If Australia and likeminded nations want secure, sustainable supply chains for critical minerals, they must address the interconnected challenges of price premiums and global environmental, social and governance (ESG) standards.
Australia and its mining companies are leaders in ESG performance in mining, but maintaining high standards costs more than striving for lower standards.
Without minimum production standards, it is difficult, if not impossible, to compete in critical minerals markets that are flooded with products that are cheaper but less ESG compliant. This is not an argument for lowering Australian standards, but for treating products that do not meet minimum standards as inferior and selling them at a lower price.
Many like-minded countries have already signed agreements to build more diverse supply chains than those currently dominated by China. Australia and its allies have committed to promoting high ESG standards for supply chains and agreed to explore how to achieve market price differentiation. For example, an agreement between Australia and the European Union to be signed in May 2024 includes provisions on supply chain transparency and promoting “market recognition of high ESG standards”.
As a recent ASPI report shows, there is no common global standard for the sustainability of mineral supply chains or the ESG performance of mining companies. A recent proposal by several global companies to the London Metals Exchange (LME) to introduce a “green premium” for nickel produced in compliance with high ESG standards failed due to a lack of agreed standards and industry consensus.
The LME noted that there was no consensus in the industry on what should constitute “green nickel” and that any standard intended to underpin premium pricing would need to cover everything from carbon footprint to labour rights. But why should there be such consensus when low standards are part of the business model for producing critical minerals in some countries such as China and, in the case of nickel, Indonesia? Buyers tend to be influenced primarily by price, which drives supply.
Meanwhile, the cessation of much of Australia’s nickel production due to market price undercutting by Chinese-backed Indonesian production has led to a concentration of global supply while worsening environmental and social impacts.
Indonesia’s own attempts to diversify its minerals investments away from China appear to be failing due to market conditions and poor ESG standards. In June, German company BASF and French company Eramet abandoned plans to build a nickel-cobalt refinery complex in Indonesia’s Weda Bay in the North Moluccas, citing the availability of alternative supply chains for a “safe, responsible and sustainable supply of critical raw materials for the production of precursor materials for cathode materials.”
To date, governments have largely left the development of ESG standards to industry, implicitly recognizing that the mining industry and downstream processors have the incentive and expertise to develop standards.
While global consensus on standards will be difficult to achieve, establishing mechanisms to ensure that critical minerals supply chains meet standards will be even more difficult. Standards must be approved by government, but effective and trustworthy control mechanisms require government-supported oversight and guarantees.
Since 1997, when the Minerals Council of Australia (MCA) published its Code for Environmental Management, several global standards have been developed for the mining industry. (I was a co-author of this code.) However, these standards typically apply to upstream extraction and primary and secondary processing. Few apply to the entire minerals supply chain.
Several processes are currently underway to rationalise mineral supply standards, but not all of them appear to be coordinated, potentially leading to further fragmentation.
The Consolidated Mining Standard Initiative aims to combine five mining industry standards into one global standard: the Copper markthe Canadian Mining Association Towards sustainable mining (also taken over by the MCA), Mining principles of the International Council on Mining and Metals and two standards of the World Gold Council.
The Initiative for Responsible Mining Assurance is revising its Standard for responsible mining and mineral processing and a separate standard for the chain of evidence to be published by the end of 2024.
The Responsible Minerals Initiative, whose members come from the production, mining and processing sectors, has Global standard for responsible sourcing of mineral supply chainsas well as standards for the processing and refining of various minerals.
The main government-related processes to promote standards development are carried out by the Organisation for Economic Co-operation and Development, which held its 17th Forum on Responsible Minerals Supply Chains in May 2024, bringing together 1,300 representatives from global industry, society and government to discuss policy cohesion and responsible business conduct.
In 2016, the OECD published the third edition of its Due diligence guide for responsible supply chains for minerals from conflict-affected and high-risk areaswhich is of great importance due to the rapid development of mining for critical minerals in several of these African and Latin American countries. The OECD has also produced guidelines on environmental due diligence in mineral supply chains and on responsible business conduct.
It is unclear how these OECD discussions and guidelines will be translated and incorporated into industry initiatives to create globally accepted standards, but this must happen if the goals of like-minded nations on critical minerals supply chains are to be achieved.
Once new standards are agreed and recognised by governments, safeguards must be implemented with government support and oversight.
Common standards and quality assurance mechanisms will provide an essential basis for the implementation of differentiated prices for responsibly mined minerals.
However, it will be very difficult to enforce price premiums or discounts for unsustainably produced minerals. Government subsidies in the form of low-interest loans or production tax credits are short-term and inadequate substitutes for market-based prices that cover full costs and margins. In any case, systematic global responses are needed to counter China’s willingness to manipulate the markets it dominates through restraint and dumping. It is hardly economically feasible for Australia to over-subsidise domestic production of minerals such as US lithium, and in any case it is pointless.
It remains to be seen whether and how industry and governments can achieve differentiated prices for sustainably produced critical minerals required to cover their often higher costs. One thing is certain: without market demand for ESG standards, neither industry nor government will have much influence in promoting sustainable supply chains.
