AI data center boom drives lithium demand as supply risks grow

The rapid expansion of artificial intelligence infrastructure is reshaping global lithium demand, with energy storage systems emerging as a key growth driver alongside electric vehicles.

Last year, data centers powering chatbots and other AI applications drove a sharp rise in demand for lithium-iron phosphate batteries, which provide stable and reliable energy supply.

These batteries are increasingly used in Battery Energy Storage Systems (BESS), large-scale installations that store electricity from renewable sources or the grid and release it during peak demand or outages.

BESS deployments are accelerating across the United States and other regions, as hyperscale data centers face rising power consumption and exposure to volatile electricity prices, particularly during large language model (LLM) training.

These systems also enable renewable energy providers to store excess solar output during the day and sell it later, creating more stable revenue streams.

According to Benchmark Minerals Intelligence, BESS demand grew 51% last year, significantly outpacing the 26% increase seen in electric vehicle-related demand.

Despite this, EVs still account for around 75% of global battery consumption.

Tightening supply lifts lithium prices

The growing role of energy storage is contributing to a shift in lithium market dynamics, moving from a period of oversupply and low prices to tighter supply conditions.

Lithium prices have surged 120% over the past six months, rising to about $20,000 per ton in late February from $9,000 per ton in August.

The earlier slump was linked to disruptions in China, including the suspension of operations at CATL’s Jianxiawo mine due to licensing issues.

Prices have also shown volatility, including a 46% spike in January driven by low inventory levels ahead of the Chinese New Year.

"The market is looking pretty strong," said Andy Leyland, founder of industry researcher SC Insights, adding that in 2026, demand could grow 24% while supply could expand by just 19%. "We expect the market to get tighter in the next two to three years," he added.

This tightening is also reflected in futures markets, where participants are increasingly using CME Group lithium contracts to hedge price risk amid supply disruptions and shifting demand patterns.

Global supply expands amid geopolitical competition

On the supply side, producers are accelerating expansion efforts, particularly in Africa, which is emerging as a major hub for lithium production.

Benchmark analysts noted that new output from the continent exceeded that of the rest of the world in 2025, led by Zimbabwe and Mali, with additional growth in South Africa and Nigeria.

China is playing a key role in financing these developments to secure feedstock for its battery supply chain.

Meanwhile, Argentina is expected to deliver the largest output growth globally, with plans to double production to 250,000 tons by 2029 and significantly increase export revenues.

The United States is also stepping up efforts to reduce reliance on Chinese supply.

The Smackover formation, stretching from Arkansas to Florida, has attracted significant investment after the discovery of lithium-rich brine deposits.

Exxon Mobil is investing up to $20 billion in lower-emission initiatives, including lithium infrastructure, while Standard Lithium and Equinor plan to develop production capacity in the coming years.

Despite the bullish outlook, some analysts caution that demand risks remain.

Advances in battery technology and increased Chinese production capacity could weigh on prices.

"There is huge competition to improve batteries [such as extending their operational life] and China has the best proposals to do this," said Gonzalo Mondaca, a Bolivian lithium expert.

Geopolitics is also shaping the market.

The United States has launched a $12 billion strategic critical minerals stockpile, known as Project Vault, and is pursuing supply agreements with countries across South America.

Brazil is also moving closer to cooperation deals with the US on rare earth and lithium development.