Critical minerals: Ripple effects from the US to Australia to Asia

Introduction

In December 2023, at the United Nations Climate Change Conference (COP28), nearly 200 countries committed to transition away from fossil fuels, to triple renewable energy capacity by 2030 and to achieve net-zero carbon emissions by 2050. To achieve these goals, they must manufacture more semiconductors, electrical vehicles (EVs), wind turbines and solar panels, and encourage innovation in other energy efficient decarbonization technologies. Central to these efforts will be the extraction and production of the so-called group of elements known as “critical minerals,” including lithium, cobalt, nickel, graphite and rare earths.

Reserves of critical minerals are located across all continents of the world, with Australia possessing the world’s second largest reserves of lithium, cobalt, copper, and nickel. The US is also home to some of the world’s most significant reserves of critical minerals, and North American investors control the highest number of overseas operational mines containing critical minerals as a primary commodity. In the last five decades, China has established itself as the world’s leading refiner of critical minerals. The International Energy Agency has estimated that the transition towards net-zero will triple the demand for critical minerals by 2030.

The pledge to transition to net-zero has seen countries racing to secure their critical minerals supply chains in myriad ways. This article will provide an overview of the United States’ critical minerals strategy, how it has influenced Australia’s strategy and the ripple effects that these developments have had on political-economic decisions being taken across the Asia-Pacific region. This article will then note the areas where potential disputes may arise, and highlight some key considerations for companies investing, or seeking to invest, in critical minerals.

The US critical minerals strategy

In 2017, the Trump administration released a “Federal Strategy to Ensure Secure and Reliable Supplies of Critical Minerals,” calling for interagency cooperation to reduce US reliance on imports of critical minerals. The following year, the US Government published an initial list of 35 critical minerals and overhauled the US foreign investment framework from a largely voluntary notification system to one imposing mandatory screening for certain inbound transactions. Under the Foreign Investment Risk Review Modernization Act (2018) (FIRRMA), investment proposals that involve certain foreign investors acquiring, relevantly, interests in “critical technologies” or “critical infrastructure” businesses in the US, must be notified to the Committee on Foreign Investment in the United States (CFIUS), the regulatory body that administers the US’ foreign investment framework. In determining whether a proposed transaction threatens US national security interests, CFIUS may consider, among other things, the “potential effects of the cumulative control of…any one type of critical infrastructure, energy asset, critical material or critical technology by a foreign government or person.” FIRRMA also maintained CFIUS’ power to initiate retroactive reviews of any covered transaction.

In 2022, the US Government passed the Chips and Science Act (Chips Act) and the Inflation Reduction Act (IRA). Both Acts envisaged the implementation of various production tax credits and subsidy programs to jumpstart nascent domestic capabilities in critical minerals processing and chips and renewable technologies manufacturing. Under the Chips Act, the US has awarded US$8.5 billion in grants to Intel, US$6.4 billion in grants to Samsung and US$6.6 billion to Taiwan Semiconductor Manufacturing Company (TSMC) to build out their respective semiconductor productions in the US.

Under the IRA, subsidies will be granted to EVs that contain a certain percentage of critical minerals “extracted or processed in the United States or in a country with which the United States has a free trade agreement.” Australian mining companies have reportedly benefited from US$13 billion in IRA-related deals with US car manufacturers. By contrast, EVs that contain battery components manufactured by a “foreign entity of concern” or with batteries containing any critical minerals “extracted, processed or recycled by a foreign entity of concern” will not be eligible for subsidies. A “foreign entity of concern” has been defined to include (i) all entities incorporated, headquartered in or performing the relevant activities in a “covered nation” (further defined to mean China, Russia, Iran and North Korea); or (ii) all entities where 25% of the “voting rights, board seats or equity interests” are directly or indirectly held by a government of a covered nation, including such government’s agencies or instrumentalities.

Since the promulgation of the Chips Act and the IRA, the US has imposed sanctions on certain Chinese entities and steeper tariffs on Chinese-made semiconductors, EVs, batteries and critical mineral imports. The US Congress is considering draft legislation to establish a screening process for outbound investment flows into certain “sensitive technologies” businesses operating in “countries of concern.”

Australia’s critical minerals strategy

In response to the US mobilization in the critical mineral space, in June 2023, the Australian Government released its Critical Minerals Strategy 2023-2030. The Strategy envisioned Australia transforming into a “renewable energy superpower,” namely through collaborations with “international partners” – specifically, the US, the UK, Japan, Korea, India and the EU – to secure supply chains through entering into offtake and equity investment agreements, and by facilitating foreign investment in downstream processing and greenfield critical minerals operations.

Similar to the US approach, in May 2024, the Australian Government announced a plan to grant production tax credits and other incentives to support domestic projects processing critical minerals and domestic manufacturing of solar photovoltaic components and batteries. At the time of writing, Australia’s Resources Minister has expressed that it is “up in the air” as to whether companies with Chinese investors may qualify for production tax credits. It is unclear how the policy will be implemented in practice.

The Australian Treasurer has also announced that it would be increasing scrutiny on inbound foreign “[i]nvestments in critical infrastructure, critical minerals, critical technology” to “protect our national interests.” Australia’s foreign investment regime is governed by the Foreign Acquisitions and Takeovers Act 1975 (Cth). Like the US, the regime requires foreign investors, in certain circumstances, to notify the Treasurer of proposed foreign investments, and for the Treasurer to decide whether such proposed investment can proceed (including on a conditional basis). For up to a decade after the initial investment decision, the Treasurer maintains the discretion to “call in” certain actions and potentially impose new conditions on the foreign investor or require divestment. Although the underlying legislation has not been amended, the Treasurer has expressed that the discretionary “call in power” will be “more robustly applied and enforced,” including allowing the Government to “go back into those deals, if that’s necessary.”

Ripple effects in the Asia-Pacific region

The US critical minerals strategy has had ripple effects across the Asia-Pacific region.

In Northeast Asia, Japan and South Korea have joined the US-led Minerals Security Partnership, along with Australia, nine other countries and the EU, represented by the European Commission. The Partnership has already seen, for example, an Australian nickel company securing debt financing commitments from Canadian and German entities, and offtake agreements for nickel and cobalt sales for the life of the project with companies in the US and South Korea. Japan and South Korea have also entered into a separate trilateral mechanism with the US to build “resilient semiconductor supply chains” and to increase the “availability of critical minerals and resilience of the supply chains, including through enhanced processing and refining capabilities.”

On the bilateral front, Japan has signed a Critical Minerals Partnership agreement with Australia and joined Australia and the US at the Darwin Dialogue to discuss critical mineral production and supply chain security. It also entered into a Critical Minerals Agreement with the US, allowing it to be considered a US Free Trade Agreement (FTA) partner under the IRA so that its companies would be eligible for the EV tax credits offered by the IRA. South Korea has assumed the chair position of the Minerals Security Partnership, entered into a Memorandum of Understanding with Australia in respect of cooperating on critical mineral supply chains, and continues to seek partnerships with Australian-based critical minerals mining companies to ensure an “IRA-compliant” supply of critical minerals. Like China, Korea is investing heavily in critical minerals in Central Asia and Africa as part of a “K-Silk Road” initiative.

The US critical minerals strategy has had ripple effects across the Asia-Pacific region.

Ripple effects are also being felt in Southeast Asia. Both Indonesia and the Philippines, with substantial nickel reserves, are reportedly seeking bilateral critical minerals trade and investment agreements with the US. Indonesia has already entered into a Memorandum of Understanding with Australia with respect to EV battery manufacturing. Following the example of Indonesia’s export ban on raw nickel ore which triggered significant foreign investment inflows, Malaysia and Vietnam have also declared intentions to ban exports of raw rare earths and to instead require domestic processing before export.

Mitigating against future dispute risks

A. Risks arising from increasing resource nationalism

The race for critical minerals has given rise to increasing resource nationalism, and with that comes the increasing risk that a contemplated investment in critical minerals may be barred or existing investments expropriated. Chile and Mexico have already sought to nationalize their respective lithium industries. In response, a Chinese mining group has initiated an ICSID arbitration against Mexico, while other foreign investors with affected operations are pursuing talks with the Mexican government. China has also declared that from October 2024, its domestic rare earth reserves will be considered state property, and that “no organization or individual may encroach upon or destroy rare earth resources.”

Mitigating against risks arising from resource nationalism should ideally start from the outset of a contemplated critical minerals investment, well before a threat of expropriation. It will necessitate consideration of how an investment should be structured under a relevant investment treaty or agreement, and the extent to which emergency relief may be available in the face of threatened expropriation. In some cases, it may also involve an evaluation of the advantages and disadvantages of partnering with certain entities, such as state-owned entities, and an exploration of the availability of political risk insurance. In the event of expropriation, even though some tribunals have recognized that states may reassert control over “strategic assets,” the requirement under international investment law to compensate the foreign investor for such loss is not obviated.

A more novel development in recent times is the threat of forcible divestment. Instead of outright seizure, some countries have ordered, or threatened to order, foreign investors to divest from their existing critical mineral investments. For example, in 2022, citing national security reasons, Canada ordered three Chinese companies to divest their investments in three Canadian critical minerals companies. China characterized the order as breaking “international commerce and market rules” and asked Canada to afford Chinese-domiciled companies a “fair, impartial and non-discriminatory business environment.” Canada subsequently clarified that it would not order other Chinese investors to divest stakes in its largest mining companies, conceding that it would “create all kinds of uncertainty.” In June 2024, the Australian Treasurer ordered a Chinese investor to reduce or divest its stakes in an Australian rare earths company on “national interest” grounds. As noted earlier, both US and Australian foreign investment law similarly empower their relevant regulatory body to withdraw its approval of a foreign investment years after approval is given, and to order divestment.

Companies at risk of encountering threats of forcible divestment need to consider the potential avenues of recourse under domestic administrative law and any applicable investment treaty or other investment protection. States too need to ensure that they comply with domestic and international law. In some circumstances, a forcible divestment order may amount to a compensable breach of domestic or investment law. Most international investment treaties guarantee that investors will be afforded fair and equitable treatment and standards of treatment including protection against discrimination. Other treaties carve out investment regulatory decisions (such as an order of forcible divestment) or provide for essential security exception clause that a state could potentially invoke to defend its divestment order. The invocation of such provisions does not necessarily, however, obviate the obligation of the state to compensate the foreign investor for loss suffered as a consequence of any forcible divestment.

B. Risks arising from commodity price volatility and persisting inflationary environments

After reaching peaks in 2022-2023, the prices of many critical minerals and rare earth elements have plummeted dramatically. Coupled with persisting inflation worldwide, it may be challenging to obtain finance for contemplated critical minerals investments or to continue to operate existing critical minerals projects. Lithium, nickel and cobalt mines have, for example, been particularly hard hit and are at increased risks of closure.

Given such volatility, companies may want to understand the circumstances in which contractual renegotiation or termination can occur, and the extent to which compensation is payable upon such termination. For contracts that are still being negotiated, parties should carefully consider how future risks of continued price volatility in critical minerals can be addressed and allocated. These considerations can potentially be reflected in contractual clauses related to, among other things, breach, force majeure/ material adverse change, limitation of liability, potential price review or adaptation mechanisms and dispute resolution.

C. Risks arising from complex supply chain arrangements

The critical minerals supply chain is highly complex. In a nutshell, it encompasses the extraction of raw ore, the processing of that ore followed by the manufacture of clean energy technology components. Each of these phases is interwoven with project financing and supply chain and procurement agreements. The complexity of such intra-party relationships means that disputes can impact on a number of contracts cascading down the chain with the risk of parallel proceedings occurring in different forums. With that risk, conflicting decisions concerning the same dispute may eventuate.

For participants in a critical minerals supply chain, dispute resolution clauses cannot be a mere afterthought. Boilerplate clauses will often be insufficient in addressing dispute risks arising from complex multi-party/multi-contract situations. If the parties decide that arbitration is a preferred platform upon which to resolve future disputes, the parties should carefully consider the extent to which they may agree to consolidate parallel proceedings or permit the joinder of related claims or parties to an arbitral proceeding. The various arbitral institutional rules available offer varying levels of procedural flexibility in this respect and ensuring compatibility across the arbitration clauses in each agreement will be critical to properly reflect the parties’ intent, and to prevent the risk of conflicting decisions being rendered over the same set of factual circumstances.

D. Risks arising from adverse impacts on environment and human rights

An irony associated with the transition to net-zero is that it cannot occur without the extraction and processing of critical minerals, which entails a highly energy-intensive process that produces significant toxic waste products. If not properly managed, this may have consequences for the surrounding environment and for nearby local communities.

At the domestic level, investment regulatory authorities of certain countries have announced plans to subject contemplated critical minerals investments to closer scrutiny, not only with respect to issues of foreign ownership, but also with respect to potential environmental and social impacts. This is for example, envisaged by Australia’s Critical Minerals Strategy, which anticipates that Australia’s investment regulatory authorities will “apply the highest ESG standards and practices” to guide investment decisions. As a consequence, foreign investors seeking to invest into critical minerals may need to factor in potentially longer deal timelines while waiting for regulatory approval.

Ensuring compliance with domestic ESG standards and practices does not end at the acquisition phase but may continue throughout the investment itself. Companies with existing critical minerals investments may need to comply with a growing body of legislation requiring identification and reporting of potential human rights and environmental risks. Some countries, such as the US and Australia, focus on financial reporting disclosure, whereas others like the EU have embedded more onerous due diligence requirements.

Companies with existing critical minerals investments will additionally need to stay abreast of developing standards of corporate responsibility at the international law level. Negotiations on an international treaty regulating the conduct of companies with respect to human rights are ongoing, and in April 2024, the UN Secretary General appointed a Panel on Critical Energy Transition Minerals that will discuss “globally agreed guidance to safeguard environmental and social standards across the entire critical minerals value chain.” The Panel comprises 24 countries including Australia, China, and the US, as well as 14 international organizations, such as the World Bank, the Organisation for Economic Co-operation and Development (OECD) and the International Energy Agency.

Non-compliance with domestic ESG regulations and other standards may run the risk of civil and/or criminal liabilities, depending on the relevant legislation. The exposure of parent companies to liabilities arising from adverse human rights or environmental impacts caused by subsidiaries operating abroad will also need to be considered in some jurisdictions. At the international law level, failing to comply with host state law at the time of investment acquisition or failing to obtain (or maintain) a “social license to operate” in the host state during the life of an investment may respectively, preclude a foreign investor from bringing a claim against a state, or reduce the damages that such foreign investor may otherwise have been awarded.

Conclusion

Just 25 years remain before the COP28 2050 deadline to achieve net-zero. As that deadline approaches, the battle for critical minerals will only intensify.

In striving toward net-zero, states which attempt to bolster their domestic critical minerals mining, processing and manufacturing capabilities will need to ensure that they still comply with their obligations under international investment and trade law to ensure transparent and non-discriminatory treatment of foreign investors and goods. They must ensure that measures taken in competition with each other do not unduly stymie the foreign investment inflows essential to gross domestic product (GDP) growth, nor undermine net-zero goals. There are already reports warning of delayed net-zero targets amidst slowing investment flows and slowing demand for critical minerals and EVs in Europe and the US.

Companies seeking to invest in critical minerals will have to navigate – at the outset of the contemplated investment through the life of that investment – myriad dispute risks arising from escalating global and regional geopolitical tensions, continued economic volatility, complex supply chain arrangements and from various regulatory developments occurring at the place of their corporate domicile, in the country within which they are investing, and also under international law itself.