Critical Minerals Security Partnership may not be enough for Australia
Fourteen countries this week took what they intended to be a big step in countering China’s dominance of critical minerals supply. But it’s unclear whether the initiative will restore competitiveness of Australian production and investment in the face of massive subsidies offered by China and, in response, the United States.
The Minerals Security Partnership, a coalition of 14 countries, including the G7, Australia, India, South Korea, and European Union members, announced plans for a finance network to boost investment in critical metals. The initiative will tap into domestic export credit agencies and development finance institutions to attract private sector capital to produce, extract, process and recycle critical minerals, especially in riskier markets. The partnership seeks to lower investment risks and drive global supply chain resilience by providing guarantees and concessional financing.
Australia’s economic prosperity and national security are intrinsically linked to the exploitation of its abundant resources, notably critical minerals. These minerals are the new oil. They’re the building blocks for everything from emerging technology to energy transition. Although Australia has vast reserves, its critical mineral mining and processing are still threatened by the intense subsidy war between the US and China.
For decades, the Chinese Communist Party (CCP) has used state subsidies to establish and then entrench its dominance of global critical mineral supply and value market chains.
China’s subsidies for critical minerals, while opaque, are nevertheless clearly substantial. Industry experts estimate that Chinese subsidies could cover anywhere from 20 percent to 40 percent of the total project costs for critical mineral mining and processing, depending on the specific mineral and region. For example, the domestic rare earth element sector gets direct grants and low-interest loans. Other examples of support are deeply discounted electricity rates, access to cheap land and cheap finance, as well as providing tax benefits and stockpiling.
With reduced operating costs, these companies can operate in market conditions that are too difficult for others. The Chinese producers can thereby control global processing capacity.
In response to growing geopolitical tensions with China and a push for energy security, the US government implemented substantial financial incentives of its own. Under the Inflation Reduction Act, the US committed more than $369 billion to clean energy and climate-related initiatives, including massive subsidies for the domestic production and processing of critical minerals.
Amid such foreign industry intervention, Australia’s production costs are, on average, higher than those in the US in refining critical minerals and much higher than those of Chinese companies. In May 2024, the Australian government announced a temporary Critical Minerals Production Tax Incentive to provide eligible recipients with a refundable tax offset of 10 percent from 2027 to 2040 for the costs of processing 31 currently listed critical minerals. This partially offsets the disparity created by the US Production Tax Credit, which offers a 10 percent production subsidy. Regardless, broader US tax incentives could still effectively reduce US production costs by 30 percent or more.
Australia has positioned itself as a reliable and ethical supplier of critical minerals, particularly to US and European markets looking to diversify away from China. However, the high capital expenditure required for mines and the cost-intensive process of refining and processing minerals means that Australian companies will still struggle to compete with their US and Chinese counterparts.
For example, building a lithium processing plant in Australia could cost nearly $1 billion. This is hard to justify without a clear and favourable return on investment. In contrast, a company setting up a similar operation in the US or China might see its costs slashed by hundreds of millions thanks to government subsidies. It’s unclear whether financing via the new coalition and the Australian tax incentive will be enough to address this challenge.
Ironically, US and Chinese subsidies have both made it harder for other nations to diversify their critical mineral sources.
Without a detailed understanding of the true scale of foreign subsidies, Australia risks underinvesting in its critical minerals sector, failing to attract the necessary capital and investment to scale projects vital to its economic future.
Developing resilient, competitive, ethical alternative critical mineral supply chains is about more than just resource access. Instead, the issue is access to financial and technological means to competitively mine, refine and process these minerals at the lowest cost.
If Australia wants to play a meaningful role in the critical minerals supply chains of the future, it must start by understanding the subsidy landscape in which it operates. If the US wants to truly break the CCP’s entrenched control over critical minerals and its ability to weaponise them, then it must support global, not national, supply chains.
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