The sudden collapse in battery minerals prices, particularly lithium and nickel, has attracted significant media attention in recent months, and for good reason. Lithium prices have fallen by more than 80% since January 2023, and nickel prices have dropped by almost 50% in the same timeframe.

Australian producers are feeling the pinch, with several operations being suspended or curtailed, leading to calls for enhanced Federal and State Government support in the form of subsidies, royalty relief and tax reform.

But are any of these measures viable, or likely to be sustainable over the medium term? If not, what does this mean for the Federal Government’s much-vaunted policy to shape Australia into a “globally significant producer of raw and processed critical minerals” by 2030?

How did we get here: unravelling the battery mineral price decline

No commodity market is immune from price volatility and, at one level, the decline in battery mineral prices appears to stem from a simple case of supply exceeding demand. Scratch the surface, however, and geo-political influences can be seen to be at work.

On the supply side in the nickel market, the finger is generally pointed at the flood of Indonesian laterite ore and its impact on the global nickel market. In January 2020, Indonesia banned the export of unprocessed nickel ore, causing global nickel prices to rise and prompting an influx of foreign investment into the country, particularly from China. This, in turn, saw nickel laterites (the dominant geology in Indonesia) being processed at greater scale, with an increasing proportion of the resulting nickel pig iron (itself unsuitable for battery technology) being converted into nickel matte, an intermediate product used in the production of battery-grade nickel sulphate.

These developments have resulted in structural change in global nickel markets and have blurred the lines between high and low-grade nickel producers. Utilising its newly developed processing capability, Indonesia has effectively stolen nickel market share from Australia, albeit, in the eyes of many, at considerable environmental cost.

In the lithium market, Chinese lepidolite producers, many of whom benefit from explicit or implicit central government support, appear to be operating at a loss, even before taking into account the added cost of significant environmental damage through thallium and tantalum pollution of water sources: albeit Chinese authorities appear to be attempting to curb the worst environmental impacts.

On the demand side, two much-vaunted developments in the battery mineral value chain are taking longer to come to fruition than many expected.

First, though still substantial, global take-up of electric vehicles (EVs) has been slower than projected. Reasons for this may include supply chain disruptions caused by the COVID-19 pandemic, cost of living pressures, increasing finance costs and moderated government subsidies. In China, the world’s largest EV market, purchaser subsidies were phased out in 2023, clouding the demand outlook for EVs and causing battery chemical inventory levels to be progressively wound down over the year.

Second, while the global investment community has continued to push for enhanced environment, social and governance (ESG) values in mineral extraction and production, and concerns have grown regarding supply chain vulnerabilities, there is as yet no compelling evidence for the emergence of a “green premium” in commodity markets. And at this stage at least, despite concerted jawboning by political leader at home and abroad,  battery mineral customers seem unwilling to pay more for diversity in supply or for “ethically sourced” raw materials, preferring instead to rely on existing, established and ultimately cheaper Chinese supply chains.

Industry and government responses to battery mineral prices

In Australia, the industry response to the decline in battery mineral prices has been swift. To list a few examples:

Recognising the challenges in the lithium and nickel industries, the Hon Madeleine King MP, Federal Minister for Resources, and the Hon David Michael MLA, Western Australian Minister for Mines, met with the heads of resources companies and industry bodies on 25 January 2024 to inform possible responses from government to the crisis. In the short term, Minister King, with support from Minister Michael and the Western Australian Government, has committed to:

• accelerate discussions within Government on incentivising investment in mid and downstream production, including through the taxation system (the concept of a 10% production credit for downstream production has been mooted);
• urgently progress discussions on common user infrastructure for critical minerals to include strategic minerals such as nickel; and
• further discuss the future of the nickel industry and the role of royalties with the Chamber of Minerals and Energy of WA.

As an initial step, the Commonwealth has (belatedly in the eyes of many) earmarked nickel as a “critical mineral” under its eponymous industry policy, thereby opening the prospect of concessional funding under various previously announced initiatives (see previous article).

In addition, the WA State Government proposes to offer WA nickel producers a 50% royalty rebate under a new Nickel Financial Assistance Programme commencing in March and available over an 18-month period. The rebate will be provided if the quarter's average price of nickel in concentrate falls below $20,000/tonne. The repayment will be split into equal quarterly instalments over the following 24 months. Companies will have to apply for financial assistance and provide information to validate their need for support and specify actions taken to adapt to the prices and industry changes.

Longer-term, the Commonwealth Government is looking to support the critical minerals sector through initiatives such as:

• working with industry to consider how trading platforms and end users (e.g. electric vehicle manufacturers) can better recognise and disclose ESG performance to consumers;
• using the US-Australia Critical Minerals Taskforce to work towards recognition of common and aligned ESG standards for the sector;
• finalising the Australia-EU bilateral partnership on sustainable critical and strategic minerals as agreed in 2022, with a renewed recognition of the importance of ESG differentiation in the market; and
• ensuring ESG standards in international critical minerals markets is a core theme of discussions with like-minded partners and considering policies that may help drive this outcome.

Key takeaways for Australian producers

In general terms, industry groups have welcomed the Federal Government’s commitment to at least listen to their concerns. However, there have also been calls for stronger action, including reform to existing approvals processes. A lack of efficiency, timeliness and certainty in approvals processes remains a key barrier in the industry, particularly in relation to environmental approvals.

The question for Government at all levels is whether the kind of direct or indirect support measures proposed represent anything more than a “finger in the dyke” response to what may prove to be overwhelming structural change in battery metals markets. In our view, there are some reasons for pessimism.

First, history demonstrates that the only guarantee of survival for commodity producers is being among the lowest quartile in terms of cost. Australia has an enviable resources endowment and generally supportive economic environment for resources extraction. Together, this has entrenched our bulk commodity exporters as some of the lowest cost producers in the world. However, the natural advantages that producers in these industries enjoy (such as proximity to export infrastructure, lack of land-use competition and outcropping or near-surface mineralisation) are not necessarily present for battery minerals such as nickel, lithium, cobalt and vanadium.

Second, while we can argue as vociferously as we want for a “green premium” for Australian battery minerals, the extent of coordination and advancement in global supply chains necessary to achieve this is considerable. We must also accept the reality that calculated on a value-add basis, Australia is a big player in the global industries driving demand in upstream markets. By way of example, the global automotive market alone is worth around US$3 trillion a year, compared to the total value of Australian commodity exports of around US$250 billion, only a small fraction of which end up in the cars we drive. So our ability to dictate the terms on which end users procure their components is limited.

Third, there is a significant risk that producers in other jurisdictions will be able to establish their positions in the global supply chain well before any “green premium” can be estimated, let alone realised. Bear in mind that we are only in the very early stage of global adoption of uniform sustainability-related financial disclosures: there is a long way to go before this can be translated into a standard taxonomy and measurement criteria for commodities which can be reflected in a pricing differential (this is a much more complex adjustment than, say, a grade adjustment for iron ore).  

On the other hand, there are at least four policy levers that Governments can pull to position Australian producers to be more cost competitive:

• rationalising approvals processes, avoiding Federal / State duplication and minimising bureaucracy wherever possible;
• establishing a common user infrastructure build program to support the delivery of new and developing battery minerals projects and to optimise existing infrastructure for shared use;
• encouraging workforce mobility through flexible employment law, implementing sensible immigration policy and supporting vocational education to address acknowledged and widespread skills shortages; and
• structuring tax concessions to encourage Australian companies to participate at multiple levels of the supply chain, rather than being hostage to offshore processing.

Finally, still greater co-ordination is required between Australia and its strategic allies to explore opportunities for technical collaboration, co-funding of new developments and integration between various aspects of the supply chain. This process is far more likely to identify opportunities for direct and targeted financial support, rather than a piecemeal or ad hoc approach to subsidisation of the battery minerals industry.

Only by creating the conditions that will allow Australian commodity producers to be integrated into global supply chains on a reliable, low-cost basis, will we ensure the longevity of the battery minerals industry in Australia.