Article: Critical mineral market volatility and what it means for Australia's mining industry

Less than two years ago, the International Energy Agency published a report by analyst Tae-Yoon Kim warning that spiking prices for critical minerals threatened the global clean energy transition.

Today, Australian producers are grappling with a sudden collapse in critical mineral prices, with lithium falling over 80% since January 2023 and nickel dropping by half in the same period. Projects are being suspended or downgraded, and several industry voices are calling for government subsidies and tax reform.

What happened? An analysis by Gilbert & Tobin points to the simple reality of supply exceeding demand, with the nickel market impacted by a flood of Indonesian ore. Geopolitics (Chinese market domination) also plays a major role, along with a slower-than-expected uptake of EVs, and a price premium for enhanced ESG values in mineral extraction and production failing to materialise.

Attendees can expect market volatility to dominate the conversation at the upcoming Australian Critical Minerals Conference to be held on 28-30 May in Brisbane. Ahead of the event, we interviewed Tim Buckley (Director, Climate Energy Finance), Joel Crane (Investor Relations/Commercial Manager, Cobalt Blue Holdings), and Rob Wilson (Head of WA and Resources, Clean Energy Finance Corporation) to learn more.

Amid market volatility for critical minerals, what strategies can Australian producers consider to mitigate financial risks and stabilise revenue streams?

Buckley recommends producers look for strategic partners who want to secure long-term, reliable supply, possibly supported by an equity share. “This can be globally – say Korea, Japan, India and the US, supported domestically by leveraging the growing interest of government-owned finance entities like the Clean Energy Finance Corporation (CEFC), The Australian Renewable Energy Agency (ARENA), The Northern Australian Infrastructure Facility (NAIF), Export Finance Australia (EFA), and the National Reconstruction Fund (NRF).”

Crane comments that the volatile market creates strategic uncertainty. “There’s a lot of ‘chicken and egg’ here,” he notes. “For example, we [Cobalt Blue] are seeking offtake and joint ventures, but the counterparty requires funding commitments which are more difficult without a commercial partner.”

For Wilson, volatility can be mitigated through strategic partnerships with highly credible and aligned parties. “By this, I mean geopolitically aligned (IRA, AUKUS, or EU-linked), vertical integration, carbon or ESG-aligned,” he explains. “Financiers are looking for revenue confidence in these opaque mineral markets, so floor prices that are above C1 costs or linked to C1 or AISC plus a margin are a great help. Producers could also encourage offtakers to emulate a derivative pricing structure that trades off price support in low-price markets against discounts in high-price markets.”

Wilson also comments that setting new ESG and carbon intensity standards for the sector is likely to be the new battlefield as focus on supply chain carbon increases once CBAM comes into operation.

Considering the downturn, how can advocates help ensure the shift to EVs and renewable energy does not lose momentum?

“The want for the shift is not losing momentum, but the investment around it is,” says Crane. Government can provide more temporary tax breaks and other incentives to improve the financial viability of new entrants into these new sectors.”

“It is all in the framing,” says Buckley. “While it lasted, the dramatic hyperinflation of the lithium price over the previous couple of years was great for established firms and shareholders. But it created a hyperinflationary headwind to decarbonisation efforts. There are two sides to each coin. The return to long-term averages of critical minerals means that battery prices are coming down, an estimated 14% reduction on average globally in 2023, and another forecast 18% decline is expected in 2024. This will accelerate cost competitiveness of batteries and electric vehicles. As EVs become more cost competitive in terms of upfront purchase price relative to ICE alternatives, the customer resistance will fall away, permanently. We need strategic patient public capital to support and grow our industry across the commodity cycle, given the strong demand outlook underpinned by the accelerating global energy transition.”

Wilson says the sector can walk the talk and do more to actively support electrification and EVs and support transparency on carbon, carbon pricing, and embedded carbon in battery minerals. 

Could alternative financing and investments be leveraged to overcome the challenges within the Australian critical minerals industry?

“Alternative funding and access to thematic investors can certainly overcome challenges”, says Wilson. “For example, Pilbara Minerals accessed the Nordic Bond market to build its first plant/mine, with the bond cornerstoned by the CEFC. This approach may require higher-priced construction financing in the short term, with subsequent refinancing with lower-cost finance.”

Joel agrees that this approach works, but it is an unfortunate time given where interest rates are. “Alternative funding is now much more expensive than it has been over the past decade,” he says. “The best way to attract funding is through Government agency backing, like EFA stamps of approval.”

As a public interest think tank, Climate Energy Finance has been strongly advocating for an Australian Government response to the US IRA, and China’s global leadership of almost all zero emissions industries of the future. “We are advocating that the 2024 Federal Budget makes a significant start on the additional $100bn of public capital and budget support needed over the coming decade to crowd in private capital,” says Buckley. “In addition to budget subsidies like an advanced manufacturing production tax credit, we are advocating that the Federal government better leverage the growing capacity of government-owned finance entities like the CEFC, ARENA, NAIF, EFA and NRF. We also advocate that Treasurer Chalmers make a $20bn strategic allocation to the Future Fund to invest in mining and value-added refining in critical minerals and metals, so that capital continues to flow, and to prevent the loss to foreign interests of strategic Australian developments.”

What role do you believe the Australian government should play in diversifying the critical minerals supply chain?

Looking to the future, Buckley explains that in addition to the Future Fund, Climate Energy Finance is advocating for a strategic stockpile reserve investment to provide long-term working capital and revenue offtake assurance for new critical mineral development proposals, thereby crowding in private bank debt and equity capital support.

“Additionally, given the concentration of control that China has strategically built up in these industries, including the ownership of the LME, it would be advantageous for the Australian government to work collaboratively with other international partners to build more transparent and independent financial intermediaries that are free of potential conflicts of interest that undermine the integrity of market transparency and the critically important fair market price signal,” Buckley adds.

Crane would like to see more grant programs along the development pipeline (i.e. early to late), accelerated approvals, more incentives for commercial international investment (offtakes and Joint Ventures) and sponsoring of “ESG-approved” certification programs.

To learn more about the opportunities for your organisation in the critical minerals space and solutions for the sector’s challenges, or to hear more from Tim BuckleyJoel Crane and Rob Wilson, join us at the Australian Critical Minerals Conference 2024.

View the conference agenda here or download the conference brochure here.