According to the analyst, the increasingly strained relationship between the West – a burgeoning battery maker and a key end market for electric vehicles – and China – a dominant player in lithium processing and a manufacturer of Current leading batteries – are the main issues posing risks to the resilience of supply chains.

On the supply side, the lithium market is geographically concentrated in terms of production and ownership

One of the considerations behind this claim is the fact that on the supply front, the lithium market is geographically quite concentrated from a production and ownership perspective, both on the upstream front with mining, dominated by Australia, Chile and China, and on the downstream front. , with chemical processing and battery manufacturing, currently dominated by China.

“The current trend towards de-globalization and increasing efforts to localize supply chains to some extent mean that governments are likely to increase local supply of raw materials (e.g. lithium production in the EU and the United States) or to promote long-term supply agreements, ”the document read.

As a result, the entire manufacturing landscape of the EV battery value chain, from lithium mining to battery manufacturing and EV manufacturing, is expected to change in the coming years, so that developed markets aim to reduce their dependence on China.

“In any case, we believe that the growing rivalry between China and the United States (and their allies or areas of influence) poses growing and significant risks to the lithium industry, as it could disrupt demand and markets. trade flows when tensions increase, ”the report said. States.

Fitch points out that in this context some market players are anticipating and, for example, senior management at BMW mentioned in 2021 when signing a long-term supply agreement with the US company Livent that they ” were doing [them]technologically, geographically and geopolitically less dependent on individual suppliers. ‘ Notably, their other supplier is Ganfeng, based in China.

Strategic sourcing

Fitch’s analyzes show that a key growing theme in the lithium industry – as well as for broader green and tech transition materials such as cobalt, nickel and copper – is that of strategic sourcing, access and increasing politicization of the battery supply chain.

According to the report, amid growing investment in battery materials and a positive price outlook, the lithium industry is already experiencing increasing government intervention and resource nationalism, which is expected to increase further either to secure this strategic material. , stimulate local production or benefit from solid fundamentals by increasing taxes or controlling the sector.

The company believes that government intervention in the lithium sector will take different forms, such as increased official support for the production of battery materials, through the development of supportive industry frameworks. This has already started in the EU, which launched its European Raw Materials Alliance in 2020, as well as in Australia, the United States, Canada and China.

Nationalization of assets is also a possible government intervention, as is revised contracts and increased taxes on lithium projects.

These official moves are mainly a risk in Latin America, a key producer, particularly in Mexico, where President López Obrador said in April that his office was analyzing the possibility of having a greater stake in lithium mining. Similarly, in Argentina, state-owned energy companies, including YPF, are entering the lithium sector.

Higher nationalism is also seen as a risk following increased fiscal and external imbalances in many emerging markets caused by the covid-19 pandemic.

Sustainability and supply risks

The competitive search for ‘clean’ sources of lithium is also expected to lead to a race for battery / EV manufacturers and even their governments to access the most sustainable raw material. This, in turn, should limit the risks of “oversupply”.

“Efficient supply of sustainable lithium takes considerable time for research and development and requires higher costs, for example to reduce water intensity in brine operations in South America,” the document explains. . “Perceptions of overdevelopment in the present are also unlikely to result in an oversupply of lithium in the short term, as mine development schedules, like any other mineral, involve several years from design to operation. . “

The market research also expects the growth in lithium consumption to exceed current developments in supply. Demand must be stimulated by strong government support in large economies to promote electric vehicles and large-scale energy storage systems.

“Within Li-ion batteries, the use of lithium in batteries with different cathode chemistries will help isolate demand for lithium from technological advancements and coincide with changing preferences for cathode chemistries,” the report predicts.

A low supply means that prices will stay high in the short term. Still, in Fitch’s opinion, it is unlikely to see any significant spikes that would push prices towards the highs seen in 2016 and 2017 before the collapse in lithium prices.

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