Less than two years ago, the International Energy Agency published a report by analyst Tae-Yoon Kim about how spiking prices for critical minerals will affect the global clean energy transition.
Today, Australian producers are grappling with a sudden collapse in critical mineral prices, with lithium falling over 80 per cent 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 (such as Chinese market domination) also plays a major role, along with a slower-than-expected uptake of electric vehicles (EVs) and a price premium for enhanced environmental, social and governance (ESG) values in mineral extraction and production failing to materialise.
Attendees of the upcoming Australian Critical Minerals Conference in Brisbane from May 28–30 can expect market volatility to dominate the conversation.
Ahead of the event, Climate Energy Finance director Tim Buckley, Cobalt Blue Holdings investor relations commercial manager Joel Crane, and Clean Energy Finance Corporation head of WA and resources Rob Wilson discuss the issues.
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),” he said.
Crane said the volatile market creates strategic uncertainty.
“There’s a lot of ‘chicken and egg’ here,” he said. “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 said.
“Financiers are looking for revenue confidence in these opaque mineral markets, so floor prices that are above C1 costs (operating cash costs) or linked to C1 or AISC (all-in sustaining costs) 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 said 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 the EU’s carbon border adjustment mechanism 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,” Crane said.
“Government can provide more temporary tax breaks and other incentives to improve the financial viability of new entrants into these new sectors.”
Buckley believes it is all in the framing.
“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 per cent reduction on average globally in 2023 and another forecast 18 per cent decline is expected in 2024. This will accelerate cost competitiveness of batteries and EVs.
“As EVs become more cost competitive in terms of upfront purchase price relative to ICE (internal combustion engine) 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 said the sector can 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”, Wilson said.
“For example, Pilbara Minerals accessed the Nordic Bond market to build its first plant or mine, with the bond cornerstoned by the CEFC (Clean Energy Finance Corporation). This approach may require higher-priced construction financing in the short term, with subsequent refinancing with lower-cost finance.”
Crane agreed this approach works, but it is an unfortunate time given the current position of interest rates.
“Alternative funding is now much more expensive than it has been over the past decade,” he said. “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 Inflation Reduction Act, and to 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 $100 billion of public capital and budget support needed over the coming decade to crowd in private capital,” Buckley said.
“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 Federal Treasurer Jim Chalmers make a $20 billion 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 roles do you believe the Australian Government should play in diversifying the critical minerals supply chain?
Buckley said 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 … 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 said.
Crane would like to see more grant programs along the development pipeline (ie 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 Buckley, Joel Crane and Rob Wilson, don’t miss the Australian Critical Minerals Conference 2024 taking place in Brisbane from May 28–30.
View the conference agenda here or download the conference brochure here. Find out more about the event here.