Lithium Supply Shortages and Chokepoints: What they mean for Defence Readiness

In brief

• Defence ministries are underwriting multi-year supply commitments against forecasts that contradict one another. S&P Global anticipates a 2026 surplus of roughly 109,000 tonnes of lithium carbonate equivalent; Morgan Stanley anticipates an 80,000-tonne deficit for the same twelve months. That 190,000-tonne divergence exceeds some lithium producing countries' entire annual output. Governments have answered the uncertainty by stockpiling. China, the United States, Japan and South Korea all hold strategic reserves. Each purchase withdraws further material from circulation, aggravating the imbalance the buyers hoped to insure against.

• Conversion capacity, not ore, is the scarce asset outside China. The world holds a comfortable surplus of plants capable of turning concentrate into battery-grade chemicals, but roughly two-thirds of them sit in China. That surplus is itself the barrier to entry, since few boards will finance a converter obliged to compete with idle Chinese capacity able to undercut it at will.

• Development timelines reflect policy rather than geology. New lithium projects in Australia, Canada, the United States and the European Union average 10 to 17 years from discovery to production. Chinese buyers in Zimbabwe carried already-permitted assets from acquisition to output in 11 to 18 months. The gap measures permitting regimes and the patience of investors, which means supply responses from OECD jurisdictions will arrive years behind those mounted from China.

Earlier parts of this series set out a paradox. Militaries consume so little lithium that no demand model needs to account for them, yet defence ministries have made themselves investors, lenders and price guarantors across the battery supply chain. This final part reverses the question. Instead of asking what rearmament does to the lithium market, it asks what that market will do to rearmament.

Planning against forecasts that disagree

Defence procurement is an exercise in multi-year commitment. The lithium market currently offers projections too divergent to sustain one.

For three years supply outran consumption. Inventories built up while prices fell, the surplus peaking at roughly 175,000 tonnes of lithium carbonate equivalent in 2023 on Fastmarkets' estimate before narrowing to about 141,000 tonnes in 2025 as consumption grew 13.5 per cent. Projections for 2026 then split. S&P Global expects the surplus to contract to some 109,000 tonnes. Morgan Stanley expects a deficit of 80,000. Fastmarkets and Benchmark Mineral Intelligence likewise anticipate demand overtaking supply within the year.

A spread of 190,000 tonnes between reputable houses exceeds the annual production of Zimbabwe, the world's fourth-largest source. The disagreement reflects real gaps in visibility rather than weak analysis. Nobody knows how much lithium Chinese converters will process, since many run well below their rated throughput and can lift volumes quickly once prices justify it. Nor can anyone say how fast new projects will reach the output their operators advertise, most running below that mark for one to three years after start-up. Least predictable is the volume governments will divert into strategic reserves, which is one of the fastest-growing variables this series has examined.

The disagreement over tonnage has not stopped the market from repricing. Battery-grade lithium carbonate roughly doubled between December 2025 and late January 2026 to reach $26,278 a tonne. Spodumene, the hard-rock mineral from which that compound and lithium hydroxide are converted, breached $2,000 a tonne for the first time since 2023. Fastmarkets then raised its 2026 carbonate forecast from $17.40 to $23.80 a kilogram and now projects $31.40 for 2027.

Why supply responds slowly, and where it does not

Lithium demand compounds at roughly 12 per cent a year, doubling about every six. Supply expands more slowly. The obstacles are institutional as much as physical.

Greenfield projects, meaning those advanced from a fresh discovery rather than an acquired one, average 10 to 17 years between the drill hole and the first commercial shipment in Australia, Canada, the United States and the European Union. Brine operations, which pump lithium-bearing water from underground reservoirs and concentrate it by evaporation, require 13 to 15. Those timelines cover exploration, resource definition, permitting, financing and construction in jurisdictions where environmental review and community consent each take years.

Chinese acquisitions in Zimbabwe show what happens once the earliest stages are already complete. Huayou Cobalt closed its $422 million purchase of Arcadia on 20 April 2022, acquiring a deposit that Prospect Resources had drilled and carried through an optimised feasibility study. The concentrator took nine months to build. Trial production began in March 2023 and the first shipments left in April, roughly twelve months after the deal completed.

Bikita is a different case, instructive for that reason. Sinomine bought it for $180 million in January 2022, though nothing about the asset was new. Mining on the site dates to 1911 and lithium production to the 1950s. For decades Bikita supplied petalite to the glass and ceramics trade as Africa's only working lithium mine. Sinomine added a spodumene plant and expanded the existing petalite circuit, completing both in July 2023 and reaching stable output that November. Wood Mackenzie describes the result as a restart rather than a start.

Neither project compares like for like with a greenfield timeline, which is precisely what makes them useful. Both,in a sense, isolate the same variable. Once exploration and permitting are settled, the remaining schedule reflects how quickly capital commits. These operators committed during a price trough that kept most listed boards on the sidelines. Comparable brownfield and late-stage assets sit in Australia, Canada and Europe. None advanced at this speed.

Should scarcity arrive, the Chinese supply chain can add capacity faster than the economies contending with it, because Chinese firms build through downturns that would stall a listed miner answerable to shareholders. Serbia furnished the contrasting illustration when it revoked Rio Tinto's licence for the Jadar deposit following sustained public protest, cancelling what would have become one of Europe's largest lithium mines.

The price collapse of 2023 to 2025 compounds the difficulty. Typically, mining companies commission feasibility studies before committing capital. Fewer than ten appeared in 2025 against dozens in a normal year. Each study not commissioned,then, represents a mine that will not open in the mid-2030s. Analysts at Lithium Harvest expect a persistent shortfall to emerge around 2029 at 55,000 tonnes and to reach 700,000 tonnes by 2035.

Concentration narrows the field further. Five producers, namely SQM, Albemarle, Tianqi Lithium, Pilbara Minerals and Rio Tinto, hold nearly 70 per cent of mine output, so one boardroom can shift the global balance.

The chokepoint: Conversion Capacity

Defence ministries have met supply risk by accumulating reserves, taking equity in miners and guaranteeing prices, as Part IV of this series described.

China's advantage sits in the midstream, the refining and chemical-conversion stages between the mine and the finished cell. The country refines roughly two-thirds of the world's lithium, produces about 71 per cent of the battery-grade carbonate and hydroxide that cathode manufacturers buy, and processes more than 70 per cent of anode-grade graphite, the material forming the negative electrode of every lithium-ion cell. Wood Mackenzie expects Chinese entities to control around half of global lithium production by 2027.

An apparent contradiction arises at this point. If converters worldwide can process more ore than mines supply, conversion capacity is plainly not scarce. How then can it constitute a chokepoint?

The answer is that abundance and access describe different properties. Spare capacity exists in quantity; almost all of it answers to Beijing. A cargo leaving Australia or Chile confronts no global shortage of converters, only an absence of them outside Chinese jurisdiction. The surplus is also what preserves the arrangement. Any board weighing a conversion plant elsewhere must reckon with idle Chinese capacity able to undercut it at whatever price the moment requires, which makes the investment case hard to build.

Two things are true at once. They simply answer different questions. Ore holds the pricing power, because converters compete for feedstock that mines cannot supply in sufficient volume, which decides who earns the margin. Conversion holds the strategic leverage, because a state can stockpile concentrate indefinitely without acquiring any means to turn it into something a soldier can carry, which decides who can build cells at all. Australia mines more lithium than any other country and still ships most of it to China for processing.

The consequence for rearmament programmes is tangible: The Center for Strategic and International Studies examined the drone supply chain in December 2025 and concluded that every drone flying in Ukraine, on either side of the front, depends on Chinese inputs. Airframes require Chinese carbon fibre. Motors require Chinese rare-earth magnets. Radar and communications require Chinese gallium-nitride semiconductors. Every aircraft requires Chinese lithium-ion cells.

That dependence underpins the doctrine NATO militaries adopted after studying Ukraine. Precision mass, introduced in Part I of this series, favours millions of inexpensive expendable drones over hundreds of highly capable ones. A Patriot PAC-3 interceptor costs upward of $3 million, carries sophisticated guidance and takes months to assemble; a Ukrainian Sting interceptor costs about $2,500 and can be produced within hours. The doctrine exchanges individual sophistication for volume, then discovers that volume means consuming Chinese-processed material at scale.

Ukraine's procurement history shows how Beijing manages this position. The country imported 99 per cent of its drones as finished aircraft in 2022; by 2025 it imported 99 per cent as discrete components for domestic assembly. Battery cells remain among the most obstinate dependencies, with Ukrainian manufacturers reporting that Chinese export licensing and pricing nudge them toward purchasing finished sub-assemblies rather than developing substitutes.

Beijing has already used the option deliberately. In 2023, after American restrictions on Chinese access to advanced semiconductors, China required exporters to obtain state approval before shipping graphite. Consignments slowed while officials processed applications. Prices climbed. Manufacturers elsewhere discovered how thin the alternative supply base had become.

Producer states and the price of security

Zimbabwe suspended exports of unprocessed lithium concentrate in February 2026, advancing a prohibition originally scheduled for 2027. The measure follows an industrial logic that long predates current conditions. Harare wants refining capacity built inside its borders rather than shipping ore abroad and buying back the resulting chemicals at several times the price. Indonesia, Chile and Namibia have pursued the same objective through comparable measures.

Market conditions dictated how much the decision accomplished. Zimbabwe will produce roughly 124,000 tonnes of lithium carbonate equivalent in 2026, about 7 per cent of world supply and around 15 per cent of the ore China imports. Arriving in a market already short of rock, the suspension reinforced the price rally on Fastmarkets' assessment. Australian mines idled during the downturn became viable to restart.

The same measure would have accomplished far less in 2023. In a glut, buyers replace restricted material cheaply, so the restricting state absorbs most of the cost. Scarcity reverses the calculation. Where some buyers are defence ministries whose demand scarcely contracts as prices climb, a supply restriction transmits directly into world prices. Scarcity thus converts domestic industrial policy into international leverage, strengthening producer states precisely as the governments seeking secure supply grow least willing to walk away.

How the market reaches defence budgets

Three monetary mechanisms carry these conditions into the public finances of the states involved.

Invoicing comes first. Lithium trades mainly in US dollars, increasingly also in renminbi through the Guangzhou Futures Exchange contract, with Chinese converter quotations anchoring much of the market's reference pricing. A material that NATO governments now classify as strategic is therefore priced substantially in the currency of the state they treat as their principal competitor.

Export earnings come second. Rising prices improve the terms of trade of lithium exporters, meaning the ratio of their export prices to their import prices, so an unchanged volume of shipments finances more purchases abroad. Zimbabwe, Chile, Argentina and Australia consequently earn more foreign exchange per tonne in 2026 than in 2025, easing the dollar shortages that constrain fiscal policy across several producer economies. Appreciation carries a cost, making a country's other exports less competitive in the pattern economists call Dutch disease, after the damage North Sea gas did to Dutch manufacturing.

Deficit financing comes third. Governments are funding rearmament through borrowing rather than taxation. Moody's downgraded the United States in May 2025 partly over debt, while France carries obligations worth 112 per cent of annual output and Italy 135 per cent. Borrowing creates purchasing power that did not previously exist. Directed toward commodities whose production cannot expand quickly, it raises prices rather than volumes. Producer states collect the difference, so rearmament partly finances the leverage of the countries supplying it.

Three scenarios to 2035

Baseline. Scarcity arrives; states insure against it.

Military battery demand grows 8 to 12 per cent a year through drone programmes, hybridised land fleets and submarine conversions. Military consumption still stays below roughly 3 per cent of world lithium demand in 2035.

A persistent shortfall opens around 2029, traceable to mines never built. The price collapse of 2023 to 2025 deterred capital commitments exactly when projects needing a decade or more to deliver should have been approved.

Defence ministries extend to lithium the guaranteed minimum price already applied to rare earths, committing to buy at a fixed level so producers can raise finance whatever the market does.

Producer states negotiate terms unavailable to them throughout the surplus years.

Escalation. The chokepoint closes.

Confrontation between major powers prompts Chinese export controls on refined lithium or finished cells, reprising the graphite licensing regime of 2023.

Military requirements remain modest in tonnage, but material reaching buyers outside China contracts abruptly, since conversion capacity concentrated there cannot be rebuilt elsewhere within a decade.

Governments release strategic reserves, place military orders ahead of civilian ones and administer emergency pricing.

De-escalation. Growth slows without reversing.

A settlement in Ukraine moderates the rate at which military battery demand expands.

Militaries rarely abandon a doctrine after reorganising their forces around it. Precision mass now shapes procurement across NATO.

Ukraine's drone industry, with capacity above 8 million aircraft a year, seeks export customers at a few hundred dollars apiece. Purchasing ministries acquire the aircraft together with the lithium dependency inside them.

Conclusion

Militaries will not exhaust the world's lithium. Their consumption sits below one per cent of supply today and stays under 3 per cent in 2035. The risk to military security lies elsewhere. Rearmament programmes now rest on a market that cannot forecast itself twelve months ahead, that has concentrated its indispensable processing stage within a single jurisdiction, and that answers scarcity on timelines measured in decades wherever OECD permitting regimes apply.

Stockpiles, equity stakes and guaranteed prices all address the supply of rock. None addresses conversion, where significant vulnerability resides and which no government can accumulate in a warehouse. Building that capacity outside China demands years of construction and an appetite for investing against a competitor's idle plant that private capital markets have not yet shown. Until it exists, defence ministries can buy lithium in quantity and still be unable to guarantee a single cell. Producer states, meanwhile, hold assets that appreciate each time a government adds lithium to a list of strategic materials.

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Principal sources: Fastmarkets, Benchmark Mineral Intelligence, S&P Global Commodity Insights and Wood Mackenzie market analysis and asset reports, 2025–26; International Energy Agency, Critical Minerals Outlook, on project lead times; Investing News Network, Q1 2026 lithium review; Lithium Harvest, lithium mining market outlook; Center for Strategic and International Studies, The Drone Supply Chain War, December 2025; Mining Weekly and MINING.COM reporting on the Arcadia and Bikita transactions and commissioning, 2022–23; ChinaTalk and Defense Daily reporting on Ukrainian component supply chains, 2026; SIPRI, April 2026. The estimate of military battery demand growth is the author's own.