America should lead clean energy to protect its vital national security interest both domestically and abroad. We can lead by investing at home and creating more jobs in America.
The United States has found itself amidst a precarious situation. China has recovered from the COVID pandemic stronger than the U.S. The U.S. faces a structural threat from China that is looking to dominate the foundational components of the clean energy infrastructure. In this regard, the U.S. is lags far behind China.
The global economy is transitioning to electric vehicles (EVs). Every 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. Rare earth minerals will be the foundation of this new global economy.
Recent events prove a dependance 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 interdependencies, 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 and a clean energy leader for the benefit of all.
Supply
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 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 percent of the electric battery production capacity. By 2030, Goldman Sachs predicts China could supply 60% of the world’s EVs. By increasing the supply, the U.S. can ensure it meets the demand it will have in the future. It is imperative that the U.S. not become reliant on foreign nations, such as China, to receive its allotment of lithium. Increasing the supply will provide stability for a clean energy future. U.S. automakers will be able to push EVs into the market. We will limit our reliance on fossil fuels and even push our supply across the globe to be a leader in the rare earth mineral space.
Infrastructure
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 9 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.
Pricing
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.
Image Source: Fastmarkets and the London Metal Exchange lithium prices
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.
Summary
The U.S. is at a critical moment in history where it can become a world leader in a transitioning global economy to clean energy. The COVID-19 pandemic has ravaged the economy and magnified structural concerns in relation to China. With limited means to impact the global lithium market, the U.S will continue to lose the race to China. It will prevent the ability to recover. Recent discoveries of large Lithium mega brines are crucial to the national security of the country. It is imperative the U.S. invest heavily in these projects and advance the scientific abilities to extract the materials. It will create countless jobs and stabilize the economy.
About VIKASA Capital Partners
VIKASA Capital Partners LLC provides investment banking and other financial services. VIKASA Capital Partners is a subsidiary of VIKASA Capital Inc., a diversified financial institution founded in 2010. VIKASA is an industry leader in investment advisory, investment banking and other financial services with national offices in Beverly Hills, New York City, Maui and Oklahoma City and international offices in Mumbai, New Delhi, Singapore, and Mauritius.
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