Managing the coming lithium boom (and bust) in select African states

Lithium-rich African countries would benefit from aggressively localizing refining and pursuing mine ownership structures that eliminate informational asymmetries vis-á-vis multinational companies.

I: Can African states ride the lithium boom?

The current push for accelerated energy transition raises questions not only about African states’ development prospects in an era of climate change, but also whether they will benefit from producing green metals.

Take the example of lithium. All over the world carmakers are hungry for the crucial mineral that goes into the making of batteries for electric vehicles (EVs). Currently, the demand is far higher than the supply, a fact that sustains mouthwatering margins for producers. This year the average cost of a ton of lithium has been over $50,000 — an estimated five to ten times the cost of production. With some projections indicating that the “supply of lithium has to increase 42-fold by 2050 to support a transition to clean energy,” there is reason to believe that demand will remain high (despite recent developments towards possible alternatives like sodium-iron batteries and demand shocks related to the EV industry).

Lithium production in Africa is projected to increase fourfold over the next decade (see figure). Proven reserves are concentrated in a handful of countries led by Zimbabwe, the Democratic Republic of Congo (DRC), and Mali. Zimbabwe is currently the leading producer in the region (much of it destined for China) and will likely dominate production over the coming decade.

African states’ ability to ride the lithium boom will depend on whether they can lock in beneficial domestic ownership of production, lithium refining, and deliberate supply management.

Source: VW Group

But risks abound. The case of lithium presents an important instantiation of the arguments I made earlier on natural resources and economic (under)development in Africa. First, African states’ lithium reserves are relatively small (Chile, Australia, Argentina, and China lead the pack in reserves — see above). Second, lithium-rich African states lack the capital, technology, and market access needed to efficiently mine, refine, and sell their outputs. Third, many lack sufficient (political) property rights protections to ensure that their respective lithium sectors do not replicate the pathologies that have historically characterized mining sectors in the region. Consider this example from the DRC:

Marius Mihigo, a Congolese businessman who acts as a middleman for AVZ in Africa, says that Zijin was behind an “orchestrated misinformation campaign” against the Australian firm, after a proposal to pay him a $5mn success bonus if it secured an exploitation licence was leaked to the media.

Speaking from a hotel in London, Mihigo says he only accepted $1mn as an upfront payment and the success fee was scrapped in the final contract. Zijin rejects his claims, calling them “biased and misleading”.

An example of atrocious mining conditions in the Democratic Republic of Congo’s cobalt sector. Source: New York Times

If African political and economic elites are limited to water-carriers rent-seeking middlemen like is apparent here, we are very likely going have in three decades an African lithium industry worth billions (and a non-trivial share of global production) and not a single notable African firm or individual entrepreneur in the sector.

Lithium prices over the last decade. The precipitous decline in prices early this year is a reminder not to bank on the boom. Source: Daily Metal Prices

Data on metal prices and exploration budget trends. The data suggests that Africa is underperforming with regard to mineral exploration — which is partially responsible for the challenges I previously outlined here.

The risks involved are accentuated by the fact that the lithium sector promises to be volatile. Just this year alone prices skyrocketed to more than $80,000 before plummeting by more than $50,000 (see figure above). Granted that the coming ineluctable expansion of energy storage demand beyond EVs might stabilize the market, the pile-on in search for alternatives means that there will be quite a few bumps on the road as scientific discoveries are made (on top of the standard commodity cycle dynamics). With this in mind, African policymakers must plan for the boom with the bust in mind.

Electric vehicles and clean energy sources consume significantly larger amounts of the so-called “green metals.” Source: IEA

Growth in demand for selected minerals from clean energy technologies by scenario, 2040 relative to 2020. Source: IEA

Finally, there is also a geopolitical angle involved. China commands nearly 60% of the global lithium refining capacity. Like in many other domains, China is far ahead of its Western competitors in securing lithium deals in the region, with African mines being part of the supply chains that feed Chinese refiners and stockpiles. Western countries (through both private and state-backed firms) are racing to try and catch up, though. In an age of de-coupling and securitization of everything under the sun, the United States and its Western allies fears that China might use its dominance in the lithium market to strategically ration access. As such, African policymakers must understand that investments in the sector will likely not necessarily follow market logics — we are already seeing a rush to acquire and hoard mining and refining capacity for national security reasons. Instead of adhering to standard economic models of optimal exploration and consumption strategies, industrial policies (in high-income states) seem to be the leading source of incentives.

The geopolitics of lithium mean that African countries stand to lose if they stick to type, end up becoming mere geopolitical pawns, and lose sight over the commercial aspects of their respective lithium sectors.

II: More natural resources, more problems?

Well-run commodity dependent countries typically try a mix of three strategies to manage their exposure to the vicissitudes of commodity markets: 1) diversify their economies by using windfalls to invest in other sectors; 2) de-enclave the commodity sector through backward linkages, i.e., producing inputs and services for the sector (commonly known as “local content” policies); and 3) add value to the primary commodity before export in addition to other downstream activities like logistics and business services.

For example, Botswana’s famous joint diamond venture with DeBeers fits in the first category. The 50-50 joint ownership enabled the government to access revenues for its developmentalist (and diversification) agenda through multiple streams — dividends, royalties, as well as corporate taxes and income taxes (reasonable people can debate whether diversification has succeeded). Estimates suggest that these revenue streams may have yielded up to 70% of profits for the state. In other words, Botswana was not content with royalties and taxes since those revenue streams could be easily manipulated by foreign mining companies through undervaluation or transfer pricing. More recently, the country has pivoted to the third strategy, with a push to localize value addition (and diversify from DeBeers).

The stylized narrative about Botswana tends to be that it illustrates the triumph of strong (elite) institutions and good governance — which is definitely true. However, it is worth noting that Botswana is also a triumph of strategically stymying multinational mining firms’ proclivity to steal from resource-rich low-income countries — principally by corrupting government officials, undervaluing reserves, the leveraging of lopsided legal and contracting capacities, and tax evasion through transfer pricing.

Without the joint venture with DeBeers, Botswana would not have been able to 1) allocated and enforce specific property rights to the state; 2) solve for the problem of information asymmetries; 3) ensure private sector operational efficiency; 4) fully internalize government policy implications in the mining sector. Strong institutions and good governance alone would not have been enough. If in doubt, ask Ghana, Tanzania, or Mozambique.

Overall, holding institutional quality and regime type constant, it appears that resource-rich countries do better when they have two things in place: 1) the ability to overcome informational constraints related to enforcing property rights allocations; and 2) market-based operational efficiency. Regime type and intra-elite political stability play important roles, obviously, but are far from being determinative. The difference between Equatorial Guinea and Botswana is not just a function of their respective regime types.

Finally, not even Botswana managed to fully overcome the inherent informational constraints faced by governments in resource-rich states:

Today, "we got a glimpse of how the diamond market works, and we found out that we received less than we should have," said Mr. Masisi [President of Botswana], who spoke in both English and the local language, Tswana.

"We also found out that our diamonds are bringing in a lot of profit and that the (2011) agreement had not been favorable to us," he added, before warning: "We want a bigger share of our diamonds. Business cannot continue as before.

The point here is that we should take Hannah Appel’s critique of the global petroleum (and mining more generally) industry seriously. The very nature of these sectors mean that the dominant multinational players have disproportionate power vis-á-vis governments and face strong incentives to stiff their host economies through otherwise perfectly legal (and some extra-legal) contracting arrangements. Fortunately, the empirical record suggests that states can manage this structural problem by deploying the strategies described above (regardless of regime type).

III: Will lithium be different?

The lithium sector presents African countries with the potential to exploit all three strategies of managing exposure to natural resources. However, given that nearly all of them are unlikely to produce EVs or batteries soon, the focus should be on: (1) structuring ownership to eliminate informational asymmetries between states and multinationals; and (2) maximizing value addition before export (i.e., local refining).

Doing (1) need not involve full nationalization. Joint ventures between the state and multinationals or majority private ownership by domestic elites can work. States should pursue (2) through export bans and providing incentives for participating private multinationals to build refineries in-country (or in a coordinated manner within Africa’s regional economic communities). However, in countries without enough reserves to justify such bans, governments should push for majority ownership in joint ventures with the private sector.

All this will not be easy. The temptation for quick cash, combined with global hunger for lithium will create strong incentives (including via illegal inducements) for politicians and their allies to move fast. So far only Zimbabwe has banned exports of unrefined lithium; and it is safe to say that they aren’t the ideal test case for the region. There might also be the fear that lithium-rich countries might miss the boat if they do not sell as much of their deposits as possible before alternatives hit the market. Foreign firms and hordes of consultants are likely to argue against joint state ownership (corruption!) or local refining (infrastructure gaps, etc). Finally, managing a joint venture with a private firm and/or localizing refining would be predicated on elite political stability and predictable and enforceable allocation of property rights.

Despite these challenges, it is still important to articulate the importance of countries being more intentional about maximizing revenue flows from their green metals deposits — beyond standard concerns about institutions and governance (which, as Appel reminds us, the invariably unscrupulous multinationals love to tout as the problem in the natural resource sector). With this in mind, we need more research on natural resources with specific attention to the causes and consequences of informational asymmetries between governments and firms. Such an endeavor would allow for a reevaluation of the nationalization waves beginning in the 1960s with a view of understanding African states’ motivations and coping strategies in the face of imbalanced relationships with multinationals.