Iran's Ministry of Industry, Mine, and Trade has declared that a significant discovery of 8.5 million tonnes of lithium has been made in Qahavand, Hamadan. The discovery puts Iran in possession of the largest lithium reserve outside of South America. Furthermore, the Ministry has indicated that there could be even more significant amounts of lithium to be discovered in Hamadan in the future. These developments position Iran to potentially overtake Australia as the top supplier of lithium in the world, although it will be heavily reliant on Iran's diplomatic trajectory.

Background

Lithium is widely referred to as "white gold", similar to petroleum being “black gold”, and is a critical element in the shift towards green energy. It serves as a fundamental component in lithium-ion batteries, the primary energy storage system in electric vehicles (EVs). While lithium-ion batteries have been employed in portable electronic devices for several years, their use in EVs is growing rapidly. By 2030, it is anticipated that 95 per-cent of global lithium demand will be for battery production. However, the price of lithium has been declining for several months, and the recent discovery of Iran's reserve is expected to continue this trend. The extent of the impact on global markets will depend on Iran's ability to export and their production capacity.

Iran's economy is facing significant challenges due to a combination of domestic and international factors. The country has been under severe economic sanctions from the United States since 2018, which has severely impacted its ability to trade with other countries and access the global financial system. The ongoing protests and civil unrest have also taken a toll on Iran's economy. Inflation has been a major problem in Iran, with the annual inflation rate reaching over 40% in 2022. This has led to a decline in the purchasing power of the Iranian currency, the rial, and made it difficult for many Iranians to afford basic necessities.

Analysis

Given Iran's current domestic instabilities, the new find will likely be used as a tool to stabilise the Rial (IRR) which is especially volatile due to international sanctions adversely impacting the country and international political disputes, like the developments linked to the JCPOA. However, as extraction is not planned to begin till 2025, there will not be any real direct short-term economic relief; the government will have to rely on the market’s reaction to future potential.

The discovery will also have diplomatic and foreign policy implications. According to IEA projections, the concentration of lithium demand will be in the United States, the European Union and China. Iran can leverage the necessity of lithium supply to the energy transition and net-zero emission goals as a bargaining chip in future negotiations with Western powers over sanctions relief and its nuclear activities. Iran's growing and diversifying portfolio of essential commodities is a potential threat to those pushing for its exclusion from global trading networks. The new discovery can even act as a catalyst for Iranian membership in BRICS. 

China has long-standing economic and political ties with Iran, even amidst Western sanctions. China has been a significant importer of Iranian oil, and in recent years, they have invested heavily in Iranian infrastructure and other sectors. With the discovery of a large lithium reserve in Iran, China is primed to take advantage of its relationship to further pursue its trade interests for rare earth minerals.  This could further strengthen the economic ties between the two countries, and also create a new avenue for diplomatic relations. However, the relationship between China and Iran is not without its complications. China's increasing involvement and improved relationship with Iran's regional rivals such as Saudi Arabia has raised concerns in Tehran.

Despite these challenges, the potential economic benefits of the lithium discovery in Iran are significant enough that China is likely to overlook some of these complications and Iran can strengthen its diplomatic ties with political powerhouse. The demand for lithium is expected to increase exponentially in the coming years, particularly in China, which has set ambitious targets for the adoption of electric vehicles. Therefore, the availability of Iranian lithium could be a significant boost to China's domestic EV industry.