The United States has found itself amidst a precarious situation. The global transition to an “EV economy” is based on access to critical natural resources in which the U.S. lags far behind China. The U.S. faces a structural threat that is looking to dominate the foundational components of the clean energy infrastructure.
The global economy is transitioning to electric vehicles (EVs). Each major car manufacturer has committed to electric vehicles. California, a leading market, has enacted regulations that require all new vehicles sold by 2035 to be electric, which will continue to shift global manufacturing of automobiles. This will result in lithium being a central component of battery technology for the foreseeable future.
Recent events prove a dependence on a China-centered supply chain will pose a serious national security threat. China has expressed a willingness to weaponize access to supply chains of essential goods such as medical equipment. China produces up to 80% of the raw rare earth materials used in lithium-ion batteries. Even considering global economic interdependences, the national security threat is real. Demand for lithium will grow exponentially. The 2020s are a “transformational decade for lithium,” as some analysts expect the demand to grow six times the 2019 levels. The U.S. has an opportunity to become lithium independent and a clean energy leader.
It is crucial the U.S. makes a concerted effort to take control of the foundational components of the transitioning clean energy ecosystem. This leadership begins with control of lithium and other rare earth mineral supply chains. Investing heavily into these areas will not only protect the United States from a national security threat, but also create a future of stability, bring back jobs, and create a clean future for the country. Lithium and other rare earth minerals are the foundation of America’s clean energy independence. Such investments will have a vast impact that we believe can be evaluated across four verticals: supply, infrastructure, pricing, and employment.
Today, the U.S. contributes less than 2% of world supply of lithium even though it holds 17% of global lithium reserves. The U.S. has failed to diversify investment in the large lithium reserves in Australia and South America. U.S. lithium production has historically been hindered by low concentration of lithium in U.S. brines, regulatory pressures, and lack of new technology available to economically extract it. Recent lithium brine complex discoveries in the U.S., along with new technological advances in extraction, have made it feasible for the U.S. to evolve into a leader in the industry.
Demand for battery energy storage is expected to grow exponentially over the next 10-20 years and beyond, underpinned by increasing awareness of the need to limit fossil fuel usage. Over 80% of the global supply chain of rare earth elements, important minerals for electric vehicles and wind turbine components, is controlled by China. In December 2018, Tianqi, a Chinese manufacturing company, bought a 23.8% share in Chilean-based SQM, the world’s second largest lithium producer, from Canadian fertilizer company Nutrien for $4.1 billion, the largest deal in history for a lithium asset. Moves like this are further solidifying China’s dominance in the sector. Already, the global leader in sales and production of electric vehicles, Beijing’s mining and manufacturing prowess has left Washington behind. China controls 51% of the global total of chemical lithium, 62% of chemical cobalt and 100% of spherical graphite — the major components of lithium-ion batteries.
The United States is at risk of losing its renewable targets and needs to secure lithium, and other resource deposits to help drive its clean energy development industries. Beijing government subsidies and quotas for EV sales have incentivized efforts to corner the electric vehicle supply chain. Reuters reports that Chinese entities now control nearly half of global lithium production and 60% of the electric battery production capacity. By 2030, Goldman Sachs predicts China could supply 60% of the world’s EVs. By increasing the lithium supply, the U.S. can ensure it meets future demand and provide stability for a clean energy future. U.S. automakers will be able to accelerate their push to bring EVs into the market, limiting America’s reliance on fossil fuels. Therefore, it is imperative that the U.S. not become reliant on adversarial nations to receive its allotment of lithium.
China’s exposure to the lithium market has allowed the country to lead in multiple segments of the supply chain. Demand for lithium is on the rise because of the increase in EV. As a result, the country developed the largest charging infrastructure in the world. China is the largest market for electric cars and buses across the world and sold 872,000 units of new EVs (passengers and commercial vehicles) for the first nine months in 2019, exhibiting a growth rate of 20.8%. In 2019, China installed more than 1000 EV charging stations every day.
Once the U.S. is able to impact global production of lithium, there will be more EVs on the road, which will in turn require more charging stations. This could be a generational opportunity for the U.S. to lead infrastructure projects to develop nation-wide charging stations, which will provide more jobs and create a better market for EVs. The lithium market affects many more markets downstream. By providing more supply to the market there will ultimately be the need to develop the necessary infrastructure to handle it. Countless jobs can be created and many more will be preserved, especially those in the mining industry that have seen a decline in recent years.
China’s battery-grade lithium carbonate prices surged due to producers’ limited availability of spot materials while most buyers were cautious of higher prices and only purchased small volumes for immediate need. As a result, the world pricing of lithium rose steadily in January 2021. The fact is that the U.S. must enter the market in order to normalize pricing. Today, the world equity researchers are pricing lithium by the Chinese Yuan and not the USD. This signals that China is the leader in the field and everyone else is following. Being attached to the Yuan also signals that any changes in the prices are dependent on China.
Without a substantial footprint in the market, the U.S. will have little leverage to affect prices. As demand grows, this asymmetry will be magnified and China can ultimately choose when to push more supply into the market, affecting prices on demand. The U.S. must act to create stability and gain a prominent foothold.
There is an opportunity to leverage the lithium mining boom to increase jobs in the U.S. emerging from the pandemic. Extraction and infrastructure are ideally aligned to shift this industry. Further opportunities will continue to materialize from the lithium and rare earth mineral extraction space. Once the U.S. gets demand into the market, it will boost the need to build infrastructure, cars, and other downstream needs that the supply fills. By simply putting U.S. money towards the lithium complexes, it will certainly help increase employment. The transition to an EV economy, away from oil and gas, will create volatility in the sector. Traditional energy companies will be forced to diversify. Lithium and other rare earth minerals provide the opportunity to diversify their existing technologies into sustainable uses to power the global economy for the next generation.
The U.S. is at a critical moment in history where it can become a world leader in transitioning the global economy to clean energy. The effects of the COVID-19 pandemic have magnified structural concerns in relation to China. Supply chain weakness is a good example. With limited means to impact the global lithium market, the U.S will continue to lose the race to China. Recent discoveries of large, domestic lithium mega brines are crucial to these initiatives. It is imperative the U.S. invest heavily in these projects and advance the scientific abilities to extract and refine the materials. It has enormous potential to create countless jobs, stabilize the economy, and bolster defenses against both material and existential threats to the nation.
VIKASA Capital Inc. is a global investment and capital advisory firm established in 2010 offering investment advisory, investment banking, and venture capital solutions for family offices, institutional and qualified investors. VIKASA is committed to sustainable and responsible investment strategies focused on today’s fastest-growing sectors to drive long-term growth for our clients.