Boosting Western supply of refined critical metals means de-risking investment. But how?: Russell

By Clyde Russell

SYDNEY, Oct 28 (Reuters) - The Western world is starting to reel in China's massive lead in producing and controlling the refined metals critical to defence, the transition to cleaner energy and the development of AI-related infrastructure.

The question is how to translate initial successes into a long-term, economically viable supply chain that bypasses the world's dominant producer.

It was this question that dominated the International Mining and Resources Conference (IMARC) this week in Sydney, which brought together miners, governments and financiers to discuss how to turn the resource endowments of countries like Australia into refined metals.

Unlike China, which can sustain forms of subsidies for state-controlled enterprises for years until economies of scale are achieved, Western nations are shaped more by finance and profitability.

But it is also apparent that in a world where China dominates the production of refined metals and prices are often viewed as opaque, the previous model of mine development and downstream processing will not work.

The United States is further ahead than the European Union in recognising that if critical minerals and metals are to be obtained in sufficient quantities and via relatively secure supply chains, then government intervention and support are going to be key.

The traditional model of junior miners exploring and proving up a resource, then trying to raise capital to build a mine and eventually moving into production simply will not deliver the needed ore when compared with China's subsidy-driven rivals.

And even if ore can be successfully mined, refining is often more challenging, especially in countries like Australia, with its high labour and energy costs and stringent environmental approvals.

The main question at IMARC was how to significantly move the needle toward more secure supply for Western economies in a world where China controls 99% of the world's refined gallium, 74% of antimony, 81% of molybdenum, 91% of rare earths, 70% of lithium and 44% of copper, showed data from Visual Capitalist. And that is to name just a few of the vital metals.

The answers were varied and reflected that no one tactic or policy is likely to deliver the necessary results.

But there was some consensus on what measures are likely to bring the greatest chance of more rapid development of mineral resources.

DE-RISKING

The biggest factor is how to de-risk projects. Under the traditional model financing was only available if the developer could show that the cost of producing the minerals and metals would be less than the expected future price, or that offtake agreements were in place that guaranteed revenue.

It was on this basis that Australia was able to approve massive resource expansion, such as Japanese investment into coal and iron ore mines, and both Japanese and Chinese support for liquefied natural gas projects.

Australia also jumped in the past decade to become the world's largest lithium producer, but this was achieved largely with Chinese money and the vast majority of the country's mined lithium ore is processed in China for use by Chinese vehicle and battery manufacturers.

For more minor metals with opaque pricing the situation is more complex.

There are three main tactics to try and speed up development.

The first is to set a floor price for the commodity, as the United States has done for the rare earth compound neodymium-praseodymium, which is used to make magnets.

The minimum price of $110 per kilogram gives producers certainty and may end up costing US taxpayers nothing as the price of the compound has risen to trade above the floor.

The second is to guarantee offtake, giving producers confidence that buyers will be available for the product at prices that will ensure viability, even if those prices are higher than what is charged by Chinese-controlled suppliers.

The third is to directly invest in mines and downstream processing and be prepared to subsidise losses until economic viability can be achieved.

The trick is in working out which tactic will deliver the best outcome, and this is likely to vary from project to project.

For metals where the government is the main buyer, such as those used by defence industries, owning stakes may be the answer.

For industries vital to technology and the energy transition, setting minimum prices and ensuring offtake agreements are likely the better solution.

What is lacking so far is a comprehensive strategy across the developed Western economies, and at IMARC it was also clear that the United States and the European Union are showing signs of competing with each other, rather than working together.

The risk is that the Western response to China's dominance of refined critical metals remains fragmented and uncoordinated.

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The views expressed here are those of the author, a columnist for Reuters.