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The shadow war for natural resources

It might seem odd that during a time where nearly all commodities have seen double-digit declines in the past year there is an underlying push for investment and consolidation of these resources.  It’s no secret OPEC has fought to drive out US shale oil producers by flooding the market with supply, depressing oil prices down to 12-year lows.  But it seems consolidation is happening for other commodities as well.  As we shift away from fossil fuels, other finite resources are taking their place such as rare earth metals, which are integral in technologies like renewable energy.  Lithium cobalt oxide, derived from lithium carbonate, has become a crucial component in nearly every electronic device we own as it is a primary ingredient in lithium-ion battery technology.  Now lithium-ion batteries are finding their way into durable goods such as cars and home power systems, and even into industrial applications supplying energy storage for renewable energy resources.  Companies and countries are taking note of this shift, and some have already started to move on controlling as much of these resources as possible.

Lithium_triangle

One timely example of this is trend is Lithium carbonate production consolidation.  The Economist recently reported Lithium carbonate spot prices have soared in recent months to over $13,000 a tonne, doubling from 2014 prices.  In 2015 Albemarle, the world’s largest Lithium producer, completed the purchase of Rockwood, which owns Chile’s second largest lithium deposit.  The acquisition valued at $6.2 billion, secured Albemarle as the leading producer of lithium products, including lithium salts and metals critical for lithium-ion battery production.  Recently, shares of Sociedad Química & Minera de Chile SA (SAC) surged after it was reported Citic Securities Co., a Chinese firm, was interested in purchasing a stake in the company.  Just weeks prior, Citic invested $60 million in FDG Electric Vehicles, another Hong Kong-based company planning on expanding its manufacturing capacity of lithium-ion batteries for buses it plans to build.

This news isn’t shaping up well for companies such as Tesla which depend on lithium-ion battery technology. A majority of the cost for Tesla’s cars is the battery pack. A rise in lithium prices makes the manufacturer vulnerable, especially when it does not own a company directly involved in lithium production.  Although Tesla has penned agreements with a number of producers, including a local startup in Nevada, the car maker will still be exposed to fluctuating lithium prices as supplies continue to consolidate.

Although other commodities such as rare earth metals are also on decline, their output is still largely controlled by China.  In 2008 and 2009 prices for raw materials such as polysilicon, used for the manufacture of photovoltaic (PV) cells, skyrocketed.  Other rare earth metals experienced similar trends during this same time period.  These commodities saw such a drastic price increase because China, a primary producer, enforced export controls and other measures in an attempt to encourage manufacturing locally.  This tactic backfired and these export controls were later relaxed after the 2008 recession.  China then tried another tactic: just as OPEC flooded the market with cheap oil to drive out US shale producers, China also began to flood the market with rare earth metals.  The result has successfully depressed commodity prices, incentivised manufacturers to incorporate and become dependent on these cheap resources, and drive out US producers who can’t withstand sustained lower prices making production unprofitable.  Molycorp, which mines rare earth metals in California, filed for bankruptcy in June of 2015 citing lower prices.  Other producers will soon follow as they are unable to sustain unprofitable mining operations over an extended period of time.

With China still controlling about 95% of global rare earth production, this trend continues to be a risk.  As technology continues to become more reliant on these commodities and the US and other countries start to develop and manufacture locally, China might once again step in to curtail its exports once US producers and others are gone, again increasing prices.  Tesla and other manufacturers are incredibly vulnerable when critical components for their products are derived from materials controlled by only a few entities and cartels.  We’re already seeing this play out with Lithium prices.  The consolidation of Lithium producers has coincided with a drastic increase in price.  Despite the US dollar index at all-time highs and other commodities at all-time lows, lithium has defied this trend and producers are positioning themselves to profit and control as much of the rare earth commodities as they can.

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