Western Australia's lithium industry wants an exemption to the federal government's proposed foreign investment reforms worrying China, with the state's spodumene producers "at risk" and its yet-to-be-commercialized lithium hydroxide manufacturing sector at a "critical crossroads," according to Western Australia's Chamber of Minerals and Energy and the Association of Mining and Exploration Companies.

Consultation closes Aug. 31 on reforms proposing new measures for Australia's Foreign Investment Review Board to approve all investments in a "sensitive national security business," according to the government.

Australia's Home Affairs Minister Peter Dutton said the laws would be "country agnostic." Meanwhile, China's Ministry of Commerce spokesperson Gao Feng said the policy should be "fair and nondiscriminatory ... and observe the legal rights of all foreign investments, including those from Chinese companies," according to a June 11 South China Morning Post report.

The association, or AMEC, and the Chamber of Minerals and Energy, or CME, in an Aug. 21 report argued for the lithium sector exemption as a "special case" based on market conditions and unpredictability, which have put spodumene producers at "significant risk." The mineral spodumene is common in Australia and is a main source of lithium, which can also be extracted from certain brines.

"While medium-term price recovery will likely see a return to an expansionary phase, actions taken now will significantly impact how competitive the sector is with respect to new production capacity elsewhere when markets recover," according to the Aug. 21 report.

Market forces

Western Australia's upstream lithium sector will help electric vehicles grow from around 60% of battery-derived demand for lithium to around 90% in the "next few years," the report said. However, reduced demand from China and the U.S., the world's two largest EV markets, is only partly offset by growing demand in the European Union.

This results in excess supply of lithium chemicals and feedstock, which has also significantly impacted Western Australia's emerging lithium hydroxide manufacturing sector.

Lower discretionary spending due to COVID-19 will also cut EV demand in the short term, particularly higher-performing EVs dependent on nickel-rich battery chemistries, which are the main source of derived demand for Western Australia's upstream lithium industry.

"Widely touted as a certainty only 18 months ago, the commissioning of Stage 1 of Chengdu Tianqi Industry Group Co. Ltd.'s Kwinana plant has been delayed and investment in Stage 2 suspended, and the Albemarle Corp.-Mineral Resources Ltd. Kemerton plant has been reduced in scale with its development slowed," the report said. Other proposals for lithium hydroxide plants in the state have not progressed to a final investment decision.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Amid these conditions, Australia's government recently blocked certain Chinese investment in critical minerals projects by ASX-listed companies.

In April, AVZ Minerals Ltd. said Australia's government would reject its A$14.1 million equity placement to lithium chemical producer Yibin Tianyi Lithium Industry Co. Ltd., backed by China's largest EV battery maker Contemporary Amperex Technology Co. Ltd. and Suzhou TA&A Ultra Clean Technology Co. Ltd.

AVZ Minerals said Australia's government had advised Yibin Tianyi that its investment, representing an 11.77% interest after closing, would be "contrary to the national interest." The company would have used the funds for the Manono lithium-tin project in the Democratic Republic of Congo.

Lithium Australia Chairman George Bauk. Source: George Bauk

Also in April, Northern Minerals Ltd. said Australian Treasurer Josh Frydenberg had blocked a A$20 million investment in the West Australian rare earths producer from Baogang Group Investments (Australia) Pty. Ltd., which had received approval for the deal from the Chinese government's Assets Supervision and Administration Commission.

George Bauk, who was CEO of Northern Minerals when Baogang Group signed on and is now nonexecutive chairman of Lithium Australia NL, said "it's always going to be tough for government to give exemptions for industry bodies [for such things]."

"There are a lot of things playing out that we don't see, at the highest levels of government between China and Australia," Bauk said.

Australia has been "dogged" in its determination to ensure Australian companies are not tied purely to Chinese investment, including opening a critical minerals facilitation office in early 2020 and establishing ties with the U.S. to help fund projects, Bauk told S&P Global Market Intelligence.

AMEC CEO Warren Pearce. Source: AMEC

AMEC CEO Warren Pearce told Market Intelligence that increased barriers to foreign investment will cause issues for Australia, particularly for lithium developments that form part of a "very substantial global supply chain."

Australia not only needs foreign investment but the technical expertise and proprietary technology that could unlock those opportunities, particularly in the case of value-adding in critical minerals.

"Government should of course look at the national interest when they make those decisions, but we ought to be clear that we benefit a huge degree from foreign investment," Pearce said, echoing Fortescue Metals Group Ltd. CEO Elizabeth Gaines' recent comments about the importance of Australia's trade relationship with China.

Policy requests

Though Western Australia's government changed tax legislation, set up a critical mineral task force in 2018 and invested A$6 million in the Future Battery Industries Cooperative Research Centre, the AMEC and CME report said none of the industry recommendations have been fully implemented.

The report called on the state government to forgo or defer some of the millions of dollars worth of royalties spodumene producers pay for the short term, and make concessions for companies enduring financial hardship.

The industry groups also want the Western Australian government to encourage port authorities to stabilize fees and charges, form a task force to expedite lithium project approvals, and work to build lithium product provenance in key markets and establish a traceability system.

Longer term, industry wants a review of the state government's Strategic Industrial Areas framework that's uncompetitive with industrial zones in other economies competing for lithium chemical manufacturing market share.