Abstract
This paper discusses potential new metrics for criticality assessments testing them on lithium supply chain. In the midst of the US-China technological competition, it is essential to fine-tune the methodology according to the new international context. First, to understand more in depth the structure and complexity of critical minerals supply chain, as countries are not fully aware of the intricate webs of cross-ownership or firm-to-firm relations that determine ultimate control from mining to downstream activities. To this end, I propose and discuss the concept of source of control (SOC). Second, I take as a case study the geography of production of lithium, from a country and company perspective, to show the complexity of two-level interconnections among entities involved. Criticality is a social-constructed feature that can inform policymaking in raw materials’ supply chains and it should consider not only where those critical minerals come from but also who controls their production. In order to test the plausibility of these improvements, I show how the US Inflation Reduction Act (IRA) is intended to redraw the lithium-ion battery supply chain through a top-down approach. Generally, criticality studies have been primarily concerned about dependency risks while not considering the role of positive/negative externalities. Once these are clearly recognized, policy interventions should be tailored according to supply chain dynamics in industries or technological assets that States judge to be strategic.
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Source: European Commission (2017)
Source: Author’s elaboration
Source: USGS (2023)
Source: Benchmark Minerals Intelligence, Wood Mackenzie
Source: United States Geological Survey (USGS)
Source: USGS, BGS
Source: RFC Ambrian
Source: Author’s own compilation. The flow is only indicative and not comprehensive
Source: DERA (2023), with 2021 data
Source: SNE Research
Source: Jones B., et al. (2021)
Source: American Enterprise Institute (AEI), China Global Investment Tracker
Source: USGS, BGS (2022)
Source: Company data, Wood Mackenzie, own research
Source: Company data, own research
Source: RFC Ambrian research (2023)
Source: own research based on corporate announcements and companies’ reports
Source: Company presentation
Source: own analysis based on corporate announcements and specialized media coverage (Argus, SMM, BMI)
Source: Ding and Dafoe (2021). The diagram is theoretically inside a two-way matrix, where the x-axis represents the economic or military utility of the given asset and the y-axis represents the economic or security externalities associated with the asset taking into account the level of supply chain integration (from upstream to downstream). The diagonal line consists of the nationalization of the asset
Source: S&P (2023)
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Data availability
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Notes
This indicator describes the market concentration. The sum of squares is calculated for all involved shares (in percent). Thus, the Herfindahl-Hirschman index (HHI) can have values from 0 to 10,000. There are three categories for concentration: 0 to < 1500 low, 1500 to < 2500 moderate and over 2,500 high. This market concentration indicator goes back to Albert O. Hirschman (1945) and Orrin Herfindahl (1950).
The HHI used to calculate supply risks indicators is nonetheless useful because even foreign-owned mining companies or projects targeting specific raw materials are subject to inherently risks that are associated with a country or territory, for example political instability or climate risks (floods, droughts etc.).
Generally, institutional or individual investors need to ascertain two things in supply chain before deciding to make an investment decision: if the company has secured feedstock and guaranteed off-take agreements.
The network analysis is also useful for understanding the security implications of interdependence from a country perspective, where nodes in global production network can be weaponized or leveraged by entities (states) for coercive ends or by denying network access to adversaries as found by Newman & Farrel et al. (2019). See Section 3 of this manuscript.
The notions of “reshoring,” “nearshoring,” and “friendshoring” conceptualize the value of geographic proximity in intra-firm relationships. The problem is that, by incentivizing the come-back of mining, refining or manufacturing activities (prioritizing stages in the supply chain) it may not necessarily attract complex networks. For instance, the conflicting interests between producing and consuming countries can be seen in the different value added activities pursued within the supply chain: on the one hand, industrialized countries view the vulnerabilities and security of raw material supplies with increasing concern; on the other hand, non-OECD resource-rich countries look at the opportunity to build domestically downstream industry.
This has not to be confused with “vertical integration” which underline the level of integration of a single firm between upstream and downstream stages within its business structure. The horizontal dimension is thus related to B2C or B2B interactions taking into account the relative position of the ipothetical firm Y (operating company) and firm X (SOC).
As defined by Yeung and Coe (2015, 49), strategic partnership refer to “collaboration, coevolution, and joint development of a lead firms and its strategic partner(s) or key suppliers in the same global production network” with OEMs that often rely on established and trusted suppliers for specialized materials or products.
A clear example of this dynamic is the case of MP Materials, the only established rare earth producer in the USA. After going bankrupt in 2017, an investor consortium bought the Mountain Pass deposit from the former owner, Molycorp. Among of its shareholder, the Chinese mining company Shenghe Resources to which MP send rare earth concentrates (mostrly cerium and lantanum, with low amounts of NdPr) for further processing in China. While holding about 7.72% shares but not being the ultimate SOCs, the midstream position of Shenghe as a rare earth integrated producer (metal processing) further cement its bargaining and market power.
The relative increase in demand for lithium is due largely to a much smaller basis of comparison than for other minerals, because the current size of its market is smaller. Lithium demand in 2020 was roughly 300,000 tons of lithium carbonate equivalent (LCE), whereas the demand for refined copper was 75 times greater at 22,550,000 t, according to the United States Geological Survey (USGS).
In the battery’s bill of materials, some components matter more than other: for a nickel-manganese-cobalt (NMC) cell, the cathode can make up to approximately 60% of its value, whereas the anode between 10 and 15%. Therefore, securing capacity for the cathode’s manufacturing, along with the production of precursor materials, are crucial for capturing the benefits of battery cell value-added stages.
Hard-rock and brine-based operations present different set of challenges related to technical and economic viability, costs and preference of downstream manufacturers. The close commercial relationship between chemicals providers and cathode/battery producers explain in parts why the lithium-ion battery network has been developed accordingly. See “The company perspective on global lithium production” section.
Data collected from these authors, relying on the Global Trade Tracker database, proved to be one of the most complete and detailed breakdown of lithium production, consumption and trading figures publicly available.
In contrast with lithium carbonate (HS 2836.91), breaking down lithium oxide and hydroxide trading figures is not possibile because they are subsumed under one HS commodity code (it is plausable that the latter accounts for the larger share).
Notable it was the Rio Tinto’s USD$ 850 million acquisition of the Rincon Lithium Project from Sentient Equity Partners.
Investors with interest for mining remain concentrated in Australia and Canada on their respective stock exchanges. The London Metal Exchange remains predominanlty a financial platform for trading spot and futures contracts on a range of non-ferrous metals and iron ore, but in 2012 it came under the control of Chinese capital: bought by the Hong Kong Stock Exchange.
The choice to focus on headquarters (HQ) of companies rather than on location of operating or emerging projects is consistent with the methodology shown in the previous chapter, with a preliminar study on the country of incorporation to understand the relation between ownership and control.
It refers to the expansion of business activities within a company’s own supply chain. It may vary by scope of expansion (majority or minority shareholding stakes), means of expansion (founding or acquisition) and direction of expansion (upstream or downstream). Mining, processing and recylcing companies are relevant targets for vertical integration. However, according to DERA’s survey on raw materials strategy used by manufacturers, vertical integration is the least used amond the companies surveyed. This is mainly due to (a) large capital investments required; (b) loss of flexibility; (c) the complexity to manage different business models; d) reputational and economic risks.
Offtake agreements can be divided in “binding” or “not binding.” The former is realized when two commercial parties are bound to sell and pay for a certain amout of the material in a certain period of time; the latter is like a ‘promise’ that the price will be favourable and the quality of the material will be right. Companies commonly agree on a combination of the two through equity injections, meaning that the buyer company (investor) will invest in the mining operator with, for example, taking a 10% of equity. This operation is favorable for junior miners because in this way they can secure investment for developing the mine, but then the investor (being also the battery manufacturer) want its fair right to get the material. In brief, with offtake agreements companies become preferial buyers for these materials, and then of course they have return on investment (ROI) in form of capital other than securing the access to the material itself for their core business. Source: Personal conversation with market expert Lukasz Bednarski, author of Lithium (2021).
Looking at junior mining companies, there is an increasing trend toward business (vertical) integration. They typically approach the challenge by raising capital from investors for jump-start their mining activities, but they also tend to integrate mining operations with a refining plant, in order to generate more value for their shareholders. This trend is also interesting in the sense that build-up a mining site is matching the value of refining facilities, so their overall business counts on 1 billion dollars. Therefore, they don’t want to invest in a single stage, seeking all the capital required at once. They prefer, instead, to raise capital at two stages: mine development and then, if the project reach commercial feasibilty and show profitability, they may target the refinery investment. Source: Interview with market expert.
The chlor-alkali electrolysis process is used in the manufacturing of chlorine, hydrogen, and sodium hydroxide (caustic) solution. Of these three, the primary product is chlorine. Chlorine is one of the more abundant chemicals produced by industry and has a wide variety of industrial uses. Chlorine was first used to produce bleaching agents for the textile and paper industries and for general cleaning and disinfecting. Since 1950, chlorine has become increasingly important as a raw material for synthetic organic chemistry.
Interview with market expert.
See note 18 here at pag 28.
The Pampa Group corresponds to three shareholders that together own the majority of the shares in SQM and constitutes its SOC. From the GPN firm perspective, the shares held by the Pampa Group may not be sufficient to determine control on SQM business developments.
See here pag. 8 on “strategic value.”.
The existence of free trade agreements (which low trade restrictions scores in EU methodology) is rather a derisking factor in supply risk assessment, but is not a criteria conceived to categorize binarily between “allied” or “unfriendly” or “rival.”.
For example, the International Monetary Fund estimates that a 10% price shock will result in a 16.9% growth of lithium supply in the same year. After 20 years, the same price shock yields a supply growth of 25.5% (Boer et al. 2021).
Dependency on today lithium mining producers will decrease ten years from now. However, its criticality will likely not decrease substantially due to huge demand for decarbonization and eletrification worldwide, and because different battery grade lithium supplies will still be required to sastisfy industrial end-user. Source: Interview with market expert.
At the same time, except for Atacama in Chile and Olaroz in Argentina, most of the lithium projects in South America are still under development. It is likely that Australian-based operations will affect lithium mineral output in the short-mid term, thus making the Sino-Australian relation essential for market balance.
Covered countries by the US law are: China, Iran, North Korea, and Russia.
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Prina Cerai, A. Geography of control: a deep dive assessment on criticality and lithium supply chain. Miner Econ (2024). https://doi.org/10.1007/s13563-023-00414-x
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DOI: https://doi.org/10.1007/s13563-023-00414-x