Critical minerals supply chain outlook in Asia-Pacific

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Obakeng Makapane co-authored this report.

Several Asia-Pacific governments are implementing strategies seeking to ensure more secure and stable access to minerals deemed critical to the energy transition.

The critical minerals list varies across jurisdictions. The list generally includes minerals that are not available domestically but essential to industrial activities and/or minerals that are present in abundance domestically where the government is seeking to leverage global competition for supply of the minerals as part of its national economic and industrial development strategy.

Reflecting the emergence of secure and stable access to critical minerals supplies as government priorities, Australia added nickel to its critical minerals list in February 2024. South Korea announced its critical minerals strategy in February 2023, and India launched a similar strategy in July 2023. Mongolia is seeking to amend its Minerals Law, which will for the first time include a list of "minerals of strategic importance."

Across the region, the outlook for critical minerals strategies and relevant policy implementation in Asia-Pacific will be influenced by common factors such as mineral reserves, mining technological expertise, environmental concerns, and geopolitical partnerships.

Increased scrutiny

These strategies will involve the use of regulatory tools — including subsidy programs and tax incentives — combined with informal restrictions on investment in efforts to safeguard and expand domestic critical minerals production.

New critical minerals industry investment proposals from mainland China are very likely to be subject to increased scrutiny in US-aligned Asia-Pacific countries, such as Australia, India, Japan and South Korea, and probably blocked on national security grounds. In turn, mainland China is likely increasingly to leverage its dominance in the extraction and processing of rare earths and other minerals by threatening targeted export restrictions and licensing requirements to deter compliance with US or allied restrictions, which it perceives as targeting China.

The critical minerals strategies of US partners seeking to reduce reliance on mainland China will prioritize reshoring initiatives involving investment in downstream production and manufacturing. Australia, which possesses established mining technological expertise, and South Korea, which has advanced manufacturing and downstream assembly industries, are likely front-runners in developing critical minerals processing capabilities.

Cooperation on supply chains

Cooperation on building shorter and more secure supply chains for critical minerals is also likely to intensify, involving friend-shoring, or reshoring to friendly geographies. In Asia-Pacific, friend-shoring will be driven by mining sector investment in exchange for critical minerals access. Developed Asia-Pacific economies, including Australia, China, India, Japan and South Korea, will increasingly seek critical minerals access in exchange for funding foreign critical minerals mining and processing infrastructure. This aligns with the policies of resource-rich countries such as Indonesia, Malaysia and Mongolia, which are seeking to develop their mining capabilities.

Friend-shoring initiatives will aim to facilitate commercial arrangements and foreign investments, through bilateral partnerships between like-minded partners in the region and "mini"-lateral partnerships, such as the US-led Minerals Security Partnership and via the Quad. Increased cooperation will also be commercially driven, involving public-private and private-private investment and offtake agreements linking different segments of the critical minerals value chain. This trend is already underway. Cooperation will likely be strongest for minerals considered critical in the strategies of multiple Asia-Pacific countries.

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Leveraging competition

Resource-rich and producer countries will seek to leverage competition for access to critical minerals through resource nationalist policies, increasing regulatory uncertainty.

This will involve adjusting national economic and industrial development strategies to incorporate competing demand for critical minerals. Countries with large mineral deposits but limited technological expertise, infrastructure and capital — including Indonesia, Malaysia and Mongolia — are likely to seek to benefit from investment sourced from firms from both mainland China and US-aligned countries. As well as new investment partnerships, industrial policies are likely to include ad hoc changes to mining laws and new regulations to benefit local stakeholders, including increased state equity in mining projects, governments requesting larger royalty payments, and measures to maximize revenue further down the value chain. Export restrictions, tax changes and changes to state contracts are likely to become more widespread, increasing business uncertainty in the mining sector.

A costly and lengthy process

Critical minerals reshoring and friend-shoring will be a costly and lengthy process. The development of downstream production capabilities alone requires investment in mining technology and training to build domestic technological skills - a lengthy process with sustained high-value investment requirements. This implies that changes to existing supply arrangements will be gradual and reliance on existing supply arrangements, particularly for processed minerals, is likely to continue in the near term.

Critical minerals mining and refining are also highly environmentally intensive activities, with some estimates suggesting mining of rare earths can result in 2,000 metric tons of waste for each metric ton of materials. High environmental costs will limit progress to increase production capacity, with projects likely to be hindered and slowed by likely community opposition.

The development of downstream processing activities in Malaysia, Indonesia and Mongolia would increase the likelihood of opposition from local communities and environmental groups to mining activities, particularly where land disputes and environmental concerns are not resolved, disrupting operations. The risk this carries for project development was indicated recently when local protests led the government to suspend an advanced-stage rare earth exploration project in western Mongolia in September 2023. Established critical minerals processing industries in mainland China are therefore likely to continue to attract demand from countries that have underdeveloped downstream capabilities and/or with strict environmental restrictions.

Critical minerals reshoring and friend-shoring will limit growth opportunities in developing economies such as Indonesia, Malaysia and Mongolia. While these countries are open to investment from both mainland China and US-aligned countries to develop their critical minerals industries, the benefits from expanded trade ties and increased FDI will be restricted by protectionist regulation and formal and informal restrictions.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.