The concessions that will drive demand for Australian lithium
Australia, Canada, Chile and other countries will have to step up their supplies of lithium to the US if they are to have any chance of meeting the forecast demand of 300,000 tonnes by 2026.
Updated Nov 25, 2022 – 8.23am,first published at Nov 24, 2022 – 7.12pmFilling the estimated 250,000-tonne gap between the supply of lithium in the United States and the expected demand from electric vehicle makers and battery manufacturers by 2026 should be a boon for Australian lithium miners.
There is no better way to see this in action than through the development of the Rhyolite Ridge lithium-boron deposit located 330 kilometres south-east of the Tesla Gigafactory near Reno, Nevada, and 530 kilometres north of Los Angeles.
The world will be short lithium unless there is a significant increase in capital investment. David Rowe
The mine is being developed by locally listed Ioneer, which is almost certain to be the first US mining project to be partly funded by the US government, and the first lithium mine to be developed in the US since 1965.
The US government funding of the $US785 million ($1.16 billion) project would come through the US Loans Program Office under the Advanced Technology Vehicles Manufacturing Direct Loan Program.
The Loans Program Office is famous for providing Elon Musk’s Tesla with the necessary financing to start building electric vehicles in 2008.
AdvertisementIoneer chief executive Bernard Rowe is not allowed to comment directly on the likely amount of money that will be offered by the Loans Program Office, but he tells Chanticleer that based on past lending by the office it could provide up to half of the company’s debt financing.
Ioneer has lined up $US490 million in equity contributions from its Rhyolite Ridge joint venture partner, Sibanye-Stillwater. It has told shareholders it will fund the rest with a mix of debt and cash.
Decision looms
Rowe says a decision on the Loans Program Office financing, which is at the same rate as US Treasury bonds, or about 4 per cent, should be made by the end of this year.
The successful development of the Rhyolite Ridge lithium-boron deposit would deliver 20,000 tonnes of lithium hydroxide by 2026. Ioneer has signed offtake agreements with Ford, Toyota and Panasonic.
The US produces about 5000 tonnes of lithium hydroxide from a lithium brine mine in North Carolina. Research house Benchmark Minerals says the US demand for lithium will rise to 300,000 tonnes a year in 2026, and 600,000 tonnes in 2031.
Thanks to President Joe Biden’s Inflation Reduction Act, Ioneer will also be entitled to generous tax credits, according to Rowe, who says the benefits of the legislation will ultimately flow to Australian lithium miners.
“Under the IRA, there are two basic ways that we would potentially benefit, and the first is through direct capital investments in projects like ours that produce the refined lithium chemicals,” he says.
“The second incentive is for the actual production using the raw materials.
“If you use those domestically produced and refined materials in a cathode or a battery or electric car, then there’s also incentives around that.”
Rowe says the IRA is designed to encourage the mining of the raw materials, and the processing of the ore into chemicals that can be used in batteries that are then used in the manufacture of electric vehicles made in the US.
This will bring forward the purchase price parity between EVs and internal combustion engine vehicles by five years according to analysis by Boston Consulting Group.
The IRA, in effect, transforms the choice between an EV and an internal combustion engine vehicle because the total cost of ownership favours the battery electric vehicle immediately.
Sourcing materials internally
There is a strong geopolitical element to the IRA because it includes sourcing requirements that will wean the US car makers off the use of raw materials made in China.
The IRA mandates two sourcing requirements to receive the clean vehicle credit system starting in 2023. These are: 40 per cent of battery minerals must be sourced from the US or a country with a free trade agreement with the US; and 50 per cent of battery components made in the US, Mexico or Canada.
Also, the IRA disqualifies vehicles from the generous concessions if they are imported or built with battery materials sourced from “foreign countries of concern”, which means China and Russia.
These concessions are what will drive demand for Australian lithium according to Ken Brinsden, former chief executive of Pilbara Minerals and now chairman of Patriot Battery Metals.
Patriot, which is listed on the Toronto Stock Exchange and has lodged a prospectus with the ASX, owns the Corvette Lithium Property, a 200-square-kilometre deposit in the newly discovered Corvette lithium district in Canada.
Brinsden says Australia and Canada will benefit from the US demand for lithium because it will be impossible for the US to source the forecast supply from mines in the US.
“Greenfield mine developments have been notoriously difficult to get up in the last decade in the US,” he says.
“There is an element of Nimbyism going on there – we want the raw materials, but we don’t want the mine in our own territory.
“The Americans will increasingly become more desperate in their support of the battery raw materials developments because the alternatives are pretty horrible.
“The alternative is you’re wholly reliant on North Asia, but especially China as a solution for your EV industry and, of course, they don’t want that.”
Brinsden says American and foreign car companies are already developing significant battery facilities in the US, even though they haven’t established raw material supply chains to match that demand.
“China dominates the middle section of the battery raw materials supply chain in such a way that the Western world is just absolutely trapped unless they start developing these alternate supply chains,” he says.
‘Incentive for pricing’
Brinsden says the demand for new battery minerals mining development will overwhelm the relatively small companies that have been focused on the developing the sector.
“I think there’ll be incentive pricing for quite some time to motivate new raw material supply because the electrification of industry is going to put a lot of pressure on the mining industry,” he says.
“And the truth is – and much of our industry might not like to hear it – we’re just not ready to deploy enough capital in those new mineral species.
“Somewhat controversially, I would say the big guys have just got fat on the old economy – the iron ore and the coal industry – and now they’ve got to fundamentally change, and it’s not easy to do.
“A lot more capital needs to be deployed, and it can’t all be done by the junior and the mid-tier companies like Pilbara Minerals, or even Patriot.
“What you need is the big balance sheets of the global majors to be deployed in the direction of critical minerals, otherwise we just won’t get enough capital deployed.”
The IRA is causing increased geopolitical tension between the US and wherever EVs are made, especially Europe, South Korea and Japan.
The US risks alienating its allies and sparking a backlash, Jason Bordoff, director of Columbia University’s Centre on Global Energy Policy and a former special assistant to president Barack Obama, says in the latest International Monetary Fund publication Finance & Development.
He says the “massive subsidies for hydrogen and ammonia made using renewable electricity (so-called green hydrogen) in the US will lower the delivered cost of such exported green fuels below that of competitors in the Middle East and Asia”.
“The European Union and South Korea have already indicated they may challenge the electric vehicle restrictions, for example,” he says.
Bordoff says countries worried that their own hydrogen or electric vehicle firms will be undercut by large US subsidies may be tempted to respond by putting in place their own protectionist policies to counter the law’s support for US firms and exports.
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