Manufacturing the first line of Western supply chain sovereignty

Government policy-fuelled ex-China critical minerals supply is ramping up. US Critical Minerals Security Program director Gracelin Baskaran expects to see next far more concerted efforts by the US and its allies to use policy levers to induce faster expansion of the future-facing industries that can sustain long-term demand for a raft of key minerals.

Baskaran said in interviews this month a “Western buyers club” was definitely on the table in Washington.

Despite fractious former Western trade alliances being in need of serious repair, she sees the underlying need in many nations to reduce reliance on China-centric metal and industrial supply lines buttressing G7 and wider cooperation.

The US and Australia, where Baskaran recently met with federal resources minister Madeleine King in Canberra for discussions about “our most important bilateral relationship for minerals security”, have production tax credits in place to incentivise downstream refining of mined materials.

Price floors for certain metals, finance and subsidies for producers are firing new investment in mines and mineral reprocessing projects.

However, Baskaran says bigger, permanent demand signals are needed because China has not only entrenched dominance of global critical mineral supply lines but also built massive end-user automotive, clean energy and technology sectors.

“I think that you need an incentive for manufacturing full stop,” she says.

“I don’t think it matters whether it’s an EV, a missile, a semi-conductor; for all of those industries if we are getting minerals sourced from the US or an allied country then it should qualify for the same tax credit.

“One of the challenges of the American market, which has 340 million people, is that it’s actually not enough. As a country we use between 1% and 5% of the world's rare earths, nickel, cobalt, graphite, gallium ... We are a tiny market.

“But when you think about the aggregated demand of India, Australia, the European Union, the UK, South Korea, Japan and the US, you get to 2.7 billion people and if we are able to create an incentive for our manufacturing industries, regardless of what they are, to source minerals from these countries, which you can do with legislation, like a buyers’ club, that offers a long-term demand signal.

“China has succeeded because they have a demand market. They manufacture so much stuff and so we're going to have to shift beyond supply mentality to get some demand legislation to say, if you're manufacturing in the US or are our friends you get the same credit.”

Baskaran wrote recently that markets for many critical minerals are “in disequilibrium”.

“Supply is outpacing demand, prices are depressed and private capital is slow to materialise,” she said. The reason is straightforward – investors will not finance expensive new mines and processing facilities unless they can see credible, long-term buyers on the other end.

“That demand signal is largely absent.”

Baskaran says a five-to-10-year horizon may be realistic for re-establishing some sort of equilibrium in critical material supply.

Using rare earths as an example, she said China was processing up to 99% of the world’s vital heavy rare earths – including many used in defence applications – when its heightened export restrictions kicked in last year.

“If we get to a point where 30-to-40% of our rare earths are coming from China that’s probably okay because our crucial industries will still have supply.

“We are able to hold a stockpile.

“That is probably a 5-to-10-year agenda because we’re getting new rare earth mines going ... and we are currently building processing capabilities and permanent magnet manufacturing capabilities.

“But the period between when you build it and when you are fully ramped up is several years.

“So it really is probably a 5-to-10-year period before we are more resilient but not fully independent.”

Innovation could both shorten the road to new supply and divert demand.

Baskaran said scarcity was a powerful driver of innovation.

“The oil embargo in the 1970s drove unprecedented innovation in things like energy efficiency and using less oil. And a lot of those energy efficiencies actually are still in our cars and in our homes today,” she said.

“BMW created the first motor that doesn't use rare earth last year. It’s not commercialised. It’s not scaled up, but it is there as a pilot model.

“So there are instances where you can use less material and get creative. There are others where there’s not a viable substitute and we may actually have to stop manufacturing which is a much bigger concern.

“Our aerospace and defence manufacturers recently raised the alarm about one of the rare earths, yttrium, in particular, saying that if it exports don’t go up they will have to stop manufacturing these technologies.”

Baskaran said while defence was arguably the most important US domestic industry it wasn’t going to stimulate multi-billion dollar mine and processing plant investments.

“It’s not a huge market,” she said.

“If you look at the majority of minerals that we identify as critical beyond rare earth the defence industry uses less than a half a percent. We only build so many s satellites and a couple of F-35s and drones are actually not that material intensive because they're so small.

“It is a very small offtaker.

 “So we’re going to have to think about those other industries and how to increase demand if we want these to be economic outside of China.

“The driver of demand is going to be energy resilience. That is going to be the future of critical mineral demand.”