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If We Want Lithium, Let China Finance It

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The surest way to test Canada’s famed affability is to buy their miners and drillers. When it comes to lithium, even minority stakes in companies just exploring for the stuff now appear to be out of bounds: Ottawa just ordered Chinese investors backing three local developers of the battery metal to ditch their shares. Given the deepening rift between China and the West, this may not surprise. But, does it actually help or hinder Canada’s strategic goals?

Foreign investment in a country’s natural resources often comes with hefty emotional baggage; centuries of resource wars and colonialism will tend to do that. The history of oil, for example, is replete with such conflict. Yet that industry has financed the development of gargantuan fields via partnerships between companies hailing from all corners of the globe. Why? Because it’s a good way to raise capital.

In managing the very real risks posed by China’s dual identity as a manufacturing powerhouse and authoritarian regime, there is still room for nuance rather than mere knee-jerks.

Lithium is strategic because it is vital for the millions of batteries required to meet the decarbonization goals set by Canada and many other countries, including the US. Yet, just as net-zero emissions has emerged as a policy priority, so too has net-zero Chinese involvement. Which is a problem, since China controls 70% or more of 11 key segments of the global solar and battery supply chain, including lithium refining.(1)

China isn’t particularly rich in quality lithium resources, with Australia and Chile being the leading producers. However, Beijing began implementing a strategic push into batteries over a decade ago, when Canada was more obsessed with stuff like potash and the US was dazzled by shale oil and gas. Since lithium is so hard to process, especially into a form pure enough for batteries, China built a world-class refining industry and electric vehicle sector. It could then dangle long-term purchasing contracts and financing to take stakes in lithium mines and miners elsewhere. Ganfeng Lithium Group Co.Ltd. and Tianqi Lithium Corp. have emerged as global, vertically-integrated powerhouses.

Cue horrified security hawks. But it’s worth remembering that absent Chinese industrial policy, many of the newer lithium projects might never have got off the ground (the same goes for cheap solar power). A longstanding refrain in the lithium business concerns the struggle to raise even nominal sums to prove a deposit or just go exploring. Junior miners must look at the $44 billion Elon Musk — CEO of one Tesla Inc. — has splurged on an overpriced social media network and weep.

In considering the role of Chinese investment in lithium, therefore, it’s worth pausing to consider the nature of the asset. We aren’t talking about critical infrastructure here like a power grid, a fab chips or even an overpriced social media network. A lithium deposit is just stuff in the ground. It cannot be floated across the Pacific en masse. And if relations with China sour into outright hostility, it can be seized by dint of the fact that it sits in the host country’s territory, not China’s. On that score, ask anyone at the oil majors old enough to remember the 1970s — or, if they were active in Russia, old enough to remember this year. Right now Mexico is weighing the fate of a lithium concession bought by Gangfeng prior to the country’s recent nationalization of the industry. President Andres Manuel Lopez Obrador’s recent comment that “they can say it’s not valid to apply it retroactively, but lithium now belongs to the nation,” doesn’t sound like that of a man particularly concerned with the finer points of contract law.

Do Chinese investors want guaranteed supply for their investment? Yes. But selling projected output under long-term agreements is how these mines get financed. And having some of it head to China is hardly a bad thing in the near term since the West lacks the processing capacity needed anyway. Would China gain valuable insights into Western lithium resources and mining techniques? Possibly, but that value is debatable. Unlike the usual concerns about technology transfer, in this case China’s head start means the transfer would likely run the other way.

The strategic imperative for Western countries like Canada and the US with regards to lithium is to build domestic supply chains quickly enough to make a difference to decarbonization, while mitigating dependence on stuff made in China. So why not — hear me out — let Chinese companies help fund that effort if they want to?

If not, domestic lithium miners will be in the curious position of being prodded to get a move on while also being told to shun one of the biggest pools of cash available to do so. The end result could be governments having to fund a bigger chunk of the risk capital themselves. Canada’s move also fits with the zeitgeist of greater government intervention in energy and commodity markets, which are fragmenting under the pressures of war and the backlash against globalization. The inevitable friction will challenge the long decline in clean technology costs that has made net-zero viable as even an ambition in the first place.More From Bloomberg Opinion:

• The US Just Can’t Match China’s Industrial Heft: Anjani Trivedi

• The Great Lithium Squeeze: Elements by Clara Ferreira Marques

• China Keeps the Wheels on Electric Vehicles: Anjani Trivedi

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(1) Source: “Localizing Clean Energy Supply Chains Comes at a Cost”, Bloomberg NEF, October 2022.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’s Lex column.

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