Investors can manage a variety of risks, including those related to construction, interest rates, weather, and even market price movements through hedging. However, one risk that remains unmanageable is political risk—the potential for government actions to undermine profits. This risk cannot be hedged.
When, as Iluka’s chief executive recently accused, China manipulates rare earth prices through monopolistic practices, resulting in market failure, how should we respond?
Australia needs to take decisive government action. This includes financing projects, supporting the construction of shared facilities, and setting price floors. These topics were discussed at ASPI’s recent Darwin Dialogue on Critical Minerals, which was attended by representatives from the United States, Japan, South Korea, the European Union and Australia, as well as key Australian critical-minerals firms like Iluka, Australian Rare Earths, and Arafura.
Rare earths are crucial for modern technology, playing vital roles in electric vehicles, wind turbines, robotics and military applications. They intersect two major contemporary concerns: geopolitics and decarbonisation.
Australia is positioned to benefit from the demand for critical minerals, but it must establish sustainable supply chains with allies while competing against China, which can manipulate price risks. China’s dominance in the global processing of rare-earth metals allows it to stifle competition by shifting value within its vertically integrated supply chain. This hampers access to private capital needed to develop rare-earth mines, refineries, and magnet-making plants in Australia and its allied countries.
One policy response has been to offer soft loans. The Australian government, for instance, doubled its commitment to Export Finance Australia’s Critical Minerals Facility to $4 billion last year. However, soft loans alone are insufficient. To establish sustainable supply chains, long-term offtake agreements at viable prices with allies are necessary.
Lessons from US history can guide this effort. During the Cold War, Moab, Utah, became the epicenter of the first federally sponsored mineral rush to supply uranium. The US Atomic Energy Commission set minimum uranium prices, guaranteed them for 10 years, built roads for prospectors, and constructed uranium mills. Similarly, Australia should invest in common user infrastructure, starting with projects like the Illuka rare-earths refinery in Eneabba, Western Australia, supported by the Critical Minerals Facility.
The 2024 federal budget includes a production tax credit of 10% for critical minerals processing. While this helps reduce production costs, it doesn’t mitigate the main risk: China’s ability to manipulate end-prices to stifle new competitors. To counter this, the Australian government should establish time-limited price floors, collaborating with the United States, Japan, South Korea, and the European Union to underwrite a 10-year floor-price scheme for a reliable supply of Australian rare earths.
This strategy parallels existing practices in renewable energy markets. For example, Britain and other countries use contracts for differences (CFDs) to guarantee electricity prices, ensuring generators receive a top-up payment if market prices fall below a predetermined strike price. The European Union is proposing a similar CFD mechanism for energy markets, and Australia is pursuing capacity mechanisms for dispatchable renewable energy.
Australia has historical precedents for such arrangements. In the 1960s, Japanese steel mills secured long-term offtake agreements to develop iron ore mines in Western Australia’s Pilbara region and coking coal deposits in Queensland’s Bowen Basin. These agreements ensured miners could secure financing, repay investments, and earn a reasonable return, establishing infrastructure that supported supply chains for decades.
Politically, implementing a floor price for critical minerals is advantageous as it ensures taxpayer money is spent on actual results. In contrast, soft loans can result in significant losses if mines fail to produce.
Liberal democracies have been slow to adopt interventionist policies in response to the new geostrategic realities. With China manipulating the market, an interventionist approach is necessary.