China’s New Strategic Metal Domination

China’s New Strategic Metal Domination by Adam English

In October, we covered how China has aggressively moved to dominate any resource it can.

We’ve seen it in massive land and crop deals in South America. Large tracts of farmland have been leased or purchased, alongside massive purchases of soybeans and other staple crops.

We’ve seen it in business deals in Africa and South America, from exploiting impoverished and poisoned cobalt miners in Congo to taking loan payments in oil from Venezuela.

The headlines may focus on the TPP, or the aggressive moves in the South China Sea, from massive armadas of patrol and fishing boats operating in contested, and even foreign national waters. All while reefs and remote rocks are turned into islands with ports and airfields.

But what we discussed in October was how Tianqi Group is aggressively moving to dominate the lithium ore market.

Today, we’re going to talk about how China may dominate the application of this resource, which has been designated as a critical metal by the U.S. Dept. of Energy, and was added to the U.S. National Defense Stockpile in 2014.

A Quick Recap

If you didn’t catch the article in early October, here is what is going on with Tianqi and lithium mining companies.

Lithium has traditionally been dominated by three big companies. Rockwood, which was acquired by Albemarle (NYSE: ALB), FMC Corporation (NYSE: FMC), and the Chemical & Mining Co. of Chile (NYSE: SQM).

Tianqi Lithium is already producing lithium from the only big project outside of South America. Through a joint venture with Albemarle, it has a major stake in the Greenbushes mine in Australia.

Now, it is vying for a controlling stake in the Chemical & Mining Co. of Chile.

Back in late September, Tianqi started a move to buy a stake in SQM for $209.6 million from San Francisco-based SailingStone Capital Partners. It represented a 51% premium to the previous day’s closing price.

Earlier in the same month, it inked a deal with Soc. de Inversiones Oro Blanco SA to bid for its stake in Soc. de Inversiones Pampa Calichera SA, which in turn holds 23% of SQM.

These deals, combined with the option to buy another 7% of outstanding SQM shares through the SailingStone Capital Partners deal, puts Tianqi at the absolute maximum ownership, 32%, allowed by corporate rules.

No other company would have anywhere close to the same power over the lithium market when the deal goes through.

The only reason for Tianqi, which for all intents and purposes is a Chinese government proxy, to move so aggressively in this market is to guarantee a steady supply of lithium in the face of booming demand.

Lithium spot prices have already soared as a result. In China, spot prices have risen from about $7,000 to $20,000 in the last year.

With current projections showing the supply squeeze remaining at least through the end of the decade, that is just a start.

The Production Side of the Equation

In spite of the lithium demand easily outstripping supply for years to come, China has set a target of having 3 million electric vehicles on the road by 2025.

This target must directly compete with the rest of the world’s demand, including Tesla’s new massive factory in Nevada and the growth of power-hungry mobile electronics.

According to consultancy CRU, this will cause the market for rechargeable batteries to double by 2025, less than a decade.

We’re already seeing how that is panning out, and it looks a lot like how China dominated solar cell production in the early 2000s.

In 2001 China made just 1% of the solar panels produced worldwide. By 2012, China peaked at 58% of solar panel production.

In 2015, five of the top ten manufacturers were Chinese, and Chinese companies accounted for around 48% of all solar panel shipments.

Lithium ion battery production is going through the same market share grab strategy.

CCM, a major market analysis firm for the country’s chemicals, agriculture, food, and life sciences markets, recently reported that the growth of the Chinese electrochemical energy storage market over the past five years has notably eclipsed the global average.

The report also notes, with a combined annual growth rate between 2010–2015 of 110%, this growth is roughly six times higher than the global figure. The lithium-ion battery market accounted for about 66% of that market.

CCM also noted that, in 2014, China produced 5.43 billion Li-ion batteries, with a CAGR of around 40% and accounting for about 70% of the total output in the global market.

Output then reached 5.6 million in 2015, up by 3.13% year-in-year. As for the capacity, in 2015, the domestic Chinese output of power Li-ion battery increased to 15.7 GWh, triple that of 2014.

2016 figures are not available yet, but the trend is widely expected to keep accelerating for the foreseeable future.

Getting In on the Boom Market

At current lithium production rates and maximum mine capacity, it is utterly impossible to fulfill global demand without lithium ore prices climbing further and pricing out some manufacturers.

China knows this, and Tianqi is the favored company to make sure the country as a whole creates and maintains dominance.

We saw exactly how far China will go with solar, including propping up companies with government funds to make sure Chinese companies control a majority of the market.

We saw it with rare earth metals, where China ramped up production then slapped quotas on the market that cut exports by 72%. This created a thirtyfold increase in prices over just a couple years.

In turn, that drove international companies to either buy domestically-produced Chinese goods, or just straight up move their businesses into China to avoid the restrictions.

And we’re going to see it again with lithium in the coming years. The big difference, though, is that there will be no artificial supply issues, like with REEs, or any demand plateaus, like with solar.

The race is now on to discover, develop, and ramp up production in new lithium mines as soon as possible.

Unfortunately for battery producers, there just aren’t many high-quality potential mines out there, and supply will be difficult to secure.

Fortunately for investors, this virtually guarantees the best of them will go from small exploration companies to becoming tomorrow’s major mines, with share prices rising in line.

Nick Hodge has been covering this sector for his readers for years. Check out his best pick.

Take Care,

Adam English

Adam English

follow basic @AdamEnglishOC on Twitter

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Jimmy is a managing editor for Outsider Club and the Investment Director of the personal finance advisory The Crow's Nest. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he's brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor's page.