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Lithium, cobalt may be next in strategic metals struggle between US, China

Australia's considerable lithium and cobalt resources could see it dragged into a potentially escalating trade war between the U.S. and China as experts say those commodities could join rare earths as the next metals to be "weaponized."

Chinese media reported May 28 that China's state planning agency had made a thinly veiled threat of using rare earths as a trade weapon against the U.S., which recently blacklisted Chinese telecommunications firm Huawei Technologies Co. Ltd., citing perceived threats to U.S. national security or foreign policy interests.

London financial advisory Hallgarten & Co. then said earlier in June that China could be vulnerable to attempts at "weaponizing" rare earths, given the firm's belief that the Asian giant is on the verge of becoming a net importer due to its significant manufacturing plans.

This had already been borne out in reports the U.S. Defense Department had been in talks with Mkango Resources Ltd., Rainbow Rare Earths Ltd. and others with non-China based projects to source rare earths supplies.

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Gilbert + Tobin partner Justin Little. Source: Gilbert + Tobin

Australian law firm Gilbert + Tobin's energy and resources group partner Justin Little told S&P Global Market Intelligence there would be growing competition for lithium and cobalt resources in the countries which have plentiful resources.

S&P Global Market Intelligence analysis, displayed below, shows Australia is high up in the list of aggregated resources and reserves, and Little said any potential "weaponization" of cobalt and lithium would present opportunities for projects in Australia.

Western Australia hosts the world's largest hard-rock lithium mine, Greenbushes— co-owned by Chinese entity Chengdu Tianqi Industry Group Co. Ltd. and America's Albemarle Corp. — and has several other mines in operation.

Little said China's heavy lithium consumption for its consumer electronics and electric vehicle manufacturing industries also means unless it can secure supply of such strategic minerals at economic prices, it potentially has more to lose over the medium to longer term.

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Thus the U.S. and China are taking an evolving approach of sourcing supply at above market cost, as opposed to a purely market-based approach, he said.

"Being caught between those two powers could be destabilizing and even threatening to market-based producer countries like Australia, which will need to manage its international relationships and alliances very carefully and adroitly," Little said.

Opportunity arises

Little, who also acts for a number of Chinese investors and Australian miners, said battery material producers may increasingly look to develop such projects in non-Chinese jurisdictions that are opening up opportunities to countries like Australia.

While he said Australia is currently not competitive with China for electric vehicle battery production on cost, the Western Australian government and industry's concerted efforts to develop a downstream battery material sector showed the opportunity at hand.

S&P Global Market Intelligence Head of Mine Economics Adam Webb said in an interview that rare earths supply chains work differently than lithium and cobalt.

Cobalt concentrate is imported into China then refined into end products in-country, while lithium spodumene concentrate is imported — mainly from Australia — and converted to lithium chemicals in China.

A large amount of lithium production comes from South American brines which produce lithium chemicals with no need for refining in China, and which can be sent straight into the battery manufacturing supply chain.

Thus China is reliant on raw material imports from other countries for both these commodities, "so the likelihood of them being able to weaponize them is far more limited as they control much less of the supply chain."

S&P Global Market Intelligence Senior Commodities Analyst Max Court said there is potential for something similar to "weaponization" to occur within cobalt markets due to the concentration of production in the Democratic Republic of Congo but, "crucially, the remainder of the battery supply chain is outside of the DRC."

"This is different because China’s supply chain for rare earth elements is largely within itself, whereas the DRC needs to export cobalt for the metal to arrive at its end-use form," Court said in an interview.

He also questioned the DRC's incentive to weaponize cobalt given lack of competitors, saying it's "far more likely" that market will suffer from price manipulation, royalty hikes or asset confiscation in the DRC which would overflow to affect the export market.

A June 22 S&P Global market Intelligence report said the DRC — on which lithium-ion battery manufacturers and cobalt alloy producers globally rely heavily —would drive increasing cobalt production out to 2023.