Critical materials and the Australia-India economic relationship

16 Apr 2020
Critical materials and the Australia-India economic relationship
Key Points

Australia’s pursuit of a closer economic relationship with India has been driven by India’s growth and Australia’s need to diversify its economy 
  • The critical materials sector, essential in producing 21st century technologies, is a priority area to develop the relationship
  •  Positive strategic and commercial developments in 2019 are likely on hold until the post-COVID-19 recovery begins 
  • India’s swift enforcement of social distancing measures may prevent longer term economic dislocation, and the future release of India’s Australia Economic Strategy can serve to reboot the relationship
Australia’s India priority
 
Significant effort has been made in recent years to strengthen the Australia-India economic relationship, by government, industry and academia in both countries. Undertakings have included the Australian Government’s implementation of a comprehensive India Economic Strategy, with an equivalent Australia Economic Strategy due for release by the Indian Central Government.
 
For Australia, India is a strategic as well as economic pursuit. Strategically, a closer relationship will build stronger political ties with a country that shares many of Australia’s international objectives, such as a rules-based regional order. Growing the economic relationship with one of world’s major emerging economies will also contribute to the diversification of Australia’s trading and industrial base.
 
Before the economic dislocation caused by COVID-19 spread beyond China, Australia’s overreliance on a select few commodity exports to this one market was laid bare. Post-COVID-19 economic recovery and trade growth efforts should therefore focus on market and sector trade diversification, with India a priority market to pursue both efforts.
 
Transforming Australia’s economic relationship with India will be a challenging task. For example, India’s endowments of iron ore mean this commodity will not be a foundation for bilateral ties, like it has for China, Japan and Korea. To succeed with India, Australia’s task includes building the services relationship, and developing a resources relationship that goes beyond raw materials exports.
 
The critical materials sector provides an ideal opportunity for Australia to help realise these goals with India.

The critical materials opportunity
 
The term “critical material” is assigned to up to thirty raw minerals (including cobalt, lithium and nickel) which are essential inputs for 21st century technologies. These include renewable energy technologies, advanced manufacturing and scientific equipment, and electrified transport systems.
 
Unlike bulk commodities such as iron ore, the supply-side risks facing consumers of critical materials are significant. Monopolised production, narrow markets and social challenges mean supply of critical materials is neither secure nor always affordable.

crtimin.jpg
Photo: ASPI
 
For producers, there are also major barriers to entry. Companies that produce critical materials face significant funding and price volatility risks, while governments’ industrial and procurement policies are challenged by the geopolitical and sustainability risks in existing critical materials supply chains.
 
Given resource endowments and manufacturing capacity limits, no single country can alone supply all of the critical materials its needs to function in the 21st century.
 
Here, Australia has a major role to play. It has significant natural endowments in many critical materials, and the capacity to contribute to the processing and manufacturing stages of value chains. However, international trade and investment relationships are needed to underpin activity by Australian companies, in what is inherently a globalised industrial sector.
 
India is an ideal critical materials partner for Australia.
 
India is determined to increase the contribution of its manufacturing sector to its labour market and economy, which has traditionally grown from its services and domestic consumption base. Furthermore, Central Government industrial policy seeks to ensure India becomes a major producer of critical materials-utilising technologies, including in electric transport and renewable energy systems. Driven in large part to meet its emissions reduction targets, India has identified lithium, cobalt, nickel and rare earths as key to its future industrial plans. Australia is richly endowed with all four.
 
Developments in 2019 were positive
 
Indian Central Government strategies recognise Australia as a potential critical materials partner. While the majority of Australia’s trade with India has been in the export of raw minerals commodities such as metallurgical coal and gold, a new focus on critical materials partnerships crystallised in 2019.
 
In developing India’s Australia Economic Strategy, the author Ambassador Anil Wadhwa made repeat public visits to Australia concerning critical materials. Subsequently, a late-2019 overview of the upcoming Strategy circulated in industry and media briefings noted that it was imperative that India focus on Australia to meet its demands for critical materials.
 
At the commercial level, the establishment of an Indian state-owned joint venture company to acquire critical materials offshore, Khanij Bidesh India Ltd., also undertook delegations to Australia in 2019. This included visits to Western Australia, Australia’s principal mineral province and headquarters of major and emerging critical materials and rare earth companies (from BHP and Rio Tinto, to Lynas Corporation and Neometals).
 
Significantly, the first Australia-India lithium agreement was signed between Neometals and Indian company Manikaran Power in 2019, to explore the supply of WA spodumene concentrate to refine lithium in India. Manikaran is India’s third largest power trading company, and if the project develops to construction phase it will be the first lithium refinery in India fed with Australian product.

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Lithium
 
The COVID-19 effect and next steps
 
With the evolution of COVID-19 into a global pandemic, the task of building the Australia-India economic relationship is likely on hold. This may jeopardise the prospects for near-term commercial developments in the critical materials sector.
 
India’s 24th March lockdown of 1.3 billion people has brought factory production across many sectors to a temporary standstill, including the car industry. Prime Minister Modi, in a national address on 14th April, extended the lockdown until early May. While India’s mining, power and metals sectors are continuing essential operations, output is reducing and particularly by smaller and private-led companies.
 
Additionally, many of Australia’s critical materials companies will face new challenges this year. For example, foreshadowing future market deteriorations and operating restrictions, Lynas Corporation has temporarily closed its rare earths processing plant in Malaysia (the biggest rare earths processing plant outside mainland China). Northern Minerals, a heavy rare earths producer in WA’s northern Kimberley region, has also temporarily suspended site operations.
 
While the COVID-19 pandemic is still spreading, there are some positive signs. In particular, the response by India’s Central and State Governments in enforcing swift social distancing measures may prevent longer term economic dislocation. The Economist Intelligence Unit is forecasting India will avoid a recession during the COVID-19 era, and remain the fastest growing G20 economy (at 2%, down from 6%). In Australia, economic recovery planning is beginning.
 
The supply-shock created by COVID-19 will eventually increase global demand for essential products and services. This will include the sourcing of critical materials by India’s companies and its Central Government.
 
Given Australia’s economic recovery and ongoing diversification needs, it is imperative Australia engages India to advance this critical materials supply and processing partnership. The future release of the Australia Economic Strategy and its priority focus on critical materials can serve to reboot the relationship.
 
Over time, becoming a trusted supplying, processing and production partner with India is one outcome that will support Australia’s post-COVID-19 economic recovery and advance its economic diversification agenda.
 
 
An op-ed version of this Analysis Brief was published on 15th April 2020 by the Australian Institute of International Affairs.
 
Hugo also recently authored Western Australia and India: The Need for a State Strategy to Recover and Grow the Economic Relationship.
 

Authors

Hugo Seymour
Hugo Seymour
Research Analyst
Hugo Seymour is the Research Analyst at the Perth USAsia Centre. He develops content and publishes on Western Australia and Australia's engagement in the Indo-Pacific region.
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