If we want lithium, let China finance it

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The surest way to test Canada’s famous affability is to buy off its miners and drillers. When it comes to lithium, even minority stakes in companies exploring the material now seem out of reach: Ottawa has just ordered Chinese investors to back three local developers of the battery metal to drop their shares. Given the deepening rift between China and the West, this may come as no surprise. But, does it really help or hinder Canada’s strategic objectives?

Foreign investment in a country’s natural resources often comes with heavy emotional baggage; centuries of resource wars and colonialism will tend to do so. The history of oil, for example, is replete with such conflicts. However, this industry has financed the development of gargantuan deposits through partnerships between companies from all corners of the globe. Why? Because it’s a good way to raise capital.

In managing the very real risks posed by China’s dual identity as a manufacturing powerhouse and an authoritarian regime, there is still room for nuance rather than mere reflexes.

Lithium is strategic because it is vital for the millions of batteries needed to meet the decarbonization goals set by Canada and many other countries, including the United States. Yet, just as net zero emissions have become a political priority, so too has Chinese involvement in net zero. Which is a problem, since China controls 70% or more of 11 key segments of the global solar and battery supply chain, including lithium refining.(1)

China is not particularly rich in quality lithium resources, with Australia and Chile being the main producers. However, Beijing began implementing a strategic push into batteries more than a decade ago, when Canada was more obsessed with things like potash and the United States was dazzled by oil and gas from shale. Because lithium is so difficult to process, especially into a pure enough form for batteries, China has built a world-class refining industry and electric vehicle sector. It could then suspend long-term purchase contracts and funding to take stakes in lithium mines and miners elsewhere. Ganfeng Lithium Group Co.Ltd. and Tianqi Lithium Corp. have become vertically integrated world powers.

Cue horrified security hawks. But it’s worth remembering that without China’s industrial policy, many of the new lithium projects might never have seen the light of day (the same goes for cheap solar power). A long-standing refrain in the lithium sector is the struggle to raise even token sums to prove a deposit or simply go exploring. Junior miners must watch the $44 billion that Elon Musk – CEO of a Tesla Inc. – splurged on an overpriced social media network and cry.

When considering the role of Chinese investment in lithium, it is therefore worth pausing to consider the nature of the asset. We’re not talking about critical infrastructure here like a power grid, a chip factory, or even an overpriced social media network. A lithium deposit is just stuff in the ground. It cannot float across the Pacific en masse. And if relations with China turn to outright hostility, it can be seized because it is on the territory of the host country, and not on that of China. On this point, ask anyone in the oil majors old enough to remember the 1970s – or, if active in Russia, old enough to remember that year. Currently, Mexico is assessing the fate of a lithium concession purchased by Gangfeng prior to the country’s recent nationalization of the industry. President Andres Manuel Lopez Obrador’s recent comment that “they can say it’s not valid to apply it retroactively, but lithium now belongs to the nation”, doesn’t sound like one from a particularly concerned man. by the intricacies of contract law.

Do Chinese investors want guaranteed supply for their investment? Yes. But the sale of projected production under long-term agreements is how these mines are financed. And having some of it going to China isn’t a bad thing in the short term since the West doesn’t have the necessary processing capacity anyway. Would China obtain valuable information on Western lithium resources and extraction techniques? Perhaps, but this value is debatable. Contrary to the usual concerns about technology transfer, in this case China’s lead means the transfer would likely go the other way.

The strategic imperative for Western countries like Canada and the United States when it comes to lithium is to build domestic supply chains fast enough to make a difference in decarbonization, while mitigating reliance on products made in China. So why not – hear me out – let Chinese companies help fund this effort if they want?

If not, domestic lithium miners will be in the curious position of being pressured to move while being told to avoid one of the largest pools of cash available to do so. The end result could be that governments have to fund more venture capital themselves. Canada’s move is also in keeping with the times of greater government intervention in energy and commodity markets, which are fragmenting under the pressures of war and the backlash of globalization. The inevitable friction will challenge the long decline in clean technology costs that made net zero viable even an ambition in the first place.

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(1) Source: “Localizing Clean Energy Supply Chains Comes at a Cost”, Bloomberg NEF, October 2022.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Heard on the Street section of the Wall Street Journal and a reporter for the Lex section of the Financial Times.

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