Critical minerals still subject to old rules of boom and bust

‘Future-facing’ battery metals are not immune to the ups and downs of supply and demand, and renewable energy will rely on gas to help in the energy transition.

Jennifer HewettFeb 15, 2024 – 6.11pm

Opinion

Columnist

Rob Scott says Wesfarmers is looking at lithium as a long-term strategy. David Rowenone

The global energy and green transition means three formerly distinct industries – oil and gas, mining and renewables – now have their fates and much of their fortunes linked.

That makes for plenty of unprecedented, even perverse, results for companies as well as countries. These dramatic shifts – at fast pace – are particularly significant in a heavily resource-dependent economy like Australia’s.

Rob Scott says Wesfarmers is looking at lithium as a long-term strategy. David Rowenone

Last year’s frenzy of enthusiasm, in business and politics, about Australia’s bright new future supplying critical minerals to a decarbonising world sounds much more restrained in 2024.

BHP’s huge $US3.5 billion pre-tax write-down of its West Australian nickel interests is a spectacular example that Mike Henry’s “future-facing” minerals remain subject to traditional laws of supply and demand and old-style boom and bust cycles.

Indonesia’s high-speed drive into the centre of the world nickel market – backed by China – has devastated the global price and growth ambitions of competitors like Australia, no matter how many electric vehicle batteries are needed.

It’s worse than the ghost of the short-lived 1969 Poseidon nickel bubble that still haunts the WA psyche. Other nickel miners are busily closing mines and slashing investment and jobs. It’s unlikely the WA government’s belated decision to consider relief on the royalties it charges will do much to alter that trajectory.

Wesfarmers is also facing a period of financial reckoning for its determination to build a lithium mining and refining business following a similar sudden collapse in prices.

Chief executive Rob Scott argues the West Australian conglomerate had always expected price volatility given lithium is such an immature market. Wesfarmers, he insists, is investing in assets that will last rather than being distracted by short-term focus and trading activity.

None of this helps the Albanese government’s aspirations to move more into downstream processing of minerals and metals in Australia.

“What attracted us to the business was not only the long-term growth fundamentals for lithium but the opportunity to acquire a very high-grade, long-life, unique, global-scale mine and asset together with an integrated mine concentrator and refinery really leveraging our chemical processing and manufacturing capacity,” he said.

“We expect that should we continue to see volatility, our relative cost structure should continue to be very favourable, and we are also seeing very strong interest in [lithium] hydroxide produced by Australia.”

That means no lithium write-down is required, according to Wesfarmers, although the company flagged the prospect of future impairment depending on “significant adverse movements in key assumptions”.

None of this helps the Albanese government’s aspirations to move more into downstream manufacturing and processing of minerals and metals in Australia. US lithium giant Albemarle also slashed its WA growth plans last month, putting on hold its plans to build a fourth lithium hydroxide train at its facility south of Perth, while some of WA’s mining billionaires are nursing huge losses from moves into lithium.

Scott insists global growth in EVs is still strong and this may yet lead to future shortages of lithium as supply dries up again. Perhaps. But in the short term, there will certainly be no profit from the ramp-up of Wesfarmers’ lithium operations at Mt Holland.

Origin results

The lack of a quick pay-off is in contrast to Origin’s results, also out on Thursday. This is a company even more directly affected by the shift to renewable energy and decarbonisation of the economy – along with the ups and downs of prices.

Origin’s surge in half-yearly underlying net profit to $747 million – compared with $44 million a year earlier – indicates why Canada’s Brookfield Asset Management and the US-based EIG Partners were so interested in acquiring the company’s assets.

Origin’s energy markets division is powering ahead, bolstered by higher retail prices. The company is getting excellent cash flow from its Queensland LNG export business, while Origin has increased its investment in UK energy retailer Octopus and its successful Kraken software.

CEO Frank Calabria is maintaining the company’s steady shift away from coal towards more renewables and batteries, although he is cautious on announcing the timing or details of new capital investments in renewables, saying most will be off-balance sheet.

What he repeatedly stressed, however, was the continued importance of gas – and the increasing value of the company’s gas peaking plants – in a volatile energy market. The NSW government also wants Origin to delay its scheduled closure of the Eraring coal-fired power station next year.

This week’s mass power outages in Victoria due to severe weather knocking out transmission lines is further evidence of the fragility of the national electricity system.

But what Calabria politely describes as “corporate activity” as well as the strong business performance have “shone a spotlight” on Origin’s advantaged position, he believes. “Both have enhanced our confidence in our strategic direction and also our capabilities to execute,” he said.

That, of course, may be a mixed blessing in terms of community and political perceptions about companies such as Origin and AGL making big profits when household and business power prices have risen so sharply.

A reduction in wholesale prices could translate into reduced retail prices from July after the regulator decides on next financial year’s default market offer.

Calabria says the cost of living is at the forefront of everyone’s minds, but the balance needs to be right in looking after customers while also having a healthy business to invest in the energy transition.

“It was only 12 months ago that we made no money in that electricity business,” he said. “So part of what we are seeing with the strength this year is in fact that averaging out over time, and you’ll see a bit of that settle itself down again next year.

“I hope people don’t take a point in time.”

Markets, like politicians, tend to do just that.

“It’s worse than the ghost of the short-lived 1969 Poseidon nickel bubble that still haunts the WA psyche.”… “