It also helps that Australia is a politically stable jurisdiction with a strong rule of law and a long alliance with the US.

The US is seeking similar relationships with other countries (some, like Indonesia, without the labour, environmental or legal standards of our economy) in an urgent effort to diversify its reliance, and that of the western world, on China for the strategic resources required to meet its carbon reduction ambitions.

China’s iron grip

China dominates the lithium, cobalt, graphite and rare earths industries that are fundamental to not just cleaner technologies, but 21st-century military and commercial applications, and is scrambling to secure that dominance through investments and access arrangements with the developing economies where much of the world’s undeveloped resources lie.

It doesn’t only have its foot on resources of many of the critical minerals, China dominates the entire value chain in many of them. It procures more than half of the metals needed for batteries like lithium, cobalt and manganese, and has near-total dominance of rare earths processing.

Australia, for instance, has more than half the world’s lithium resources, but more than 90 per cent of it is processed in China, which has been willing in the past to weaponise that dominance in a territorial dispute with Japan.

The European Union’s dependence on Russia for its core gas requirements before the Putin regime invaded Ukraine was a wake-up call for the US and others. It highlighted the vulnerabilities created by over-dependence on a third party for strategic resources, particularly a geopolitical rival.

An Australian company has already benefitted from the heightened tensions between the US and China as the US seeks to distance itself, albeit not decouple, from China, with Lynas Corp receiving a $US120 million contract from the US Department of Defence (DoD) ast year to build a heavy rare earths separation facility in Texas.

The Biden Administration has foreshadowed allowing the DoD to fund processing plants outside the US as part of the strategy envisaged in the compact with Australia to not just boost US domestic supply and processing of strategic minerals and metals, but to also supplement that with “friendshoring” of that supply and processing.

The Albanese government, which is close to issuing a paper outlining its own strategies for critical minerals, has made it clear that it sees the deeper relationship with the US as an opportunity to increase the domestic processing of Australian resources to extract more value and generate more employment.

Whether that would be the best use of corporate and national capital – it would probably require substantial financial incentives – is at least debatable. Australia is a world leader in mining and mining technologies, but has generally been uncompetitive in processing.

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Moreover, the highest returns on financial capital in the resources sector come from shipping the raw materials, not the processing, because of the capital intensity of moving up the value chain.

The exceptions have tended to be where a company’s social licence to exploit the resource hinged on value-adding or where, as with the rare earths refineries being developed in Western Australia, there are obstacles, geopolitical or environmental, to offshore processing.

It’s not just the US that offers an opportunity for Australian miners. Europe, like the US, has belatedly woken to its vulnerability because of its reliance on China for the key materials needed to meet its own environmental goals.

While it was initially alarmed by the Inflation Reduction Act – it was concerned the US would attract investment from its own companies and labelled the Act a form of protectionism – it has since been developing its own Critical Raw Materials Act to make it easier to gain permits and funding for new mining and processing projects, and has been engaged in amicable discussions with the US about a compact of its own.

Ticking the boxes

The shortages of key minerals and processing capacity outside China mean that none of the US, Europe or their key allies have the capacity to go it alone. They need a close alliance of aligned nations, preferably (but not necessarily exclusively) countries with similar environmental aspirations and labour standards to their own.

Australia ticks those boxes along with our vast resources, demonstrated expertise in exploiting them and trusted status as a reliable supplier with close and long-term relationships, not just with the US but with other key US allies such as Japan and South Korea.

Given the global shortfalls in supply, and even resources, of some key materials needed to meet the projected demand – the International Energy Agency has said the global supply of lithium will have to increase 42 times its current level by 2040 amid a broader quadrupling of the minerals needed for clean energy technologies – our resource sector will be critical to the aspirations of those advanced economies committed to decarbonisation.

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The closer relationships with nations that are distancing and attempting to de-risk themselves from their reliance on China will inevitably create some awkward moments.

Australian governments will have to decide how to treat not just new investment proposals, but existing Chinese investments in strategic minerals as China is making it clear, via its scramble to put it foot on resources in Africa and South America, that it won’t relinquish its dominance willingly.

The Americans and Europeans will be acutely aware that it will take years to wean themselves off their dependence on China for critical resources and that they are very vulnerable in the meantime.

The breakdown in trust and increase in friction between much of the West and China is creating some messy, delicate and potentially destructive pressure in what were, until relatively recently, reasonably strong and productive relationships. The “compact” between Australia and the US won’t ease those tensions.

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