Key Takeaways:
By 2030 Direct Lithium Extraction (DLE) will likely increase global Lithium Carbonate Equivalent (LCE) production by 1.3 millions tons per year, extending lithium oversupply and low prices.
KSG assesses that DLE will cause Sino-US geopolitical tensions over lithium access to increase in the near term, but decrease in the long term. The turning point from higher to lower tensions is likely to occur around 2030.
DLE will allow Argentina, Bolivia, and Chile (the so-called Lithium Triangle, which holds the world's largest lithium reserves) to expand their international market share, but is highly unlikely to lead to the formation of a cartel similar to the Organization of Petroleum Exporting Countries (OPEC). Instead, resource nationalism is very likely to leverage DLE-based lithium production to attract investments into refining and battery manufacturing.
Geopolitically significant technological advance
Direct Lithium Extraction (DLE) is a set of new technologies that extract lithium from brines (geothermal waters) found in standalone reservoirs, salt lakes and in oil and gas production. The commercialization of DLE technologies between 2025 and 2030 could significantly increase the global lithium supply, akin to the “Shale Revolution” in the oil and gas industry. KSG anticipates that a “DLE Revolution” will consolidate the current lithium oversupply and keep lithium prices low while diversifying the geographical distribution of lithium production.
KSG assesses that until 2030 DLE will intensify Sino-US competition for lithium access, but that in the long run (post 2030) DLE will likely reduce geopolitical tensions over lithium access. KSG also anticipates that the Lithium Triangle encompassing Argentina, Bolivia, and Chile, which holds an estimated 56% of the world's lithium reserves, will increasingly resort to resource nationalism to attract value added processing and battery manufacturing, but will not be able to replicate OPEC’s success in increasing prices through bottling supply.
KSG assesses that by 2030, DLE will expand global Lithium Carbonate Equivalent (LCE) production by 1.3 million tons per year. In addition to new hard-rock mines in countries such as Brazil and Serbia, this will be more than sufficient to balance supply and demand for lithium and will extend the current supply surplus and low prices. LCE spot prices dropped from over $80,000 per ton in December 2022 to less than $12,000 per ton to date as slowing Electric Vehicle (EV) sales have produced a lithium supply oversupply.
Increase in Sino-US geopolitical tensions until 2030
Until 2030 DLE will likely increase Sino-US geopolitical tensions over lithium access. China processes 65% of global lithium and manufactures more than 75% of the world’s lithium-ion batteries. This has engendered fears of Western dependence on China and vulnerability in case of a deliberate supply interruption. DLE will likely keep the lithium market in surplus territory until 2030, keeping prices low. Low prices are likely to increase Chinese control over lithium supply chains because Chinese lithium miners can better afford new Latin American lithium project acquisitions in a surplus market than their more cash-flow dependent US and EU competitors. This could consolidate China’s position in the lithium supply chain to the detriment of geopolitical stability. Chinese firms are implicated alone or through partnerships in 7 out of 29 DLE and other brine based extraction projects in Argentina, while Chinese battery maker CATL and the conglomerate CITIC Guoan Group signed contracts with the Bolivian government last year to develop Bolivia’s salt lakes via DLE. The dominant Chinese players in brine-based lithium extraction in Latin America to date, namely Ganfeng Lithium, Tianqi Lithium, the Tsingshan Holding Group, and the Zijin Mining Group, are relatively insulated from low lithium prices due to the financial support they receive from Beijing. In addition to mining, Ganfeng and Tianqi are engaged in lithium processing and refining while Ganfeng also produces batteries and Zijin plans to produce lithium cathodes in Argentina. This allows them to compensate low lithium prices with income from further downstream production, especially since low lithium prices increase margins on processed lithium chemicals and batteries. KSG assesses that Chinese miners, processors, and battery makers will leverage their competitive advantage in a low-price environment through expanding their lead in Latin American lithium acquisitions.
In comparison, Western miners and refiners are responding to the current lithium glut by dialling back greenfield and brownfield expansion. In August, US based Albemarle, the world’s largest lithium producer, which extracts lithium through evaporating brines in the Atacama salt lake in Chile, urged for government help in the face of Chinese competition. In its second quarter 2024 results, Philadelphia based lithium miner Arcadium Lithium announced it was slowing the rate of evaporation project expansion in Argentina, citing oversupply and low prices. In July, Germany’s BASF annulled plans to build a plant processing lithium into battery cathodes in Chile. These developments help China expand market share in Latin American lithium, impeding the formation of non-Chinese Western supply chains.
Decline in Sino-US geopolitical tensions after 2030
KSG anticipates that post-2030, DLE will cause Sino-US tensions over lithium to decline. KSG assesses that despite leading in Latin American lithium acquisitions, China will eventually lose market share as the region comes to occupy an important upper, middle, and potentially even downstream position in US-focused battery supply chains. While US firms are unlikely to make investments of comparable size into Latin American DLE and evaporation projects as China, extending the US Inflation Reduction Act (IRA) subsidies to lithium imports from Argentina and Chile will help tie the Lithium Triangle into US supply chains. US tariffs on Chinese batteries announced this year and subsidies for non-Chinese mined or processed Latin American lithium will reduce America’s dependence on Chinese processed lithium. Chilean lithium is eligible for IRA tax credits, creating an opportunity for South Korean and Japanese battery manufacturers to supply the US market from Chile through locating battery components manufacturing in Chile. KSG assesses that Washington will likely include non-Chinese mined Argentinian lithium in the list of IRA eligible lithium imports and extend tariffs to lithium processed in China within the next 12 months.
KSG also expects that the expansion of LCE production in North America and Europe through DLE is likely to substantially reduce supply fears and impede China’s ability to corner the lithium market. The US could achieve lithium self-sufficiency by 2030 with DLE, while Europe could cover roughly 25% of its projected lithium demand through DLE by 2030. If Canadian DLE projects are added, KSG expects North America to become a net exporter of lithium. Together with European hard-rock projects, this creates the opportunity for transatlantic lithium self-sufficiency.
A LATAM lithium cartel akin to OPEC is unlikely
Just as the “Shale Revolution” in the US sapped the oil supply dominance of OPEC, KSG assesses that the commercialization of DLE will likely impede the formation of a Latin American lithium cartel. North America is likely to achieve lithium self-sufficiency and even surpluses through DLE, while Europe will leverage both DLE and hard-rock mining and potentially imports from North America. Under these circumstances the Lithium Triangle countries cannot bottle supply to raise lithium prices. Moreover, KSG assesses that Bolivia, Chile, and Argentina are highly unlikely to be able to effectively coordinate lithium policies. Argentina favours investments into privately owned mining projects, while Bolivia has nationalised lithium production. Chile is steering a middle course through public-private partnerships in lithium production. Thus, the preconditions are unfavourable to an interventionist model that coordinates output to influence global prices.
KSG assesses that instead of a lithium cartel, a more moderate resource nationalism that leverages lithium reserves to attract refining and battery manufacturing investments is highly likely to emerge. Sino-US resource competition allows Lithium Triangle countries to trade lithium access for investments into processing and battery production. Chile launched a call to battery components manufacturers for access to preferentially priced lithium this month. KSG assesses that Chinese lithium producers and processors as well as Chinese, South Korean, and potentially US producers of EVs, batteries, and battery components will increasingly try to secure access to lithium through investments into lithium processing and battery production in the Lithium Triangle.
Looking Forward:
KSG assesses that DLE will extend low lithium prices, which will likely lead to an expansion of Chinese ownership of Latin American lithium projects, causing an initial increase in geopolitical tensions, followed by a long-term decline. This decline will be brought about by greater Western lithium self-sufficiency through DLE, and through tying Latin American DLE-based lithium projects into US supply chains through IRA credits. KSG anticipates the turning point from higher to lower tensions over lithium access to occur around 2030, depending on the pace at which DLE is commercialised.
The current lithium supply glut impedes the development of Western lithium mines and refineries and favours Chinese producers with their integrated production structure occupying several parts of the battery production chain and their access to the Chinese public balance sheet. However, commercialization of DLE can be expected to proceed because DLE is comparatively competitive in a low lithium price environment and because it allows the US, and to a lesser extent Europe, to free themselves from dependence on China. This will likely produce a low price/low supply risk environment wherein US-centred supply chains will emerge in parallel to the consolidation of China-centred supply chains, alleviating Western dependency fears. KSG thus considers the emphasis on supply-side risks and dependency fears to be a temporary problem. From now to 2030, lithium oversupply is more likely to weigh on diplomatic relations than fears of a Chinese supply interruption or price hikes.
The rise of resource nationalism in Lithium Triangle countries is posing challenges to the unfettered access to lithium for both the West and China. Bolivia has nationalised its lithium production, aiming to attract investments in refining and cathode production, while Chile is seeking to entice investments in cathode manufacturing by offering preferentially priced lithium. If these policies prove successful, they could mark a significant departure from traditional post-colonial mining practices, where raw ore extraction occurs in the Global South, while value-added refining and manufacturing take place in industrialised nations. Lithium-exporting nations could greatly benefit from exploiting the competition between China and the West for access to battery metals. By trading access to their resources for value-added manufacturing with either side, these countries could adopt a classic non-aligned approach, maximising their strategic and economic gains.
Despite accelerating the lithium rush, DLE is unlikely to produce a resource curse in Lithium Triangle countries. The likely extension of low lithium prices due to DLE will deprive these countries of sufficient revenue to rely solely on the sale of lithium. Instead, it is likely to increase pressure on these nations to leverage their lithium reserves for industrialization, particularly through battery and EV manufacturing. KSG assessment concluded that currently, Argentina is most at risk of a lithium curse due to its lack of a cohesive strategy to attract value-added investments. However, with provincial mining royalties capped at 3%, the dividends from lithium sales will be small, likely pressuring Buenos Aires to develop a more comprehensive lithium strategy. The Lithium Triangle, therefore, stands a good chance of avoiding the path of Saudi Arabia, which relied heavily on commodity revenue while foregoing industrialization. Additionally, political stability in the Lithium Triangle is sufficiently high to support the development of domestic capabilities around lithium extraction, avoiding the exploitative mining arrangements seen in African countries such as the Democratic Republic of Congo.
KSG assesses that as transportation electrification advances and battery metals increasingly substitute oil and gas as the primary means of energy storage for transportation, a more decentralised energy economy will emerge. Unlike fossil fuel extraction, which is concentrated in certain regions like the Persian Gulf, lithium production, especially with the advent of DLE, is likely to see significant growth in Europe, North America, and South America. This greater decentralisation of lithium production will also likely alleviate supply chain concerns for the EV industry, potentially accelerating the rollout of EV production and reversing the current decline in sales.