A cohesive multi-dimensional critical mineral policy is needed to reduce import dependence and strengthen energy security

India’s recent find of 5.9 million tonnes of lithium reserves—representing about 6% of the total worldwide lithium resources last year—has sparked great excitement given the mineral’s importance for use in electric vehicle (EV) battery cells. However, with international experience showing it takes, on average, over 16-17 years from discovery of critical minerals to production, India will have to continue sourcing external resources to meet its 2030 clean energy ambitions. There is a need to develop a cohesive policy to address the challenges associated with the supply of critical minerals to avoid delays in achieving net-zero and industrialization goals.

The fact is that critical minerals will play a key role in the electrification of the transport sector in India. But right now, the sector is exposed to several risks that must be addressed to make sure India doesn’t miss the opportunity to ensure a reliable and sustainable supply in the future.

Critical minerals supply risks

First, price volatility of critical minerals can significantly impede the roll out of EVs in India. Although the country’s EV ecosystem has accelerated over the past year, soaring prices of key minerals used in EV batteries threatens to reverse this growth, with EV sales already dropping from 1.19 lakhs in November 2022 to 1.01 lakhs in January 2023. This is likely due to broader economic concerns, as well as supply chain challenges that increased the cost of EV components.

Indeed, after more than a decade of price declines, average costs for lithium-ion battery packs have increased 7% year-on-year to USD 151/kWh in 2022, according to Bloomberg New Energy Finance. This has been mainly driven by higher costs of raw materials such as lithium, cobalt, and nickel that jumped amid rising battery demand. The IEA has found that lithium prices increased seven-fold between May 2021 and May 2022, while cobalt and nickel prices doubled during that period. Although prices have dropped in recent months, price volatility remains a threat.

Fig 1 – Battery metal prices increased dramatically in early 2022, causing significant challenges to the EV industry

The best approach for India to guard against volatility in spot market prices is to sign long-term supply agreements for critical minerals, which, in turn, will help reduce the demand for imports of li-ion cells used in EV batteries. India spent around INR 26,000 crore importing li-ion between 2018-21—more than the total subsidies allocated for manufacturing advanced chemistry cell batteries (ACC) under the production linked incentives (PLI) scheme, which provides incentives to businesses for the domestic manufacturing of batteries. IISD research, based on consultations with investors, has also found that access to critical minerals is one of the key considerations for companies when investing in India’s EV ecosystem—so the right government support to secure these minerals is critical.

Second, the extraction of critical minerals is heavily geographically concentrated, which brings security of supply concerns. The top three producing countries of copper and nickel cover more than 50% of global production. For cobalt, rare earths, and lithium this concentration is even higher, with the top three producers controlling more than 75% of the world’s production.

Some of these suppliers face significant governance and environmental challenges that create supply chain risks. For instance, 65% of global cobalt production is in the Democratic Republic of the Congo, where human and children’s rights violations have been reported in artisanal cobalt mines. Similarly, more than 50% of global lithium production takes place in areas with high water stress.

And there are also geopolitical risks, given China’s central role in the critical minerals supply chain. The country controls 60% of rare earths production and covers more than 30% of nickel processing, about 60% of lithium and cobalt processing, and more than 85% of rare earths processing. In addition, such a large reliance of the supply chain on one country poses other risks, like natural disasters impacting facilities or ports.

Fig 2 – China dominates the entire downstream EV battery supply chain

Third, critical mineral supply has a limited availability of substitutes to produce batteries. Most batteries rely on nickel, manganese, and cobalt, which can be substituted with iron and phosphate that have more secure supply chains and lower costs. But even these batteries still need lithium that is hardly substitutable, with the alternative options struggling to come anywhere near its performance. In higher-density batteries, cobalt can be replaced with high-purity nickel—which itself struggles with supply to competing markets, such as stainless steel.

Fourth and finally, the growing demand for batteries also means that extracting lithium through recycling will not yield sufficient output in the short term. Although several minerals used for batteries can be, and likely will be, recycled, the impact on demand will only be felt in a few decades time. The IEA estimates that by 2040, recycled quantities of copper, lithium, nickel, and cobalt from spent batteries could reduce the combined primary supply requirements for these minerals by around 10%.

Steps to secure supply

The need for critical minerals — and hence the investment — will therefore be huge. There are steps the government can take to reduce the above-mentioned risks as well as diversify and expand sustainable supply.

Many countries, including the US, EU, and China have implemented critical mineral strategies and taken steps to secure their mineral supplies. India needs to learn from them to outline its own strategy to secure critical mineral needs, and some steps have already been taken.

For instance, Khanij Bidesh India Ltd. (KABIL), a joint venture company set up in 2019 under the aegis of the Central Ministry of Mines aims to ensure a steady supply of critical minerals for the Indian market. The organisation has subsequently entered into a collaborative framework with the Critical Minerals Facilitation Office, in Australia to identify lithium and cobalt assets, with the aim of securing a steady supply of strategic minerals.

It is not the only instance of KABIL partnering with foreign agencies. Recently, it has inked three memorandums of understanding (MoUs) with Argentina-based companies to explore sources of lithium as well as other minerals, and is also pursuing lithium mining projects in Chile. These measures may help secure a stable supply chain. Another approach could be to encourage Indian companies to make equity investments in mining companies abroad as done by their Chinese counterparts.

While India must continue to externally source these critical minerals, a cohesive multi-dimensional mineral policy could reduce its import dependence and strengthen energy security. Enabling policies are needed to encourage research and support technological innovation for mineral exploration, processing, and recycling. India also needs to create strategic mineral reserves along the lines of strategic petroleum reserves to create a steady supply of critical minerals in the future, as outlined in the recent Economic Survey 2022- 23.

EVs are the key technology for both India’s net-zero commitment and industrial ambitions; hence, the government should do all it can to secure the supply of critical minerals. This should, for instance, include setting up a dedicated fund to encourage R&D in new battery chemistries that have less dependence on critical materials. A lack of action to secure critical mineral supply chains could impede India’s climate and industrialization objectives, and leave the country behind in its quest to achieve energy independence by 2047.

Authors are:
Siddharth Goel (International Institute for Sustainable Development (IISD)), Tom Moerenhout (IISD), and Pradeep Karuturi (OMI Foundation)