The United States and Australia have signed a Climate, Critical minerals, and Clean Energy Compact which will enable enhanced cooperation within the two countries and make Australia only the second country after Canada to be considered a “domestic source” under the US Defense Production Act.
Australia has significant deposits and active mines producing many of the minerals required for an effective energy transition, lithium, nickel, and cobalt for high-nickel cathode batteries. Rare-earth metals for permanent magnets used in electric vehicle motors and in other applications. Use of Australia’s mineral reserves as a means to accelerate the shift towards electrification, particularly servicing US markets, was increasingly on the table after the passing of the IRA.
The agreement will create ministerial taskforces whose goal will be to facilitate subsidy-eligible agreements between Australian mineral producers and American sources of demand. These are initially likely to be automotive manufacturers or chemical refiners in the US as these companies will be wanting to service either their own production or be paid to supply someone else’s.
Most importantly is that under this agreement, Australia will be considered a “domestic source” under title III of the US’ Defense Production Act. Canada is currently the only other country considered a domestic source for US production, this is partly why the US Ministry of Defense was able to look at making investments in Canadian critical mineral projects a few months ago. With the passing of this agreement and Australia being considered the US’ second domestic source, Australia can be considered on par with Canada when it comes to regulatory competitiveness for US investment eligibility.
Fortescue Metals CEO Andrew Forrest has called the deal “very, very positive” and that “this should push Australia over the line. ” The deal is also in advance of Australia laying out a minerals processing strategy soon according to the Australian Government.
As to who wins from the passing of this deal, Australian mining companies with a focus on critical minerals like lithium, nickel and rare-earths, will benefit significantly from this deal as this opens them up to production subsidies from the IRA. US manufacturing OEMs win from this too, since IRA-eligible supply suddenly got a whole lot bigger, even if it is a bit far away, but it does have the possibility of simplifying operations. Refining capacity in the US is extremely lacking for many minerals, this is one of the many things the IRA was trying to address through production tax credits made available to domestic producers.
One of the complications with this is that no matter how many deals are being struck, being politically and economically closer doesn’t change that Australia is physically thousands of miles across the Pacific. Shipping costs are a major factor when it comes to shipping mineral products, and as Australia knows very well, ore isn’t very value dense. Looking at Australia’s iron exporting industry for instance, its primary trading partners in China are relatively close by Australian standards. Australia’s mineral exports have been heavily supported by China’s proximity to the country as China’s frankly insatiable mineral demand, particularly for its steel industry, has allowed Australia to turn into the mineral giant it is today without investing heavily in mineral processing facilities.
China was happy to take Australia’s iron ore and turn it into steel on home soil, as it was more than comfortable trading industrial and economic prosperity for lower lifespans caused by particulate matter and smog. But the attitude we see in North America and in Europe is one of receiving finished goods to combine in manufacturing processes, rather than refining.
Interestingly, it’s kind of a win-win situation for the US and Australia, as Australia is looking to increase its share of domestic refining capacity in higher value minerals like converting spodumene concentrate into lithium salts. This will transport significantly better than pure ore from a shipping perspective and it will be less work for battery manufacturers to use it directly in their processes. Companies like Albemarle who recently announced it’d be doubling its Western Australian refining capacity will have likely known about this compact and have planned accordingly.
Increased Australian refining capacity on top of full eligibility for IRA subsidies makes Australia a solid option number 2 or 3 if US mineral extraction capacity is lacking depending on the mineral. It will be competing on relatively level footing with Canada on supplying American green energy industries but it has the edge of being comparably mature in its processing projects. Canada has advantages related to proximity but has lots of early stage and comparably high cost projects. While Australia will be competing with mature, low cost projects halfway around the world.
The big loser in this deal is Canada and Canadian mineral extraction projects, particularly those running relatively high costs compared to Australian companies, as they suddenly have to compete with companies from a similar geopolitical position, which used to be a considerable advantage.