A Global “Battery Cartel” Could Threaten China, OPEC

When OPEC was created in 1960, oil was the most important energy source in the world, and more than 80 percent of it came from five countries: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. All of them were in a similar position, in that their oil was produced by a small number of foreign companies in profit-sharing deals.

They all wanted to wield greater influence over oil prices and improve their negotiating leverage over what share of oil rents would flow to the state. Achieving this goal required cooperation and consensus among themselves.

At the time, such coordination seemed improbable—particularly because OPEC’s founding members had starkly different political systems. In spite of their differences, though, all five countries shared a common interest as oil producers, buttressed by a political consensus within each country that the oil industry was the key to economic development.

The key conditions, then, that have made OPEC the only truly consequential commodity pact include dominance of an irreplaceable industry, common interest among the member countries and political consensus within them. To what degree do these conditions exist today with regard to lithium in Latin America?

The Lithium Triangle is a lithium-rich region in the Andean southwest corner of South America, spanning the borders of Argentina, Bolivia, and Chile and forming a geographic triangle of lithium resources underneath their salt flats.

Pools of turquoise blue span the white salt flats of South America. As much as 2.2 million liters of water are required to create one ton of lithium, and the extractive industry is endangering the ecosystem and the prospects for a sustainable future for the local population.

About 56% of the world's 89 million tonnes of identified lithium resources are found in the South American triangle, according to the US Geological Survey (USGS).

The world average price rose from $5,700 per ton in November 2020 to $60,500 in September this year.

However, within each country, there is no clear consensus on what the state’s proper role within the lithium industry should be. While commodities cartels can, at least in theory, come to operate above the partisan fray, buy-in from players across the political spectrum often takes time.

Chile hosts the westernmost corner of the lithium triangle in its Atacama desert, which contributed 26 % of global production in 2021, according to the USGS.

The country started lithium extraction in 1984 and has been a leader in the field partly because of low rainfall levels and high solar radiation that speeds up the evaporation process.

But Chilean law has made it difficult for companies to gain concessions from the government since the dictatorship of Augusto Pinochet declared the metal a "strategic resource" for its potential use in nuclear bombs.

In Chile lithium exports in 2020 amounted to just $748 million—representing just 0.3% of GDP and 1% of total exports. More broadly, the size of the markets is not comparable. Only two companies have permits to exploit the metal - Chile's $SQM and American Albemarle ($ALB), which pay up to 40% of their sales in tax.

Although Bolivia is believed to be home to the world’s largest lithium deposits, it has so far struggled to launch its mining industry.

Despite the abundance of resources, China is not at risk of losing its dominant position in the lithium supply chain. Lithium conversion – also known as lithium refining – is the processing of the raw compound into a form usable for the manufacturing of electric vehicle batteries, such as lithium carbonate or lithium hydroxide.

Although China accounts for less than 6% of suspected global lithium reserves, it controls over 60% of the world’s lithium refining capacity. China's CATL, the largest battery manufacturer in the world, accounts for 34.8% of global battery manufacturing market share.

Despite record prices, Chinese companies have also continued paying for the metal to fuel growth in its huge electric vehicles market. But, regional cooperation between Argentina, Chile, and Bolivia could provide some leverage against larger international companies.

Lithium supply chains are diversifying at a tremendous rate as countries increase exploration and extraction, which will make it harder to control global supplies.

However, with increased diversification alongside rising geopolitical tensions leading Western countries to reassess their reliance on Chinese supply chains, China could lose its world-leading position over the next decade.

Indonesia, another global leader in battery-resource production, is looking to use its position as the nickel capital of the world to set up a cartel with other like-minded mining empires, similar to the way OPEC joins forces to control the global crude oil market.

Indonesia is known for following through on its trade threats. In 2020, it banned exports of nickel ore in the hopes of boosting processing and finishing on its own shores, creating jobs and attracting foreign investment, something hotly disputed by its trading partners in the EU who wanted the raw product for their stainless steel production.

Member states went on to smack the archipelago with a World Trade Organization complaint in 2021.

Indonesia generates 38% of the global refined supply of nickel, mostly nickel pig iron, or NPI, that is used to produce stainless steel. Battery grade metal isn't yet being produced in bulk in the country, but it's obviously looking to remedy that.

And indeed, Chinese companies - including metals giant Tsingshan - have invested heavily in Indonesian nickel, with new plants sprouting all over the island of Sulawesi to convert raw nickel into nickel matte, the intermediate step before producing battery-grade nickel sulfate.

Foreign direct investment from China to Southeast Asia's biggest economy reportedly reached $1.56 billion between July and September, according to data from the Indonesian Ministry of Investment.

Unlike OPEC countries, Indonesia relies on China-owned processors. Therefore, while local industry is boosted, it is hard to see how it will strike that OPEC-style deal with the other producers of nickel, cobalt, manganese etc. South Africa, which has 80% of the world's manganese reserve, is in a similar position, with much of the extraction and processing done under the direction of foreign-owned companies, including British owned Anglo American.

Nickel mining Russia, cobalt-rich Zimbabwe and the manganese DRC would also be candidates for the "battery OPEC." By late 2020, though, estimates said the DRC's mining sector was now 70% dominated by Chinese mine owners.

Some South American countries are fighting back against Chinese investments. In 2020, López Obrador, a prominent Mexican politician, floated the idea of nationalizing Mexican lithium reserves and said the government will deny future lithium concessions to new private mine developers.

Meanwhile, the global significance of Latin American lithium has been shrinking as growing demand drives exploration and the discovery of new deposits all over the world. Any move toward a lithium cartel would likely just accelerate this trend.

It might be time to look more closely at what members of OPEC already know: a nation needs to own the means of production to pull levers on pricing and supplies.