🔋Between A Rock And A Hard Place

Why was the Defense Production Act of 1950 invoked for Li-ion batteries and is it warranted?

Apr 06, 2022

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DPA

Last Thursday, the white house released a Memorandum on the Defense Production Act of 1950 (DPA). Stemming from the war powers acts of 1941-1942 that compelled companies to produce military machinery and supplies during World War 21, the DPA started under Truman to produce materials vital for the Korean war. Basically, it is broad legislation for the federal government to control domestic economic policy and compel companies and industries during times of crisis. The act allows for three main things2,

Require businesses to accept and prioritize contracts for materials deemed necessary for national defense, set price controls, and prevent hoarding of vital resources.
Gives authorization to establish regulations, orders, or agencies to allocate materials, services, and facilities to promote national defense.
Control the civilian economy so that scarce and critical materials necessary to the national defense effort are available for defense needs.

This anti free market legislation can only be used during times of war or national security threats. For this reason, the DPA has been re-authorized over 50 times by both political parties as the act is not a permanent part of our laws.

The act has been used to regulate heavy industry for the Korean war, establish and distribute domestic industries across the US to avoid devastation from nuclear attack during the Cold War, funding the trans-Alaskan pipeline and research into liquefied natural gas, development and mining contracts for innovative technologies such as semiconductors and rare-earth metals, compel companies to detail foreign hardware to combat cyberespionage (Obama), development of aerospace and electronics materials (Trump), compel production, block exports, and control price of health and medical resources during COVID-19 (Trump), compel meat industries to remain open during COVID-19 (Trump), increase production of pandemic related supplies (Biden), and supply equipment to Merck facilities to produce Johnson and Johnson vaccines (Biden), and ensure fire hoses for wild-fires (Biden).

What is the DPA being used today for? Thursday’s memorandum in their words,

The United States shall, to the extent consistent with the promotion of the national defense, secure the supply of such materials through environmentally responsible domestic mining and processing; recycling and reuse; and recovery from unconventional and secondary sources, such as mine waste.

The materials referred to are those required to produce lithium-ion batteries (LIBs). The basic function of this legislation applied to the current context is to incentivize domestic mining operations and recycling of important battery materials.

A Rocky Start

This matters because the US depends largely on foreign nations, many of which are not buddy, buddy with the US for its strategic materials. Furthermore, in the memorandum

The United States depends on unreliable foreign sources for many of the strategic and critical materials necessary for the clean energy transition — such as lithium, nickel, cobalt, graphite, and manganese for large-capacity batteries. Demand for such materials is projected to increase exponentially as the world transitions to a clean energy economy.

Lithium, nickel, cobalt, graphite, and manganese are battery materials. After mining, they must be processed. Below is the share of processing for battery materials worldwide.

In addition to these materials, China produced 62% of the world’s graphite in 2020. The US has shockingly little domestic mining infrastructure for key commodities, batteries, and electronics industries. Why is demand going to go up exponentially? I discuss it in EVs - Enormous Ventures, but the gist is the white house currently wants 50% of cars to be electric by 2030 and automakers are on board with very aggressive EV targets of their own. All of those cars require lots of LIBs, which require a lot of metals being dug out of the ground and we don’t mine or process much at all domestically.

We can theorize what will happen to battery prices by thinking what is going on with supply and demand. Demand for batteries and electric vehicles (EVs) will go up, and the supply is not ready to meet these increases at the moment. Three weeks ago, in Just In The Nickel Of Time, I discussed how the war in Ukraine is adding to the supply shock of critical battery and technology materials. In addition to Russia supplying 20% of the world’s battery grade nickel and other electronics materials, increasing energy costs and commodity prices will spell trouble for batteries despite the kicks and screams from the most stout carbon hysterics thinking it will accelerate the clean energy transition. We are already seeing the years of cost reductions of Li-ion batteries slip away.

Reilly Brennan @reillybrennan

Ingredient costs of making an EV battery seemed to decline for years....until they didn't (via MS)

Don’t trust a Morgan Stanley report on batteries? Lithium prices have gone up almost 6x since last March according to Benchmark Mineral intelligence. Graphite, Nickel, Manganese, Cobalt, and many other important commodities also saw price increases.

National Security Risk

This decision to use the DPA by the white house is two-fold. First, they want to ease the supply shock of the key material inputs to ease the inevitable price increases that we are already seeing. Second, they want to reduce the dependance on China and other foreign nations that pose a serious counterparty risk.

It is the policy of my Administration that ensuring a robust, resilient, sustainable, and environmentally responsible domestic industrial base to meet the requirements of the clean energy economy, such as the production of large-capacity batteries, is essential to our national security and the development and preservation of domestic critical infrastructure.

To play the DPA card and get all the wonderful executive powers that come with it, they have to convince us that it is of vital national security. With how things are right now, we are handing over control of our energy and EV infrastructure to China, as they control the vast majority of the solar and battery materials. Regardless of whether we could have done something about the offshoring raw material production, or whether we really need all of these EVs by 2030 to reduce our emissions, it is easy to see why this is a national security issue.

In Are You Going To Pay For That!? I discussed the factors effecting the prices of batteries, and referenced a report from June 2021 which also mentioned the national security risk of these materials. This isn’t the first time the white house has used this language so something like this doesn’t come as much of a surprise. If electric vehicles are to be important to the future of this country, then it absolutely is a national security risk to outsource our energy infrastructure they way it stands right now.

“Clean” Energy

EVs and LIBs are secondary to the grid in which fossil fuels currently dominate. For EVs to be truly effective, we need a grid that also relies on cleaner energy than what we have now. Batteries are integral to a “clean/green” energy future, but it is no secret that it takes incredible amounts of mining to get all of the materials needed to make batteries. Max is a great follow on twitter and is skeptical of the current administration’s idea of the energy transition.

Max Gagliardi @max_gagliardi

Anytime people make statements like “better for the environment” or use words like “green” or “clean” ask them what they mean Make them define the specifics of why these things are “better” for the environment Most of the time, they can’t larpers everywhere

Through the lens of Max’s skepticism of the words clean and green, what does the white house really mean when they say, “clean energy economy.” They have been pushing wind/solar/batteries, shutting down nuclear power, and demonizing fossil fuels at every step. There are no truly clean energy sources, everything has a cost. As we all know there is a tremendous amount of earth that needs to be moved in order to get battery materials. Here is an idea of the scope.

John Lee Pettimore @JohnLeePettim13

A single Tesla battery weighing 1,000 pounds requires extracting and processing some 500,000 pounds of materials. At this rate, over the next thirty years we will need to mine more mineral ores than humans have extracted over the last 70,000 years. #GreenEnergy

I have previously mentioned solid-state and flow batteries as possible alternatives and alleviations to this issue and will discuss other options in future weeks. (You can read these pieces here and here). Ultimately wind/solar/batteries require fossil fuels themselves to produce currently, need tremendous amounts of energy input, and destroy/take up a lot of earth’s surface. Even with recycling facilities, the amount of mining that needs to be done domestically to secure these materials will be massive. This is in fact another reason that this DPA is not surprising based on the track that the current administration is on. An ironic side-effect of this legislation is pushback from environmental groups worried about the destruction of plant and animal species that would result from the construction of new mineral mines in the US. A true battle for the environment…

Grayson Hoteling @GraysonHoteling

Renewables ppl vs environmentalists: go!🤺

Ella Nilsen @ella_nilsen

WH makes it official: Biden will invoke Defense Production Act to support the production and processing of minerals including lithium, nickel, cobalt, graphite, and manganese -- used in EV batteries and large batteries used to store wind & solar energy.

DPA: Yay or Nay?

Looking at the situation objectively, it’s easy to realize that we do not want to be dependent on China for our wind/solar/battery materials the way we currently are, especially because that is the energy trajectory or “transition” we are currently on for better or worse. For that reason, this current iteration of the DPA legislation is better than nothing. If we are going to need so many of these battery materials, it would be better to de-globalize the supply chain (this will be a theme in the years/decades to come) and not rely on un-trustworthy and authoritarian regimes for the vital materials.

The DPA is effectively the free-market’s worst nightmare and the cental planner’s best friend though. The president can use DPA measures to manipulate supply, companies, and prices. Trade/free markets for goods and services work well during times of peace and abundance, but sometimes supply chains break down and it is tempting to intervene. The DPA gives power to manipulate supply chains and American companies as well as giving the federal government broad sweeping powers in times where national security is threatened. The problem is that the federal government is who gets to decide when it feels threatened. The act has been increasingly used for less and less extreme measures over time. Originally, to secure materials at a time of war, now to give extra support to companies making covid vaccines and to make more fire hoses.

Central planning manipulates the free-market price signals that allow producers to know what and how much to produce, ultimately keeping the economy from functioning properly. My own paraphrasing of Hayek in The Road to Serfdom, chapter 5,

There need be arbitrarily power for central planning, and delegation of arbitrary rules. People don’t want to relinquish decision making power so central planning would prefer a dictatorship. Democracy needs a majority, but many economic plans will not get a majority. To get things done dictatorial power is likely, where the will of a small minority can imposed on people, as they may get consensus amongst themselves.

The DPA is an act of central planning and the three powers it gives the president that I mentioned at the beginning are certainly arbitrary. Does this latest rendition of the DPA warrant the destruction of the free market? Considering the current path our leaders are taking us, the DPA is better than the prospect of having potentially adversarial nations controlling our battery production.

There are certainly alternative energy sources and technology that could achieve the climate aims better than the focus on EVs and wind/solar though. If carbon dioxide emissions are the issue, then nuclear power and natural gas production would certainly be higher on the list of priorities. Promoting an energy grid that supports nuclear and natural gas (which I will discuss in further detail in future pieces) instead of demonizing them would do more than electric vehicles for emissions. In the long run battery materials for EVs will be strategic materials and necessary, but there’s no need for them to be as critical as they are in 2022. It is a dangerous precedent to let the government keep invoking arbitrary power through the DPA especially with how much it has been used in recent years. I wouldn’t be surprised if this was not the last time it is used during the current administration with the looming global economic, energy, and food crises that will undoubtably effect the United States as well. It will be tempting for them to use the power to manipulate food and energy industries with supply and price controls just like they manipulate the economy through the money supply currently.

The DPA is an act of central planning and is the best of bad decisions. Central planning does a good job at helping certain industries, but at the expense of others. In the long run, foregoing the free market tends to mis-allocate capital, distort price signals, and cause future economic uncertainty and issues to arise. Energy prices were rising before Putin’s invasion, and the Russia/Ukraine conflict only exacerbated the issues. In a series of unfortunate energy moves that lead the US to not have enough energy, instead of securing cheap and reliable energy production domestically they are doubling down on subsidizing resources for the energy transition and importing fossil fuels from elsewhere. Countries like Germany are burning more coal and can’t rely on their wind/solar power alone, and I suspect that the emerging global energy crisis will show it wasn’t an anomaly. EVs can’t solve an energy shortage, but fossil fuels might. Recently the US has changed its mind and does want more oil from Canada.

The_Real_Fly @The_Real_Fly

BIDEN ADMINISTRATION SEEKS TO BOOST OIL IMPORTS FROM CANADA: DJ If only there was a pipeline linking the two countries

EVs are a tomorrow solution, and the focus on ESG/energy transition capital allocation actually is a main driver for the energy insecurity, rising energy costs of today, and lack of investment in cheap/reliable/emission-reducing nuclear and natural gas. The most recent DPA is like securing resources to make paint for your car because Lowe’s may not sell it to you in the future, but your car still doesn’t have a functioning engine.

-Grayson