Lithium Scarcity Pushes Carmakers Into the Mining Business

Eager to avoid falling further behind Tesla and Chinese car companies, many Western auto executives are bypassing traditional suppliers and committing billions of dollars on deals with lithium mining companies.

They are showing up in hard hats and steel-toed boots to scope out mines in places like Chile, Argentina, Quebec and Nevada to secure supplies of a metal that could make or break their companies as they move from gasoline to battery power.

Without lithium, U.S. and European carmakers won’t be able to build batteries for the electric pickup trucks, sport utility vehicles and sedans they need to remain competitive. And assembly lines they are ramping up in places like Michigan, Tennessee and Saxony, Germany, will grind to a halt.

Established mining companies don’t have enough lithium to supply the industry as electric vehicle sales soar. General Motors plans for all its car sales to be electric by 2035. In the first quarter of 2023, sales of battery-powered cars, pickups and sport utility vehicles in the United States rose 45 percent from a year earlier, according to Kelley Blue Book.

So car companies are scrambling to lock up exclusive access to smaller mines before others swoop in. But the strategy exposes them to the risky, boom-and-bust business of mining, sometimes in politically unstable countries with weak environmental protections. If they bet incorrectly, automakers could end up paying far more for lithium than it might sell for in a few years.

Auto executives said they had no choice because there weren’t sufficient reliable supplies of lithium and other battery materials, like nickel and cobalt, for the millions of electric vehicles the world needs.

In the past, automakers let battery suppliers buy lithium and other raw material on their own. But lithium shortages have forced carmakers, which have deeper pockets, to directly acquire the essential metal and have it sent to battery factories, some owned by suppliers and others owned partly or fully by the automakers. Batteries rely on lightweight lithium ions to conduct energy.

“We quickly realized there wasn’t an established value chain that would support our ambitions for the next 10 years,” said Sham Kunjur, who oversees General Motors’ program to secure battery materials.

The automaker last year struck a supply deal with Livent, a lithium company in Philadelphia, for material from South American mines. And in January, G.M. agreed to invest $650 million in Lithium Americas, a company based in Vancouver, British Columbia, to develop the Thacker Pass mine in Nevada. The company beat out 50 bidders, including battery and component makers, for that stake, said Mr. Kunjur and Lithium Americas executives.

Ford Motor has made lithium deals with SQM, a Chilean supplier; Albemarle, based in Charlotte, N.C.; and Nemaska Lithium of Quebec.

“These are some of the largest lithium producers in the world with the best quality,” Lisa Drake, vice president for electric vehicle industrialization at Ford, told investors in May.

The deals that automakers are striking with mining companies and raw material processors hark back to the beginnings of the industry, when Ford set up rubber plantations in Brazil to secure material for tires.

“It almost seems like 100 years later, with this new revolution, we are back to that stage,” Mr. Kunjur said.

Establishing a supply chain for lithium will be expensive: $51 billion, according to Benchmark Mineral Intelligence, a consulting firm. To benefit from U.S. subsidies, battery raw materials must be mined and processed in North America or by trade allies.

But intense competition for the metal has helped inflate lithium prices to unsustainable levels, some executives said.

“Since the start of ’22 the price of lithium has gone up so quickly and there was so much hype in the system, there were a lot of really bad deals that one could do,” said R.J. Scaringe, chief executive of Rivian, an electric vehicle company in Irvine, Calif.

Dozens of companies are developing mines, and there may eventually be more than enough lithium to meet everybody’s needs. Global production could surge sooner than expected, leading to a collapse in the price of lithium, something that has happened in the recent past. That would leave automakers paying a lot more for the metal than it was worth.

Auto executives are taking no chances, fearing that if they go even a few years without sufficient lithium their companies will never catch up.

Their fears have merit. In places where electric vehicle sales have grown the fastest, established automakers have lost a lot of ground. In China, where almost one-third of new cars are electric, Volkswagen, G.M. and Ford have lost market share to domestic producers like BYD, which manufacturers its own batteries. And Tesla, which has built a supply chain for lithium and other raw materials over years, has steadily gained market share in China, Europe and the United States. It is now the second-largest seller of all new cars in California after Toyota.

Chinese companies often have an edge over U.S. and European car companies because they are state owned or state supported, and, as a result, can take more risks in mining, which often encounters local opposition, nationalization by populist governments or technical difficulties.

In June, the Chinese battery maker CATL completed an agreement with Bolivia to invest $1.4 billion in two lithium projects. Few Western companies have shown sustained interest in the country, known for its political instability.

With a few exceptions, Western carmakers have avoided buying stakes in lithium mines. Instead, they are negotiating agreements in which they promise to buy a certain amount of lithium within a price range.

Often the deals give carmakers preferential access, crowding out rivals. Tesla has a deal with Piedmont Lithium, which is near Charlotte, that ensures the carmaker a large portion of the output from a mine in Quebec.

Lithium is abundant but not always easy to extract.

Many countries with big reserves, like Bolivia, Chile and Argentina, have nationalized natural resources or have stringent currency exchange controls that can limit the ability of foreign investors to withdraw money from the country. Even in Canada and the United States, it can take years to establish mines.

“Lithium is going to be tough to get and to fully electrify here in the U.S.,” said Eric Norris, president of the Lithium global business unit at Albemarle, the leading American lithium miner.

As a result, auto executives and consultants are fanning out to mines around the world, most of which have not begun producing.

“There’s a bit of desperation,,” said Amanda Hall, chief executive of Summit Nanotech, a Canadian start-up working on technology to hasten extraction of lithium from saline groundwater. Auto executives, she said, are “trying to get ahead of the problem.”

Yet, in their hurry, car companies are making deals with small mines that may not live up to expectations. “There are a lot of examples of problems that come up,” said Shay Natarajan, a partner at Mobility Impact Partners, a private equity fund focused on investing in sustainable transportation. Lithium prices could eventually collapse from overproduction, she said.

The miners appear to be the big winners. Their deals with the car companies typically assure them fat profits and make it easier for them to borrow money or sell shares.

Rio Tinto, one of the world’s largest mining companies, recently reached a preliminary agreement to supply lithium to Ford from a mine it was developing in Argentina.

Ford was one of several car companies that expressed interest, said Marnie Finlayson, managing director of Rio Tinto’s battery minerals business. Rio Tinto takes car company representatives through a checklist, she said, that covers mining methods, relations with local communities and environmental impact “to get everyone comfortable.”

“Because if we can’t do that, then the supply is not going to be unlocked, and we’re not going to solve this global challenge together,” Ms. Finlayson said, referring to climate change.

Until a few years ago, the price of lithium was so low mining it was hardly profitable. But now with the growing popularity of electric vehicles, there are dozens of proposed mines. Most are in early development stages and will take years to begin production.

Until 2021, “there was either no capital or very short-term capital,” said Ana Cabral-Gardner, co-chief executive of Sigma Lithium, a Vancouver-based company that is producing lithium in Brazil. “No one was looking at a five-year horizon and a 10-year horizon.”

Auto companies are playing an important role in helping mines get up and running, said Dirk Harbecke, chief executive of Rock Tech Lithium, which is developing a mine in Ontario and a processing plant in eastern Germany that will supply Mercedes-Benz.

“I do not think that this is a risky strategy,” Mr. Harbecke said. “I think it’s a necessary strategy.”