Lithium shortage pushes automakers into mining business

In order not to fall even further behind Tesla and Chinese automakers, many Western auto executives are bypassing traditional suppliers and investing billions of dollars in deals with lithium miners.

They show up in hard hats and steel-toed boots to scout mines in places like Chile, Argentina, Quebec and Nevada and secure supplies of a metal that could make or break their companies in the transition from gas to battery power .

Without lithium, US and European automakers won’t be able to build batteries for electric pickup trucks, sport utility vehicles, and sedans they need to stay competitive. And the assembly lines they ramp up in places like Michigan, Tennessee and Saxony, Germany will grind to a halt.

Established mining companies do not have enough lithium to supply the industry as electric vehicle sales soar. General Motors plans to sell all of its cars electric by 2035. U.S. sales of battery-powered cars, pickup trucks and sport utility vehicles increased 45 percent year-over-year in the first quarter of 2023, according to Kelley Blue Book.

As a result, car companies are scrambling to secure exclusive access to smaller mines before others enter the scene. But this strategy exposes them to the risky boom-and-bust business of mining, sometimes in politically unstable countries with weak environmental protection. If they bet wrong, automakers could end up paying a lot more for lithium than it could sell in a couple of years.

Auto executives said they had no choice because there weren’t enough reliable supplies of lithium and other battery materials like nickel and cobalt for the millions of electric vehicles the world needs.

In the past, automakers let battery suppliers buy lithium and other raw materials themselves. But lithium shortages have forced those automakers, who have greater resources, to purchase the vital metal directly and have it shipped to battery factories, some owned by suppliers and others partly or fully owned by the automakers. Batteries rely on lightweight lithium-ion to conduct energy.

“We quickly realized that there was no established value chain that would support our ambitions over the next decade,” said Sham Kunjur, who oversees General Motors’ battery materials security program.

The automaker last year struck a deal with Livent, a Philadelphia-based lithium company, for material from South American mines. And in January, GM agreed to invest $650 million in Lithium Americas, a Vancouver, British Columbia-based company, to develop the Thacker Pass mine in Nevada. The company beat 50 bidders, including battery and component makers, for that stake, Mr. Kunjur and Lithium Americas executives said.

Ford Motor has signed lithium contracts with SQM, a Chilean supplier; Albemarle, based in Charlotte, North Carolina; and Nemaska ‚Äč‚ÄčLithium from Quebec.

“These are some of the largest, best quality lithium producers in the world,” Lisa Drake, vice president of electric vehicle industrialization at Ford, told investors in May.

The deals automakers make with miners and processors date back to the industry’s early days, when Ford established rubber plantations in Brazil to secure material for tires.

“It almost seems like 100 years later we’re back to that stage with this new revolution,” Kunjur said.

Building a supply chain for lithium is going to be expensive: $51 billion, according to Benchmark Mineral Intelligence, a consulting firm. To benefit from US subsidies, battery raw materials must be mined and processed in North America or by trade allies.

But intense competition for the metal has helped push lithium prices to unsustainable levels, some executives said.

“Since early 2022, the price of lithium has increased so rapidly and there was so much hype in the system that you could get a lot of really bad deals,” said RJ Scaringe, CEO of Rivian, an electric vehicle company in Irvine, California.

Dozens of companies are developing mines, and at some point there could be more than enough lithium to meet everyone’s needs. Global production could pick up sooner than expected, leading to a collapse in lithium prices, as has happened in the recent past. That would result in automakers paying a lot more for the metal than it’s worth.

Auto executives aren’t taking chances, fearing that if their companies go without enough lithium for even a few years, their companies will never catch up.

Your fears are valid. Where EV sales have grown the fastest, established automakers have lost significant ground. In China, where almost a third of new cars are electric, Volkswagen, GM and Ford have lost market share to domestic manufacturers like BYD, which makes its own batteries. And Tesla, which has built a supply chain for lithium and other commodities over the years, has steadily gained market share in China, Europe and the United States. It is now the second largest seller of all new cars in California after Toyota.

Chinese companies often have an advantage over US and European automakers because they are state-owned or state-backed, and can therefore take higher risks in mining, often meeting local resistance, nationalization by populist governments, or technical difficulties.

In June, Chinese battery maker CATL struck an agreement with Bolivia to invest $1.4 billion in two lithium projects. Few Western companies have shown sustained interest in the country, known for its political instability.

With few exceptions, Western automakers have avoided buying stakes in lithium mines. Instead, they negotiate deals in which they promise to buy a certain amount of lithium within a price range.

The deals often grant car manufacturers preferential access and edge out the competition. Tesla has a deal with Piedmont Lithium near Charlotte that gives the carmaker a large chunk of output from a Quebec mine.

Lithium is abundant but not always easy to extract.

Many countries with large reserves, such as Bolivia, Chile and Argentina, have nationalized natural resources or have strict foreign exchange controls that can limit the ability of foreign investors to withdraw money from the country. Even in Canada and the United States, mines can take years to build.

“Lithium is going to be hard to come by here in the US and fully electrified,” said Eric Norris, president of the global lithium business for Albemarle, America’s leading lithium miner.

As a result, automotive executives and consultants are pouring into mines around the world, most of which have not yet started production.

“There’s a little bit of desperation,” said Amanda Hall, chief executive officer of Summit Nanotech, a Canadian start-up working on technology to accelerate the extraction of lithium from saline groundwater. Car managers, she said, are “trying to forestall the problem.”

But in their rush, automakers are making deals with small mines that may not live up to expectations. “There are many examples of problems,” said Shay Natarajan, a partner at Mobility Impact Partners, a private equity fund focused on investing in sustainable transportation. Lithium prices could eventually collapse due to overproduction, she said.

The miners seem to be the big winners. Their dealings with the auto companies usually secure them hefty profits and make it easier for them to borrow money or sell stocks.

Rio Tinto, one of the world’s largest mining companies, recently reached a tentative agreement to supply Ford with lithium from a mine the company is developing in Argentina.

Ford was one of several automakers that had expressed interest, said Marnie Finlayson, managing director of Rio Tinto’s battery minerals business. Rio Tinto walks auto company representatives through a checklist covering mining methods, relationships with local communities and environmental impacts “to make it convenient for everyone”.

“Because if we don’t do that, supply won’t be unlocked and we won’t solve this global challenge together,” Ms Finlayson said, referring to climate change.

Up until a few years ago, the price of mining lithium was so low that it was barely profitable. But now that electric vehicles are becoming more popular, there are dozens of planned mines. Most are in the early stages of development and will be years before production begins.

By 2021, “there was either no capital or very short-term capital,” said Ana Cabral-Gardner, co-managing director of Sigma Lithium, a Vancouver-based company that produces lithium in Brazil. “Nobody had a five-year horizon and a ten-year horizon in mind.”

Automakers play an important role in getting mines up and running, said Dirk Harbecke, chief executive officer of Rock Tech Lithium, which is developing a mine in Ontario and a processing plant in eastern Germany that will supply Mercedes-Benz.

“I don’t think that’s a risky strategy,” Mr. Harbecke said. “I think that’s a necessary strategy.”

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