The lithium supply crunch has arrived in full force. The price boom of 2016-2017, it’s now clear, was just the dry run. This is the real deal.
Back in November, 2017, the spot price for battery-grade lithium carbonate in China peaked at 175,000 yuan per tonne. Fastmarkets currently assesses it at 400,000-430,000 yuan, up 47 per cent on the start of the year and eight times higher than it was at the start of 2021.
China’s spot market, where small tonnages can have big price impacts, may be accentuating the scale of the run-up, but it’s no false flag. From mined spodumene to high-purity hydroxide, every component of the lithium processing chain is on a wild price surge.
There is simply not enough of the stuff around to meet demand at the moment.
Scarcity of what is a critical input for electric vehicle (EV) batteries could potentially act as a powerful brake on e-mobility, with profound implications for global efforts to decarbonize.
BOOM BUST BOOM
The seeds of today’s lithium boom were sown five years ago, when prices rose to what were then record highs as producers failed to anticipate the demand wave emanating from China’s subsidy-driven roll-out of EVs.
The collective supply response, particularly from hard-rock spodumene producers in Australia, then proved far too strong, leading to the price bust of 2018-2020.
New mines were mothballed, expansion projects were deferred and explorers left to seek their mineral fortunes elsewhere, hollowing out the new project pipeline.
In classic commodity cycle style, this has left producers ill-prepared to meet the current even stronger demand surge. The resulting shortfall of units is fuelling lithium’s white-hot rally.
A record 25,921 tonnes of lithium carbonate equivalent (LCE) were deployed onto roads in new passenger vehicles globally in December, 2021, according to Adamas Intelligence. That was up 68 per cent on December, 2020, and a 31-per-cent month-on-month jump.
Lithium’s exponential usage curve simply mirrors the equally fast rise in global sales of vehicles using lithium-ion batteries.
Chinese sales of new energy vehicles (NEV) rose by 157.5 per cent to 3.52 million units in 2021, a shining stand-out within a moribund domestic automotive sector.
The launch of cheaper vehicles using a form of battery that doesn’t include nickel or cobalt – lithium iron phosphate (LFP) – is accentuating tightness in the market for carbonate feedstock, manifest in a rare price premium for carbonate over lithium hydroxide.
The EV revolution is now spreading to Europe, where NEV sales grew strongly last year even while petrol and diesel sales contracted.
New registrations of plug-in hybrid vehicles jumped by 71 per cent and pure battery vehicles by 63 per cent in 2021 relative to 2020, according to the European Automobile Manufacturers’ Association (ACEA).
The pace of growth is still accelerating as the European Union channels recovery funds down green transition channels.
Alternatively powered vehicles accounted for almost half (47.8 per cent) of the EU car market from October to December, 2021, with more than a million units registered in total, ACEA said.
As Chinese battery-makers are discovering to their cost this year, you can play around with the metallic cathode mix as much as you want, but you’ll still need lithium.
And the current demand call is greater even than that implied by explosive EV sales.
A new industrial sector is taking shape to make the batteries to go in the vehicles. The number of gigafactories – huge assembly plants with output measured in giga, or billions, of watt-hours – is proliferating.
Each needs to build up working stock before the first power is switched on, translating into a huge but largely hidden call on lithium.
DEFICIT TODAY, DEFICIT TOMORROW?
The price explosion tells you that supply is simply not there to feed this demand surge.
Fastmarkets analyst Will Adams pegs the likely shortfall this year at around 60,000 tonnes of lithium carbonate equivalent (LCE), stressing that’s based on apparent demand, which allows for stock building.
Specialist consultancy Benchmark Mineral Intelligence (BMI) thinks it will be smaller at 26,000 tonnes, while Citi is somewhere in the middle with a forecast 36,000-tonne gap.
New mines and restarts of idled capacity will generate a supply response as the year progresses, with Fastmarkets anticipating robust production growth of 28 per cent this year and another 27 per cent in 2023.
The timeline however, is far from certain, given the potential for mine ramp-up teething issues and lingering COVID-19 effects, particularly in Australia.
And will it be enough anyway?
BMI isn’t convinced, penciling in consecutive years of shortfall, with the cumulative deficit mushrooming to 300,000 tonnes LCE by 2030.
The way this commodity story normally plays out is for the price to rise to a sufficiently high level to destroy short-term demand and incentivize medium-term supply.
Such scarcity pricing is already evident in other parts of the metals world, with tin punching out fresh historic price highs against a backdrop of strong demand, persistent supply shortfall and low stocks.
Could lithium be heading the same way?
The pricing pressures are already building on the EV sector, with the recent slide in battery pack prices coming to a halt as raw material costs trump years of technical improvements.
China’s largest electric car-maker BYD said last month it was raising the cost of some brands by 1,000-7,000 yuan ($200-$1,401) because of rising metal input costs.
The problem for battery-makers is that it’s not just lithium prices that have been rallying hard. So have those of cobalt and nickel, two other key metallic ingredients in the battery mix.
Metals risk becoming a significant drag on car-makers’ collective capacity to ramp up EV production to meet carbon emissions targets. “The industrialization of mines and refinery capacities may not progress as quickly as demand increases,” Mercedes-Benz chief executive Ola Kaellenius conceded in an interview with Germany newspaper Die Zeit.
That wouldn’t stop the e-mobility transition, but it could potentially delay it, Mr. Kaellenius said.
In other words, if the world’s lithium producers can’t catch up with rampant battery demand, then the green revolution is going to have to slow down.
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