Policymakers who want to increase the capacity of the United States to process critical minerals for electric vehicle batteries need to weigh the trade-offs between the cost of investment and the potential benefits of reduced Chinese market power.
Critical minerals are materials that are essential to the economy but with few substitutes available in the near term. As global production of battery-powered electric vehicles (EVs) increases, so does the need for the critical minerals that are used in EV batteries: cobalt, graphite, lithium, manganese, and nickel. Ensuring reliable and affordable supplies of these “battery minerals” is a priority in the transition to low-carbon vehicles.
Concerns about the security of mineral supplies for batteries arise because China has a large market share in processing many of these minerals (though the extraction of most battery minerals occurs in a more geographically diverse group of countries). For example, China refined 65 percent of the global supply of lithium in 2020, and its capacity grew sevenfold from 2013 to 2020, whereas lithium processing capacity in the rest of the world expanded by only 10 percent in the same period. China also refined 74 percent of the global cobalt supply in 2021. Chinese refining capacity for cobalt grew at an annual rate of 24 percent from 1999 to 2021, whereas the rest of the world expanded capacity by less than 2 percent.
What Are the Risks?
Two types of concerns have been expressed about China’s large market shares in battery mineral processing.
One is geopolitical risk; specifically, the possibility that China could be motivated by international conflicts to cut the quantities of critical minerals that it supplies to individual countries.
The other is the risk that China could exploit its market power to increase mineral prices, boost its own profits, and impose economic costs on dependent foreign buyers. China also could use its market power to flood markets and reduce prices, thereby deterring competitors from entering those markets.
Evidence for Selective Supply Cuts and Exercise of Market Power by China
For China to selectively target reductions in the supply of particular minerals to specific countries would be challenging, given the way that markets for battery minerals work. Processors and buyers of minerals generally strike bilateral agreements that specify the quantities of processed minerals to be delivered and the prices to be paid. To restrict supply to particular countries, China somehow would have to effectively limit the reallocation of supply across entire markets. Accomplishing such restrictions would be a daunting prospect that could trigger retaliation.
Some observers have highlighted a diplomatic dispute in 2010 between China and Japan that ostensibly led China to reduce supply to Japan of some non-battery critical minerals. The result of China’s announcement of supply reductions was a jump in the price of the minerals for all buyers, which persisted well into 2011. However, an examination of relevant trade statistics shows no reduction in the supply of critical minerals to Japan during that period, nor any evidence of selective cuts in supply to any buyer between 2010 and 2019. China announced cuts in supply to the United States of the critical minerals gallium, germanium, and antimony in December 2024. Whether those announced cuts have the intended effect remains to be seen.
Some evidence suggests that China did not exercise market power when it could have. Lithium prices surged between 2015 and 2018 due to growing demand (Figure 1). This surge could have been an attractive opportunity for China to drive prices even higher by restricting lithium processing and slowing the expansion of refining capacity. However, the supply of processed lithium in China continued to increase rapidly during this period. Lithium processing also grew from 2018 to 2020, even as lithium prices declined. A similar pattern can be observed during a run-up in lithium prices from 2021 to 2022, and during run-ups in cobalt prices from 2006 to 2008 and 2016 to 2018.
Figure 1. Production and Price of Refined Lithium in China Relative to the Rest of the World
Data: Roskill Information Services. Notes: The data on lithium production have been adjusted using the statistical techniques of indexing and normalization to show all the data relative to Chinese production in 2013 (i.e., Chinese production in 2013 = 1).
China’s increase in lithium production, even as lithium prices were declining, could be interpreted as an effort to drive down prices and thereby deter competition. However, a plausible alternative explanation for these actions is that China’s process for planning investment in new production capacity is biased toward overshooting expected demand—a tendency observed in their other sectors, such as steel and aluminum. For example, China’s rapid increase in its capacity to process lithium outpaced the global use of processed lithium by over 150,000 tonnes in 2017. Expanding EV production is a national priority for China, which has led the country to emphasize investments that ensure the availability of sufficient inputs, including battery minerals.
The use of surplus capacity to process critical minerals for EV batteries reduces the price of these critical minerals. However, China has utilized less and less of its capacity to process lithium (from around 60 percent of capacity in 2013 to around 40 percent in 2020), and at some points, over 100,000 tonnes of lithium processing capacity have been idled but maintained.
We have not yet assessed the potential for China to apply price discrimination between domestic and foreign buyers. This kind of price discrimination would provide more benefit to China than the alternative of withholding supply from the global market, as constraining global supply would have the unwanted effect of increasing prices for domestic customers.
China previously has been found responsible for practicing international price discrimination with non-battery critical minerals, in a case successfully brought by the United States with the World Trade Organization. China’s claim in the case—that it needed to restrict exports, but not domestic uses, of these minerals to mitigate the depletion of its resources—was not accepted. China also has imposed restrictions on exports of certain critical minerals, with the aim of making those minerals available to domestic customers.
Unfortunately, obtaining data on prices of Chinese minerals for customers in China to compare with the prices of Chinese minerals for customers in the rest of the world is not easy. All we can say is that price discrimination could again become an issue, although the issue will be less important if international transactions continue to grow in volume and lead to greater price transparency in other mineral sales agreements.
Policy Implications
Our analysis leads to several policy conclusions. First, we have argued that China is unlikely to be able to enforce a selective restriction on the supply of battery-related critical minerals to the United States or other mineral-importing countries. Accordingly, the physical availability of these minerals is not the key issue that should guide policymakers. Security policy for battery minerals should focus more on the risk of high prices for these materials.
Second, China has a history of price discrimination against foreign buyers of critical minerals. To safeguard their interests, importers in the United States and other countries could seek more transparency from China about the pricing of minerals. This transparency would include information about China’s domestic pricing of battery minerals for comparison with the pricing of China’s exports, though how buyers could obtain this information is unclear.
Finally, the ultimate remedy for the (uncertain) risk of price discrimination by China for battery minerals in global markets is increased competition from non-Chinese sources of mineral processing (along with reduced demands for critical minerals from technical innovation). With lithium, for example, processing capacity can increase in Australia for hard-rock lithium ore and in Latin America for lithium-containing brines. However, building up non-Chinese sources of processing will take time, and in the meantime, the direct costs for battery minerals from these alternative sources will be higher, unless governments significantly subsidize those sources. The uncertain risk of price discrimination needs to be weighed carefully against the risks associated with a massive and rapid build-out of new processing capacity in the United States and allied countries.
