Despite electric doubts, lithium and batteries are the future

Some electric car buyers might stand in the garage, scratching their heads and wondering whether that was a good idea. What may provide some consolation: One of the largest and oldest corporations in the world is convinced that it was right – and is betting almost $7 billion on it. This is how much money Rio Tinto, the world’s second largest mining giant, now wants to spend on buying Arcadium Lithium.

As the name suggests, Arcadium Lithium produces the very light metal that is essential as a raw material for lithium-ion batteries and therefore for electric vehicles. Arcadium’s customers include Tesla, BMW and General Motors. Rio Tinto’s takeover plan has surprised many observers because its timing seems strange. Like buying an electric car while everyone is talking about the continued future of the internal combustion engine.

The price of lithium has collapsed – no obstacle for Rio Tinto

But electric cars are currently selling worse in many markets than before, and an oversupply of Chinese production of lithium is pushing onto the market. The price of lithium carbonate has fallen by around 80 percent since a high at the beginning of 2023. But instead of waiting to see how the market will develop, Rio Tinto wants to become the world’s third-largest producer of the metal with its largest takeover to date in the lithium sector.

It’s not just the timing of the acquisition that stands out. It also doesn’t fit the industry trend. Mining companies often buy when a commodity is on the rise – and most recently that has been copper. The base metal is around 30 percent more expensive today than it was two years ago. Competitor BHP bought the copper producer Oz Minerals last year, and BHP’s failed takeover of industry giant Anglo American this year also revolved around copper.

But while copper is used for many purposes, be it for electronics, coatings, pipes, cables, machines and construction, lithium is closely linked to electrification and the energy transition. Regardless of the ebb and flow of private electric car sales, the shift from fossil fuels to electricity is a long-term trend in transportation, industry and manufacturing.

For once, money almost doesn’t matter

Wherever it’s about electricity, it’s also about storage. And therefore about batteries that will require lithium for the foreseeable future. That’s why Rio Tinto’s strategy appears justified – and in any case more long-term than any short-term political wrangling over subsidies that unsettles private electric car buyers. While the combustion engine will retain its justification for certain applications, including in industry, energy efficiency is becoming increasingly important in many places. It clearly speaks for electricity.

Rio Tinto expects lithium demand to grow by 10 percent annually through 2040 and supply shortages from 2030 onwards. Unlike many competitors, the group has been interested in the metal for a long time. Years ago, the Anglo-Saxon-Australian company wanted to acquire the minority stake in another large producer. To meet Europe’s needs, Rio Tinto is building up large-scale production in Serbia, fighting for licenses there and facing great local resistance.

Arcadium, on the other hand, has guaranteed reserves, established processing capabilities and produces at relatively low costs. In order to convince shareholders, Rio Tinto doesn’t want to take any risks and spends a lot of money: a hefty surcharge of 90 percent on the price of Arcadium shares is offered. The group can afford this without any problems. Rio Tinto is huge and has deep pockets filled primarily by mining very profitable iron ore.

Such unity is rare

But Arcadium’s management does not support the offer because of the price, but for strategic reasons – precisely because Rio Tinto has enough capital to permanently finance the company’s growth. Such unity is not a given when it comes to takeovers in the mining world. This shows that this is a long-term trend that hardly anyone doubts.