US president Joe Biden’s plan promises billions for Australian companies, while securing minerals for the US military. By Mike Seccombe.

Pentagon to secure Australian minerals in green deal

US President Joe Biden and Prime Minister Anthony Albanese at the Quad meeting during the G7 summit in Hiroshima, Japan.
US President Joe Biden and Prime Minister Anthony Albanese at the Quad meeting during the G7 summit in Hiroshima, Japan, this week.
Credit: Reuters / Jonathan Ernst

A new green energy agreement with the United States is set to allow the Pentagon to fund projects in Australia to extract minerals deemed vital to the US military.

The deal, signed by Prime Minister Anthony Albanese and United States President Joe Biden in Hiroshima last Saturday, goes by an unwieldy title – the Australia-United States Climate, Critical Minerals, and Clean Energy Transformation Compact – and has been sold as a measure to “accelerate the establishment of a responsible, secure, and inclusive global clean energy economy”.

“The Compact affirms the position of climate and clean energy as the third pillar of the Alliance, alongside our defence and economic cooperation,” says a joint leaders’ statement released after the signing.

It is, experts say, a big deal for the climate and for the Australian economy. It could see Australian mining, processing and energy companies benefit from billions of dollars in subsidies under Biden’s major climate policy, the Inflation Reduction Act (so-called to make it more acceptable to Republicans and swing-state Democrats).

But it also binds Australia more closely to what former US president Dwight Eisenhower, more than 60 years ago, famously called the “military-industrial complex”. These days it might be better termed the military-industrial-energy complex.

Under the new agreement, Biden affirmed a plan to ask the US congress to add Australia as a “domestic source” within the meaning of Title III of the Defense Production Act, so as to “streamline technological and industrial base collaboration, accelerate and strengthen AUKUS implementation, and build new opportunities for United States investment in the production and purchase of Australian critical minerals, critical technologies, and other strategic sectors”.

The translation is, he will seek approval from congress for the Pentagon to directly fund projects in this country.

It’s all part of a great race to control the energy sources of the future, and associated technologies – everything from computer chips to wind turbines to electric vehicles to advanced weaponry and much more. Indeed, it’s probably fair to say the biggest geopolitical contest of the moment is not about Russia and Ukraine or China and Taiwan, but about the minerals critical to winning the energy race.

And Australia is one of the biggest players, with the most to gain, because we are so exceptionally endowed with critical minerals, and the renewable energy to process them. Other countries are beating a path to our door.

That reality was driven home by the signing of the compact with the US, and emphasised again this week with the visit to Australia of Indian prime minister Narendra Modi, in which critical minerals were also a focus.

This latest attention follows an agreement last year, led by the US and signed by a long list of the world’s major democracies – including Australia, Canada, Finland, France, Germany, Japan, South Korea, Sweden, Britain, the US and the European Commission – called the Minerals Security Partnership. It was intended, as the US State Department put it, to bolster “robust, responsible critical mineral supply chains to support economic prosperity and climate objectives”.

Despite the apparent unity of purpose under these and other bilateral and multilateral agreements, nations are furiously jockeying for the immense riches that will come from digging up critical minerals, processing them and turning them into products to sell to the world. Perhaps the only real unifying factor is that all are most concerned about one country: China, which has largely cornered the market for many of the key elements.

So, what are critical minerals? The short answer is, they are mineral resources a country deems essential to its economy and whose supply may be disrupted. Various places have different lists, depending on what they lack – the European Union, for example, lists coal for steelmaking, whereas Australia, for obvious reasons, does not.

The US lists 50, ranging from the familiar, such as aluminium, to the obscure. Praseodymium is among the latter, as one of the so-called rare earth elements that are of particular concern. A number of key minerals are common to almost every list: lithium, cobalt, nickel, graphite, magnesium, manganese and rare earths.

As the US Council on Foreign Relations noted a couple of weeks ago, “China dominates the critical mineral supply chain”, starting with extraction and around the globe. “Regardless of where mines might be located, China owns or finances many of them,” the CFR noted.

To an even greater extent, China dominates the processing of those minerals, according to CFR, including “65 percent of cobalt refining, nearly 60 percent of the lithium refining, and as much as 95 percent of manganese refining”.

In the case of some of the 17 rare earth elements, China controls 100 per cent.

“China is not just the world’s No. 1 in rare earths processing,” says Tim Buckley, resources analyst and director of Climate Energy Finance. “In some cases there is no one else.”

“You cannot run an Abrams tank, you can’t run the air force, you can’t do your satellites, you can’t do your semiconductor chips without rare earths. You can’t do wind turbines, can’t do batteries, can’t do EVs without them.”

There are many other things you can’t make, either.

The Virginia class submarines, which are the first Australia will acquire under the AUKUS agreement, need about four tonnes of rare earths, says James Bowen, policy fellow at the Perth USAsia Centre.

“So what we’re talking about is using the Defense Production Act, which is a Korean War-era piece of legislation in the US that allows the Defense Department to finance key areas that are considered critical to US national security … to basically have the US Defense Department fund mines and probably processing in Australia as well,” Bowen says.

That said, defence, in the military sense, is only a part of the reason America, and other nations, are concerned about China’s dominance of the critical minerals supply chain. The bigger issue is defence in an economics sense.

As The Australian Financial Review’s resources writer Peter Ker put it this week: “As things stand, the world can decarbonise only if China permits it to do so.”

It’s scarcely an exaggeration, as China increasingly dominates the clean tech supply chain. Take electric vehicles, for example. China already is the largest and fastest-growing EV market in the world, and still accelerating.

“April 2023 EV sales were up 117 per cent year-on-year,” says Buckley.

China now makes more than half the world’s EVs. And when it comes to the batteries that power those cars – and so many other things – it accounts for about three-quarters of global production of lithium refining and battery manufacturing.

Through its dominance of rare earth supplies, China controls 87 per cent of the global market for permanent magnets, which are used in EV motors, defence systems, electronics and wind turbines.

Another example: solar cells. China accounts for about 80 per cent of manufacturing, according to the International Energy Agency.

“America has announced 40 gigawatts of new solar module manufacturing capacity in the last six months, on the back of the Inflation Reduction Act – a six-fold expansion [in] American solar module manufacturing capacity. China has announced 294 gigawatts of new solar module manufacturing capacity in just the last three months, all of which will be commissioned within the next two years, if not sooner,” says Buckley. “The IEA says China accounted for 65 per cent of global clean tech manufacturing factory expansions in the first three months of this year.”

For every other country, he says, “it is a technology race against China”.

As of now, China is way ahead and investing hugely to extend its lead, but the race is really only beginning. Demand for certain critical minerals is growing rapidly, as Resources Minister Madeleine King noted in an opinion piece in The Australian Financial Review this week following the signing of the US compact.

“The International Energy Agency projects mineral demand for use in electric vehicles could grow by around 3000 per cent between 2020 and 2040. In the same time, lithium demand could grow by about 4000 per cent, with demand for graphite and cobalt growing by 2000 per cent to 2500 per cent,” she wrote.

Most of these valuable resources are in plentiful supply in Australia. According to data from Geoscience Australia, this country has 29 per cent of the world’s proven lithium reserves, and we currently mine more than half the global total. Australia also holds 23 per cent of world’s proven nickel resources, and 20 per cent of cobalt as well as 11 per cent of copper and manganese. Australia also produces 9.5 per cent of rare earths.

We are rushing to exploit it. King cited the value of lithium exports from her home state, Western Australia, at $16.3 billion last year.

What she didn’t say was that almost all of it – 96 or 97 per cent – went to China for processing.

And that points to two big concerns: first, that we are effectively helping China entrench its dominance, and second, that Australia could wind up, yet again, as simply the quarry for resources to which other countries add value.

“Our big miners are world leaders at digging stuff out of the ground, transporting it to the coast and putting it on a ship,” says Tony Wood, director of the Grattan Institute’s energy program.

“We’re very good at mining iron ore from the Pilbara and coking coal from Queensland or New South Wales and sending them to China or Korea or Japan. And they do the rest, turning it into steel,” he says.

The renewable energy revolution has changed the equation, says Wood. Australia’s huge fossil fuel industry will wither and die, and Australia stands to lose “at least 100,000 direct jobs in carbon-intensive regions”.

The world won’t need coal and gas, but it will still need steel and other metals. And the opportunity here, according to Wood, is to use green hydrogen – a zero-emissions energy source produced by splitting water molecules, using solar or wind power – in a high-value process of direct-reduction iron-making.

“Because we’ve got the renewable energy, we’ve got the minerals – the critical minerals as well as traditional ones like iron ore – we’ve got the potential to turn those minerals into something else,” Wood says.

For critical minerals, though, he says we need to carefully assess where it makes economic sense to move up the supply chain. “Just because you’ve got lithium, for example, doesn’t mean you make batteries. What you do is you understand the economics of the supply chain … and maybe then get someone else to do some of it.”

In general, Australia would be wise to focus on the energy- and capital-intensive parts of the process, says Wood, and leave other countries where workers are cheaper to do the labour-intensive parts.

Still, Australia could do much more than fill its historical role of being a very efficient quarry. And the payoff is potentially huge. Wood cites the conclusions of a report he did for the institute last year.

Based on Australia’s share of the known critical minerals, he says, “if we got our fair share of the current global market, we would earn four times the revenue we currently get from exporting coal and gas”.

The Grattan report also concluded it was “inefficient and wasteful of public money and private capital” to continue to pour money into coal and gas projects and that there should be “no further government support for expanding production of either”.

“Such support would amount to subsidising stranded assets and decommissioning costs,” it said.

Yet the government continues to pursue contradictory policies: on the one hand moving to stimulate decarbonisation and, on the other, encouraging the production of more greenhouse gases.

It is moving ahead on the decarbonisation front, at least. This month’s budget included $2 billion for a new Hydrogen Headstart program. Last week, King announced almost $50 million in new grants to support 13 critical minerals projects “to extract, refine and add value to the resources before they are exported to global markets”.

More plans and stimulus are in the works, says USAsia’s Bowen. He points to the National Reconstruction Fund, which has earmarked $3 billion for renewable and low-emissions technology and another billion towards value-adding in resources, among other priorities.

“And we have a battery strategy coming up soon, critical minerals strategy is being revised at the moment. All these things put a lot of emphasis on value adding happening in Australia, [developing] processing and then manufacturing activity.”

The benefits flowing from the closer engagement with the US through the Inflation Reduction Act could be even greater, he says, giving Australian resources companies access to US capital, potential access to billions of dollars in various clean energy subsidies, incentivising North American manufacturers to look outside the US.

“We have been aligned with the US for a long time on this need for communal supply chain security, but there has been tension around the share of economic activity that we attract. So this deal has to some extent resolve that tension, and allows the US and Australia to work together on building up clean-energy supply chains outside China.”

The move to allow Australia to be considered a domestic supplier under the Defense Production Act – assuming congress agrees to it – is particularly significant, says Bowen, in that it would mean “the US state, US taxpayers, actually underwriting certain critical minerals projects and processing, and perhaps some other value-adding activity.

“I think that is unprecedented.”

More generally, he says, the growing realisation among like-minded nations that they need to co-operate to counteract Chinese dominance of the new economy is welcome.

“If we can get everyone on the same page, like all these other countries working together to diversify supply chains, then it could be some sort of virtuous cycle where there’s increased competition, and actually that lowers prices and makes clean energy more available.”

There’s a way to go yet, of course, and a lot of negotiating yet to happen. Climate Change and Energy Minister Chris Bowen is already engaged in talks with his US counterpart, Energy Secretary Jennifer Granholm. A formal statement is expected by year’s end.

And King will be part of the Taskforce on Critical Minerals with the US National Security Council.

We’ll see what comes of it but, as Tim Buckley says, “Australia is in the box seat, because we’ve got the resources.”

This article was first published in the print edition of The Saturday Paper on May 27, 2023 as "Pentagon to secure Australian minerals in green deal".

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