California's Lithium Tax Could Upset GM, Stellantis' EV Ambitions

A proposed flat-rate tax on lithium produced in California's Salton Sea region will shelve the electric vehicle battery metal deliveries to General Motors Company GM and Stellantis N.V. STLA, Reuters reports based on industry sources.

The tax may push some mining companies to exit the state entirely. The move comes as lithium supplies failed to match surging demand amid the push to phase out gasoline-powered vehicles.

California officials expected the tax to help restore the Salton Sea region from damage in the 20th century by years of heavy pesticide use from farming. They also saw it as making it more manageable for the state to forecast revenue.

The proposal would impose a tax of $400 per tonne for the first 20,000 tonnes of lithium produced annually, $600 per tonne for the next 10,000 tonnes, and $800 per tonne with an output of 30,000 tonnes or more.

Lithium industry executives supported the mitigation efforts but preferred a 2% or less of their sales levy. They saw a flat tax as economically destructive when prices for the metal dropped.

Mining executives acknowledged that extracting lithium from the region was already expensive due to high concentrations of impurities in geothermal brines. They may consider moving to other states with large deposits of lithium-rich brines, including Utah and Arkansas.

Lithium supplier, EnergySource Minerals LLC, halted discussions with potential financiers and a major automaker. Controlled Thermal Resources (CTR) Ltd, a lithium supplier to GM and STLA, saw the tax forcing the company to miss its delivery deadlines.

CTR saw it jeopardizing its plans to produce 60,000 tonnes of lithium to make ~6 million EVs by mid-2024 in California. CTR had won $4.5 million in grants from California in 2020 for lithium research.

CTR chose to fight the tax or leave the state.

Meanwhile, Warren Buffett's Berkshire Hathaway Inc's (NYSE: BRK-A) BHE Renewables, which bagged $15 million in federal government research funding, saw the tax helping California-sourced lithium compete in the world market.

The tax, which would affect the three Salton Sea-area lithium developers, is tied to a must-pass state budget proposal.

Most automakers pay a negotiated price for lithium that can vary significantly from spot prices, trading in June near $77,500 per tonne, but as recently as 2020 were trading near $6,750.

Lithium-ion batteries are the most common battery type used in modern EVs. These batteries have higher energy density versus lead-acid or nickel-metal hydride batteries. Their compact size made them ideal for the automotive industry. 

The EV battery market will likely reach $67.2 billion by 2025, aided by government regulations to reduce emissions and plans for phasing out ICE vehicles.

Price Action: GM shares traded lower by 2.84% at $32.50 in the premarket on the last check Thursday.

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