Lithium Americas and GM close joint venture for Thacker Pass mine
Under the JV agreement GM would contribute $625 million to the project to gain a 38% stake
Over the last several decades, the US has allowed its readiness for war to slip, whether in such critical areas as naval fleet size, modernization, defense industrial base, the sealift needed for a West Pacific conflict, and strategic thought. This includes losing control of its critical mineral supply chains.
As global markets increasingly rely on foreign countries, America becomes dependent on the goodwill of its competitors and adversaries to ensure access to the materials that power technological innovation. Similarly, as long as it remains on the sidelines of critical mineral markets, America will be subject to price shocks and volatility that impair its ability to develop domestic mines and refineries.
With that in mind, POLITICO reported on August 29th that the Biden administration was considering setting price floors for certain critical minerals produced domestically, according to an unnamed source from the Department of Energy.
If the market prices for a domestically-produced mineral fall below a set level, DOE would step in to pay the difference for certain projects. While the policy is still under consideration, setting price floors would be a major step towards greater government support of domestic mining capabilities.
Before assessing the utility of a price floor, it’s worth examining the current state of the market and better understanding how price volatility shocks stop American companies from utilizing domestic supplies of critical minerals.
Right now, the US is heavily dependent on Chinese firms for the production and refinement of several materials that are essential to the manufacture of batteries, drones, and explosives.
China accounts for 65% or more of the global supply of processed lithium and cobalt – both essential components of batteries. In the case of other resources, China commands an overwhelmingly dominant position: it processes 91% of the world’s graphite, another critical mineral.
Because the US is a passive actor in the global market, it largely has to adapt to dramatic price fluctuations. The issue here isn’t just the additional costs that accompany elevated prices – this instability stops the US from building up mineral alternatives and reasserting control over its own supply chains.
For instance, look at the market volatility of 2023. Cobalt, graphite, and nickel prices plummeted between 30 and 45 percent from peak prices in 2022. The price of lithium crashed even harder – up to 75% from the year prior. Largely stemming from production increases in Africa, Indonesia, and China, this market volatility has real consequences for American firms and workers.
The crash in lithium prices forced Albemarle, an American manufacturing company, to delay its construction start for a new lithium processing plant in South Carolina.
Similarly, America’s only cobalt mine in Idaho was forced to pause operations when cobalt prices fell too low to make the project financially viable. These individual project failures are part of a larger trend of American businesses being battered around by price volatility in commodity markets.
Even DOE’s existing efforts to encourage domestic processing capacity have been affected by the price shocks. As part of a $2.8 billion plan to support American mineral projects in 2022, nearly one third were unable to finalize negotiations by 2023, partially because of the mineral price collapse. With nearly $1 billion in grant funding left on the table
The unfortunate truth is that America’s critical mineral supplies are not price-competitive right now. For instance, American graphite may cost between 30 and 50% more than its Chinese equivalents.
As long as buying American remains more expensive than the Chinese competitors, the US will struggle to grow its domestic mining and refining capabilities. And as long as its projects can be easily knocked out of operation by swings in commodity prices, swings that Chinese companies play a large role in, the US will not be able to reduce the price of its domestically-produced minerals.
This is the mineral price paradox that confronts today’s policymakers – and for some, price floors would be a solution.
By ensuring that domestic producers would not be driven out of business by Chinese overproduction, the DOE plan could offer a lifeline to a mineral industry being battered by rising and falling prices. This increased market stability could help steady the foundations of a domestic mining and refining industry – one that frees the US and its allies from overdependence on foreign sources of critical minerals and allows America to reassert authority over runaway supply chains.
Finally, a price floor plan would be a strong signal to domestic firms, as well as foreign companies and governments, that the US government strongly supports developing its own alternative critical mineral supply chain. With a series of tax incentives and loan guaranty programs as part of the Inflation Reduction Act, the US is not short of methods for how to support domestic mineral development. But a price floor system might be uniquely effective by insuring against the likelihood of Chinese overproduction.
This kind of policy is not unprecedented, either here in the US or in China. For instance, during the Korean War, the federal government supported National Lead Co.’s efforts to build out new cobalt refining capacity by guaranteeing to purchase its output at an elevated price.
The PRC, no stranger to state support of industrial growth, offered support to copper producers to help them survive decreased prices in 2016. Chinese companies are also taking steps to reduce their exposure to price volatility. Ganfeng Lithium, a major Chinese lithium producer, recently moved to establish a domestic trading desk to “reduce risk of market fluctuation.” If Chinese firms alone insulate themselves from major price swings, American manufacturers may find themselves disproportionately affected.
But just because the Chinese government takes steps to support its domestic mining and refining capabilities is not a justification for the federal government to do the same.
A price floor plan has many possible risks: for instance, once they receive temporary government support, American mining companies may lobby Congress to make the price floors permanent. Rather than pushing domestic alternatives to become price competitive, the DOE policy could allow firms to reap profits without innovating to a sufficient degree. Beyond market incentives, DOE’s ability to fund such a program without explicit Congressional approval would be called into question in light of the Supreme Court’s decision in Loper Bright v. Raimondo, which diminished agencies’ latitude to interpret their statutory authority.
Whether DOE ends up announcing a price floor plan or not, the US must find a way to break its domestic mineral paradox. Price swings imperil domestic mining operations, and without an alternative to unstable foreign supply chains, foreign producers will be able to determine access to necessary materials for the US and its allies.
With essential commercial and military applications, critical minerals power the technologies that give America an edge in the global economy, as well as those that ensure our national security. Such a vital resource is too consequential to leave solely in the hands of our competitors.
(Farrell Gregory is a policy fellow at the Foundation for American Innovation and a research assistant at the Yorktown Institute. A junior at Dickinson College studying Chinese and International Studies, he has published analyses of Chinese foreign policy and investment, critical minerals, and US policy in Africa.)
