Following years of a troubled relationship, China and Australia are now working to restore ties and cooperation to maintain the positive momentum of bilateral relations. That’s what officials of both countries have said last week during the official visit of China’s Premier Li Qiang to Australia. 

The visit, the first by a Chinese Premier since 2017, highlights the global race for critical minerals. For over 15 years, China has been the largest trading partner of Australia – a global mining powerhouse. With abundant critical resources, Canberra has Beijing as a major investor and consumer. Simply put, Australia needs China and China needs Australia.

“Our renewed engagement is critical to managing our differences and underpins our approach to this important relationship,” comments Australia’s Prime Minister Anthony Albanese.

Both Li and Albanese emphasised that the ongoing engagement and dialogue are critical to their planned comprehensive strategic partnership. Though this is not exclusively related to energy transition minerals, Li’s visit to Western Australia highlights the interest the world’s largest battery and electric vehicle manufacturer has in the world’s largest lithium producer. 

The state has some of the most significant critical mineral deposits globally and is a leading supplier of lithium, nickel, manganese, mineral sands and rare earths. It hosts the largest hard-rock lithium mine in the globe: Pilbara Minerals’ Pilgangoora mine, which has dethroned the Greenbushes mine. The latter is owned by Talison Lithium Australia, a joint venture of China’s Tianqi Lithium (51%) and IGO (49%). 

According to the government of Western Australia, the state’s lithium concentrate exports to China increased over 40-fold in value from AUD 471 million ($314m) to AUD 19.8 billion from 2020-2021 to 2022-2023. 

Australia’s lithium resources currently stand at 8.7 million tonnes, or 8.29% of the global resources, according to the US Geological Survey (USGS). Yet, despite its strong upstream industry, the country lacks mid- and downstream capacity, which the Chinese have in abundance. Additionally, China’s investors play a major role in developing Australian assets.

In 2022, 86% of the Chinese investment in Australia went into mining at AUD 1.80 billion, according to KPMG and the University of Sidney. This dropped considerably last year with only AUD 34m allocated to the sector, though it could simply reflect development timescales. The capital injection is mainly in upstream mining projects. 

“Trade remains the cornerstone of our relationship and my government’s steady engagement has resulted in the removal of almost all trade impediments on Australian exports to China, but there is still work to do,” Albanese says in a statement.

China and Australia can jointly build competitive industrial and supply chains in the new energy sector, leveraging “complementary advantages,” Li says in a separate statement. “The essential characteristics of China-Australia relations are mutual benefit and win-win cooperation, and the development of China and Australia is an opportunity rather than a challenge to each other.”

“Premier Li’s visit to Australia is of milestone significance, indicating that China-Australia relations are on the right track,” comments Chen Hong, director of the Australian Studies Centre at East China Normal University.

Wang Zhenyu, associate researcher at the China National Committee for Pacific Economic Cooperation (PECC), adds that the official visit will “enhance mutual respect and trust, deepen mutually beneficial cooperation… seek common ground while reserving differences, and promote the [10-year] comprehensive strategic partnership to a new level.”

However, as a traditional ally of the US, Australia is also facing pressure to reduce reliance on China. Albanese and US President Joe Biden have recently announced projects to strengthen the supply chain for critical minerals, which Washington describes as a “central pillar” in the Australia-US alliance. Canberra, in the middle, needs to keep both partners happy. 

“The economic relationship [of China and Australia] is very strong and growing in spite of all the noise,” Hans Hendrischke, professor of Chinese business and management at the University of Sydney tells Kallanish. 

Yet, although Australia currently has a free trade agreement with China (ChAFTA) covering most battery-related critical minerals, Canberra could potentially be pressured into setting barriers for Chinese mineral trading partners.

“Changes can be made as the ChAFTA regulations can be re-negotiated. More important are technical and strategic changes as new resources become important for new industries. Lithium and rare earth are currently in focus, but demand will develop,” notes Hendrischke. “It is likely that Australia will come under pressure from allies to introduce tariffs as well to create international price levels.” 

The US and the European Union have recently imposed measures against Chinese imports to “protect” their domestic industries. In the US, hefty tariffs were imposed on battery minerals, semiconductors and electric vehicles. The EU is currently proposing increasing import duties on China-made BEVs by up to 48.1%.

While this move could be far in the future, if ever, Australia has already started to demand Chinese investors to reduce control of strategic assets. Early this month, the Treasurer gave 60 days for investors to divest shares in Western Australia’s rare earth miner Northern Minerals.

Commenting on whether the dialogue between politicians of China and Australia will change this decision, Hendrischke says: “It is unlikely that the Treasurer will revoke his decisions, but new projects could emerge.”

As speculation rises amid hopes of stronger Australian ties with both China and the US, Chinese companies in the critical materials arena call for “fair competition.” Tianqi Lithium’s ceo Frank Ha told Australian media that this should be the case, especially in terms of tax incentives and Foreign Investment Review Board assessments. 

“A lithium hydroxide conversion plant like our business definitely requires and deserves a tax credit,” he says, in relation to the uncertainty whether the Kwinana plant would qualify for the 10% production credit unveiled by the Australian government in May. The funding scheme will be worth AUD 7 billion over a decade. 

Ha notes that Tianqi was a pioneer in the country and that without its ground-breaking investment, others may have not followed. Australia’s lithium supply chain can move further downstream if the right incentives are in place, he adds. 

Australian mining magnate Andrew Forrest, now the chairman of Fortescue Future Industries, echoes Ha’s sentiment. “Denying incentives to Chinese investors would be detrimental to Australia’s development in critical minerals and hydrogen,” he warns.

Refining lithium and expanding its downstream critical minerals supply chain would allow Canberra to tap into the US IRA and its associated demand. However, Australia may not afford to turn its back on Chinese investment and expertise. For now, it seems the Down Under government is stuck in the middle, conveniently fostering economic and trade relationships with both partners.