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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Demand Destruction May Kick In After Lithium Price Explosion

  • Lithium prices are beginning to slow their climb after a 500% rally.
  • High lithium carbonate prices have begun to dampen demand.
  • The EV industry has failed to secure a sufficient long-term supply of battery metals and is now dealing with the consequences.

After skyrocketing by almost 500 percent over the past 12 months, lithium prices are beginning to slow their climb as current price levels begin to affect demand adversely.

Lithium carbonate, the form in which the crucial battery metal is frequently traded, quadrupled in price in 2021 and has continued to rise since the start of 2022 amid widely shared expectations of a faster shift to EVs, with the corresponding strong growth in sales of electric vehicles.

However, with prices reaching “insane levels”, per Elon Musk, they have begun to dampen demand, Bloomberg reported this week. The resurgence of Covid in China, the world’s largest EV market, has also contributed to the price rally losing some steam.

“Downstream demand is weakening as the pandemic hinders carmakers’ production in China and inventory levels remain high at battery manufacturers,” Shanghai Metals Market analyst Maria Ma told Bloomberg. “Companies are also pressured by the elevated lithium prices and there’s strong price resistance.”

What we are seeing is perhaps a slight paraphrase of the saying that the cure for high oil prices is high oil prices. Indeed, the cure for the excessive price of any commodity is that very same price that begins to erode demand when it becomes prohibitively high.

In battery metals, however, the lithium market imbalance that caused the price rally is only one facet of a major raw materials price rally that may affect a lot of energy transition plans. Every raw material used in EVs is on the rise, and while part of the reason is related to the pandemic and the disruptions it caused across global supply chains, another part is the apparent failure of the carmaking industry to secure sufficient supply for the future early on.

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The chief executive of Australian miner Pilbara Minerals earlier this month told the Sydney Morning Herald that EV makers were likely to continue to pay through the nose for raw materials.

“It happened because the carmakers were asleep at the wheel,” Ken Brinsden said. “They were not paying attention to the raw material supply base; they were too far removed. If you are an average car or EV maker [or] you’re a cell maker, today you are just about hitting the panic button.”

It goes beyond just EVs, too. Soaring metal and mineral prices have jeopardized the whole energy transition, Morgan Stanley warned in late March. In its warning, the investment bank specifically noted the price of lithium, which had risen fivefold in the 12 months to March. This, Morgan Stanley analysts said, could prompt EV makers to increase their prices by as much as 15 percent, dampening demand for them.

“Historically, the battery price cost curve had been declining at a pace of 3% to 7% annually for so many years in a row it almost seemed inevitable,” the bank’s analysts wrote in late March. “But molecules don’t play by the same rules as Moore’s Law. The world has changed, and along with it is a new paradigm of input costs.” 

In such an environment, any sign of a slowdown in the price rally would be met with a sigh of relief, albeit a cautious one: the lithium price rally may have lost some steam, but that does not mean that prices will start going down anytime soon. They won’t—not until supply and demand reach some semblance of balance, which is also unlikely to happen anytime soon.

“It’s going to take quite some time for the mines to catch up,” Pilbara Minerals’ Brinsden told the Sydney Morning Herald. Mines take several years to put into operation. Even if the lithium rally slows down, it is not reversing for years yet.

By Irina Slav for Oilprice.com

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