wartime level of urgency.

“If you think about industries like hydrogen, without that support, there would be a massive incentive for hydrogen-based industries to be based in the United States,” Albanese told reporters.

His government recently unveiled a $2 billion “hydrogen head-start” incentive to narrow the large cost gap between current hydrogen market prices and the commercial production of green hydrogen – made with electrolysis and renewable energy – which is still at prohibitively high levels when compared with hydrogen made from fossil fuels.

The threats and opportunity for resource-rich Australia are huge. The surge in demand is prompting mining executives, such as lithium exporter Mineral Resources’ Chris Ellison and rare earths producer Iluka Resources’ Tom O’Leary, to urge the government for more grants to help cover the capital cost of building battery mineral processing plants in Australia.

“Our ambition should not be limited to being the quarry of others; refining, metallising and eventually magnetising these key products for ourselves and our international partners that need them is a rational and, with appropriate policy settings and commitment, an achievable ambition,” O’Leary told the company’s investors this month.

Iluka is building the Eneabba rare earths refinery in Western Australia with a $1.25 billion Australian government loan.

Morgans analyst Max Vickerson believes Biden’s Inflation Reduction Act was a key factor behind the recent $15.7 billion merger of Australian lithium miner Allkem and US chemical manufacturing giant Livent, a tie-up that created a new lithium superpower, the world’s third-biggest supplier.

“It [the Inflation Reduction Act] is playing a big role strategically,” Vickerson says.

It’s a view confirmed by Paul Graves, Livent’s chief executive, who will stay on as the boss of the freshly minted company when it relists in New York. “You can’t escape a trillion-dollar incentive program. That changes things for sure,” says Graves.

“It’s pushing them [US manufacturers] to localise their supply chains,” he says. “That means we need to grow quicker which, as we said, is at the heart of why we want to do this [merger], the ability to grow quicker and add more volume.”

Smaller Australian miners are likely to be on the radar of larger, hungry global competitors.

Explorers such as Delta Lithium (previously Red Dirt Metals) and Essential Metals who have aggressive exploration schedules and close to bringing new deposits online are potentially vulnerable, Vickerson says. “Companies might be interested in taking a position in them in case they are successful.”

And there are subtle signs Chinese firms are taking notice.

The world’s largest lithium ion battery maker, Fujian-based Contemporary Amperex Technology, quietly sold off its $601 million stake in Pilbara Minerals in March. “I suspect it was partly because of the size of the contract Pilbara was building towards with [Korean steel giant] POSCO. I certainly think it would be a big significant strategic consideration for them,” Vickerson says.

“We can’t outspend the United States, but we can be smarter,” says Jackson. “It’s about us making decisions about where we get the best economic outcome for Australia by processing here and taking advantage of the new supply chains that are emerging globally, making sure that we’re actually getting the maximum benefit from them before we export.”

“We need smart, focused policies that drive investment in Australia’s competitive advantage,” he says.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.