It may seem like a small sum but the $87 million the Australian government is handing to two metal smelters owned by global commodity major Trafigura may turn out to be the start of a big deal.
Australia's federal and state governments in South Australia and Tasmania agreed last week to provide A$135 million ($87.4 million) to Trafigura unit Nyrstar (NYR.BR) to support its lead and zinc smelters.
Nyrstar put its troubled Port Pirie lead smelter in South Australia and Hobart zinc processing operations in Tasmania under strategic review earlier this year, citing high energy prices and lower processing fees.
Nyrstar is far from the only Western company battling low margins at metal processing plants as the industry battles both overcapacity and China's increasing dominance and cost advantages.
The problem for Western governments is that they are increasingly worried about becoming too reliant on China not only for minerals such as rare earths, but also for refined metals such as copper, nickel, manganese, aluminium, zinc and lead.
The challenge is to work out how to secure supply of these metals without taxpayers being unduly burdened.
At first glance it seems the $87 million provided to Nyrstar is little more than a band aid to enable the facilities to keep going for a little while longer.
But the money is also going to be used to allow Nyrstar to study whether it can also use the plants to produce other critical minerals including antimony, bismuth, germanium and indium.
If it is assumed that it is indeed feasible to produce these minerals at the plants, the question then becomes how governments such as those in Australia, the United States and Europe work to ensure that the new capability is viable.
There are several pathways, but the common thread is that they require governments to make and implements policies and to cooperate with each other.
It is patently clear that Western private companies cannot produce refined metals at prices competitive with those made by Chinese producers.
China now produces about 57% of the world's refined copper, 60% of the aluminium, and 53% of zinc. It also controls about 75% of nickel output in Indonesia, the biggest producer of the metal with a key role in the energy transition.
PRICING, OFFTAKE
What are the best ways for Western countries to ensure they keep existing metal refining capacity, as well as build new capability to ensure they can control supply chains for critical minerals?
Subsidies are a quick sugar hit and will not lead to sustainable production, but as Australia has shown, they can be used to buy time.
What is more sustainable is ensuring a pricing and offtake system that provides certainty for companies investing in mining and refining critical minerals.
This can be achieved by governments agreeing to buy set volumes at set prices, but really only works if the government is the sole customer.
If a refiner is also selling to private companies, such as carmakers and energy utilities, then the prices have to be competitive with metals that can be sourced elsewhere.
There is an argument for smart tariffs, which would enable producers to compete with Chinese suppliers.
But these tariffs would have to be well-researched before being implemented and would have to come with incentives to maintain or boost production.
In other words, they would have to be very different to the sledgehammer approach adopted by U.S. President Donald Trump his tariffs, which has seen high rates imposed on commodities such as steel, aluminium and copper with little regard as to how U.S. producers may be able to increase output to replace imports.
The track record of Western governments in successfully enabling critical minerals development and refining is far from encouraging.
But perhaps the decision by Australia to subsidise Nyrstar is a welcome realisation that the problem is real and needs solutions sooner rather than later.
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The views expressed here are those of the author, a columnist for Reuters.
