The Fragility of the Global Lithium Trade

Global access to lithium is in a precarious position. It's resourced mostly from a few concentrated locations, meaning the supply chain is limited upstream to key chokepoints. Not only that, but alternative emerging sources are fraught with political risks of their own. The West, nervous of geopolitical threats in countries like China, partially seeks to onshore its production. The International Energy Agency has reported that energy demand could triple by 2030. International discussion on critical minerals tends to focus on the economic risks in the global lithium trade, which the West seeks to neutralize. But will the initiatives and partnerships created by Western countries end up being enough to defang geopolitical threats, too?.This article will analyze the most pertinent geopolitical threats to lithium supply chains, specifically upstream..The West's Growing Fear.Last May, two Canadian mining companies won big. Since at least 2022, the US Department of Defense (DoD) has eyed different Canadian mines to invest in and finally awarded $14.65 million in grants to Fortune Minerals (mining cobalt, gold, bismuth, and copper) and Lomiko Metals (primarily mining graphite). The funding is part of the new Defense Production Act, an act that enables the US president to grow and accelerate the supply of materials deemed necessary for national defense. This is the first time the defense industry has invested via the act in critical minerals abroad, though, prompting questions about what exactly the US Defense Department is preparing for..Although the investment focuses on critical minerals other than lithium, it still underscores the increasing focus of Washington on these precious resources. Despite rapidly expanding global lithium supply and stabilizing price fluctuations, the US has been slow to take major steps toward securing its key lithium supply chains. Today, the US lacks an impressive strategic supply of lithium to hedge against Chinese threats. Part of this is due to the incoherence of national strategy. As the Center for Strategic and International Studies points out, the world has plenty of lithium, but perhaps not enough demand. Additionally, the Biden administration's three-pronged approach of de-risking lithium supply chains from China's dominance, increasing domestic manufacturing, and facilitating the green transition of the US energy sector is overly ambitious. For example, increasing domestic manufacturing might necessitate importing cheap products from China; it's hard to reach all three goals simultaneously..But China represents the largest threat to global lithium access because of the monopoly it has on both production within its own country and its mining campaigns internationally..To an extent, Biden's national lithium ambitions are reflected on an international level. G7 members and EU members want to bring lithium access closer to home; they've signed a number of partnerships aimed at on-shoring critical mineral production and supply. US allies in the East, like South Korea, are rapidly developing ties with Central Asian and African countries in order to secure access to critical minerals in the event of Chinese supply chain cut-offs. But are these steps enough?.The Threat of State-Controlled Chinese Lithium.On June 29th, China signed its first regulation governing its entire critical mineral industry, which provides 70 percent of total global production. According to the regulation, any rare earth minerals belong to the state, as opposed to the organization or individual. Reportedly, the agencies with oversight over all production will create a system to trace products as well..China holds plenty of lithium in reserves and will mine a third of the world's lithium in 2023. The majority of China's reserves come from spodumene and lepidolite, hard rocks containing lithium, but China also has modest lithium brine lakes in the Tibetan plateau. China refines around 60 percent of the world's lithium and also dominates the production of lithium battery cells, producing nearly 80 percent of the world's total..Those lithium reserves may seem significant, but the truth is that China imports most of its lithium––something that Beijing is trying to change. By investing in more domestic mining projects, it hopes to cut its reliance on imports..However, hard rock lithium production is expected to take a big hit in China this year due to global price slumps and high production costs—current trends favor, notably, the more affordable lithium brine pools in South American countries. Beijing cut its mined lithium output for 2024 from 54 percent to only 12 percent. Just a year or two ago, lithium's price seemed to be skyrocketing, but as energy markets took a hit and more reserves were found, the price dropped..The world has plenty of lithium supply, yet demand currently pales in comparison. A report by the Carnegie Endowment for International Peace says that current lithium reserves vastly outweigh demand (which as of 2024 remains in a foreseeable slump), but that by 2030 that may change: demand may suddenly switch and outweigh the available supply in democratic countries..What does this mean for China? It means that despite the current downtrend of lithium's price, if demand reaches its forecasted levels in the next decade, democratic countries can't rely on their own supplies; they'll be forced to source their lithium from other US Free Trade Agreement countries, specifically countries like China. And if a shooting war were to happen between the US and China, that access could be cut off..The United States's reliance on Chinese production and Beijing's control of critical minerals are two well-reported phenomena over the past few years. Still, China's reign over the global lithium industry, which permits the state to threaten to weaponize the commodity, as it did in late 2023 when it threatened export bans on critical minerals, greatly threatens the US. Although China is unlikely to actually cease its production and export of critical minerals to foreign trade partners due to the economic significance the industry provides for China, over-reliance on Chinese supply chains is still a physical security vulnerability to the US and other potential enemies. Not only that, but Beijing could largely influence policy or set norms for guidance on lithium and other rare earth minerals abroad. For example, China could advocate for or pressure other countries (e.g., South American countries) to deny US companies access to lithium reserves..The potential for Beijing to take economic measures via the lithium industry is apparent, but perhaps less obvious is the potential for supply chain security threats. The important vulnerability is not consumer-grade products requiring minimal amounts of lithium, like smartphones, but rather larger-scale lithium battery cells required by the US military. These batteries could be used in autonomous vehicles, for example, and are becoming essential to developed militaries. The potential for foreign actors to deny the US military specialized production of these batteries is possible, but equally as possible are faulty components appearing in the production process. The distribution of faulty components into lithium battery packs has the potential for catastrophe. For example, flammable lithium components in smartphones or other products seem to routinely make news for catching fire..Specialized military batteries might involve safety-critical components that reduce this risk. Nonetheless, counter-intelligence efforts that utilize supply chains are commonplace; for example, in 2018, the Chinese government installed a stealth doorway into servers made by the Oregon-based company Elemental Technologies in the form of a tiny microchip. That microchip reportedly made its way into the Department of Defense, the CIA, and the US Navy. Subcontractor manufacturers in China inserted the chip far upstream in the production process..The Pentagon, as a result, has become very wary of counterfeit parts in its supply chains and has taken steps to upgrade transparency and testing. If a conflict were to escalate between the US and China, the US might lack transparency into downstream Chinese lithium production supply chains, meaning testing would remain the only option to ensure the credibility of parts. Western adversaries could take advantage of the module preparation phase of production to implement fraudulent batteries. Additionally, the potential for upstream lithium disruption at mines is an even greater threat; China already produces oftentimes inferior-quality lithium, and if production standards were to drop upstream and impure materials were to appear, it would reverberate globally..Washington & Beijing Fight in the Lithium Triangle.Because of these threats to the Chinese mainland's lithium production, the US has become invested in the "lithium triangle" of South America. Although Australia may be the top global supplier of lithium (producing mostly hard rock), Bolivia has an estimated 21 million metric tons of lithium reserves, a fifth of global total reserves. Bolivia has been slow to industrialize its lithium industry, but along with Chile and Argentina, the other members of the lithium triangle, it has the largest lithium brine resources globally..Two large-scale brine operations in Argentina and Chile contribute the most to global production. Argentine lithium enterprises have largely been pursued by private investors, largely in contrast to Chile and especially Bolivia, where the state maintains strict control of national lithium resources. Chile produces the most annually of the three, but Argentina could catch up as production ramps up..Plenty of actors are interested in South America's lithium, and the United States became interested late, at least in contrast to the Chinese companies that have long been investing in sources of lithium in the area, particularly in Bolivia. The commander of US Southern Command, General Laura Richardson, fervently warned the House of Representatives of rapidly increasing Chinese investments in the lithium triangle in 2023, which she claimed were focused on extracting resources instead of investing. In response to the US accusations that Chinese investments in Bolivia are exploitative, the Bolivian government has accused the US of indulging imperialist interests. The investments of Chinese companies in the lithium triangle have focused on establishing production clusters, while the US has focused on exporting raw lithium materials..Geopolitical Risks in South America and Abroad: National and Private Balance.Whoever ends up becoming the dominant player in Bolivia's lithium deposits––whether it be China, the United States, or the EU––internal political risks could endanger new lithium development projects in Bolivia. The industry is highly nationalized, which presents its own economic hurdle and also means that the industry is prone to stalling because of bureaucracy favoring state-owned companies instead of foreign investments..But privatization of lithium is not necessarily the right answer either. The current Bolivian regime opposes it, as do opposition candidates––they want to preserve the natural beauty of the salt flats. Underneath the salt flats lie enormous quantities of lithium, and mining without disturbing the natural environment which attracts thousands of tourists each year and is an economic engine in its own right. Taking advantage of Bolivia's untapped lithium entails destroying Bolivia's biggest national park. Giving companies mining contracts would also require strict oversight to make sure they don't encroach beyond their permitted mining area. The current regime specifically opposes foreign companies mining its lithium, but even for Bolivian lithium miners, frequent rainfall makes the extraction process difficult..Furthermore, an opposition candidate could capitalize on the highly speculative conspiracy theory that the US was behind the overthrow of Evo Morales and other such destabilizing events. The theory speculates that Morales was ousted because the US wanted to get rid of the socialist leader in order to privatize the lithium industry (although the theory fails to account for the subsequent free election and continuation of the democratic system). Of the Latin American countries, Bolivia does hold major distrust in its collective consciousness of the United States, tracing back to covert action programs under President Johnson. Citing the most recent "coup" by Bolivia's armed forces in late June, a candidate could argue it was a plot to destabilize the region in hopes of gaining control of more lithium..Chinese mining companies are drastically more invested in Bolivia than other companies, but a fair amount of the work the companies have done is simply research into the best way to extract lithium. Some might consider the long-term extraction of Bolivia's lithium as inevitable, but for now, foreign companies must be ready to put in the work to do it in a sustainable way..Chile, on the other hand, is a much dryer and more well-developed option. Last year, President Gabriel Boric introduced a roadmap outlining a way in which Chile would attract foreign investment without sacrificing its environment. Like Bolivia, Chile has environmental concerns in addition to social concerns about the displacement and well-being of local communities around mining projects. In contrast to Argentina, lithium is deemed a national resource, and the state holds access to the best mining prospects. This presents an economic risk to companies hoping to profit alongside the state. For example, Chinese company Tianqi Lithium, as the Financial Times reports, is encumbered with financial woes due to Chile's ambition of nationalizing the industry..Argentina, a major producer of lithium that boasts low production costs, has historically enjoyed billions of dollars worth of Chinese investments in its lithium industry. But Javier Milei, the current Argentinian president, heavily advocates for a more pro-US foreign policy and a highly privatized market, causing some to forecast that Argentina will become a bigger global lithium supplier than Chile in a matter of years..Will Milei's sweeping deregulation come with any downsides? As the situation stands, if mineral resources are within provincial limits, they are owned by Argentina's provincial governments. If talks of a state-owned lithium company ever come to fruition, then the situation could drastically change. But that seems like an unlikely possibility under the current administration. Lithium was never declared a national resource in Argentina, meaning companies can come in and mine the material more freely with substantially less red tape than in Bolivia, in part thanks to Milei..The central risk for Western countries hoping to tap into South America's lithium, besides Chinese investment, is the ambitions of the countries themselves to take control of their own natural resources. Nationalizing the industry wards off foreign investment, forcing international companies to look elsewhere. US involvement in South America's rare earth mineral industries requires commercial and technical partnerships focused on mitigating the environmental impact and delivering returns to the state..An Upcoming Lithium Crisis.New lithium reserves are discovered each year, and the global supply for now is more than enough. In addition, there are also smaller lithium industries around the world, whether they be in southern NATO countries, on which Russia relies for critical minerals, Central Asia, which is rich in essentially all critical minerals, or Zimbabwe, the richest African country in rare earth minerals. Central Asian countries and African countries have notoriously high levels of Chinese investment..To an extent, though, the issue seems to boil down to a conflict of hegemonies, i.e., the US and China. The rising pressure between the two countries has become a popular topic of national discussion in recent years, but parts of US foreign policy remain conflicted on how to appropriately deal with China. Although Russian interests are also present in rare earth mineral mines globally, Russia's scope is ultimately more focused than China's..The global lithium trade is dominated by China. The US could become invested in Central Asia for access to critical minerals but would be fighting a continuous wave of Chinese investments, of which Russia provides the only hedge. Here, the US seems to prefer an indirect presence by relying on the developing footholds of other democratic countries in Central Asia. More and more, the US hopes to become invested in the Lithium Triangle in Latin America but must fight against a well-established Chinese presence in the area, too. Here, Washington is clearly interested in a direct presence to combat China, but perhaps at the expense of the same environmental concerns it hopes to avoid domestically..An effective deterrence against the Chinese chokehold on lithium would necessitate the sort of partnerships that the Biden administration has sought after (with the EU, for example). Friend-shoring is required until the US public can decide on taking the financial and environmental hit necessary to exploit lithium domestically on a large scale. But is it too late? The numbers released by the Carnegie Endowment for International Peace infer that access to lithium will become harder and harder in the next decade. The US might not be able to act fast enough to secure its lithium supply chains and move them away from dependence on China while also combating the aggressive expansion of Chinese companies internationally..On the other hand, China itself might develop an internal lithium crisis as the costly mining of lepidolite continues to take a hit. If the Chinese economic crisis worsens, Chinese mining companies could shutter and cut jobs, despite Beijing's fixation on cutting imports..Australia has so far been an effective boon for the US. It's the global leader in lithium production and a US ally. But its proximity to China is risky in and of itself, in the event of a shooting war between the US and China. Lithium battery recycling is also lengthy and costly, and recovering lithium from the recycling process involves heavy emissions. Recycling methods vary internationally, and the West tends to favor higher-emission methods, while the East favors higher-water and chemical-impact methods. If the metallurgy and chemistry components of lithium battery production work closer together, this could produce benefits throughout the supply chain. To combat some of the risks outlined, companies need to focus on integrating and investing further upstream in the lithium supply chains, which will ensure product quality, cheaper costs, and hopefully partnerships that can withstand the geopolitical tensions that will only continue to rise.