The Consequences Of A 500% Rally In Lithium Prices

• After surging 500% over the past year, lithium prices have continued their meteoric rise in China.
• Mining.com’s EV Battery Metals index has quadrupled since May 2020.
• Greenflation, is increasing the costs of setting up new green power projects, which could slow down the pace of the transition.

The energy transition is driving the next commodity supercycle, with immense prospects for technology manufacturers, energy traders, and investors. Clean energy technologies require more metals than their fossil fuel-based counterparts, with prices of green metals projected to reach historical peaks for an unprecedented, sustained period in a net-zero emissions scenario. After surging 500% over the past year, lithium prices have continued their meteoric rise in China, with Chinese lithium carbonate prices climbing 35% month-on-month thanks to a jump in electric-vehicle registrations.

According to the China Automotive Technology and Research Center via Bloomberg, nearly 400,000 EVs were registered in the country in December, with Tesla Inc. (NASDAQ: TSLA) supplying about 18% of the total.

But with lithium prices blowing past previous records, there's a growing risk that greenflation could start posing formidable headwinds for the burgeoning industry.

The greenflation menace

With the energy transition in full swing, new energy research provider BloombergNEF estimates that the global transition will require ~$173 trillion in energy supply and infrastructure investment over the next three decades, with renewable energy expected to provide 85% of our energy needs by 2050.

For instance, BNEF projects that by 2030, consumption of lithium and nickel by the battery sector will be at least 5x current levels. Meanwhile, demand for cobalt, used in many battery types, will jump by about 70%. Diverse EV and battery commodities such as copper, manganese, iron, phosphorus, and graphite--all of which are needed in clean energy technologies and are required to expand electricity grids--will see sharp spikes in demand. 

In 2020, Mining.com launched the EV Battery Metals Index, a tool that tracks the value of lithium, cobalt, nickel, and other battery metals flowing into the global EV industry at any given point in time. The index combines two main sets of data: prices paid for the mined minerals at the point of entry into the global battery supply chain and the sales-weighted volume of the raw materials in electric and hybrid passenger car batteries sold around the world.

That index has more than quadrupled from May 2020, indicating an industry that's been expanding at breakneck speed--despite a raft of challenges, including the ongoing pandemic, supply chain constraints, and rising raw materials costs.

Related: Are America’s Drilling Hotspots Preparing For A Pivot To Renewables?

Back in 2009, around the time when Tesla's first Roadsters hit the road, electric and hybrid cars sold around the world contained a paltry 31 tonnes of lithium in their batteries worth a combined $182,000. Fast forward to the present, and the industry has grown 3,330-fold for a value of $609 million. Over the past five years alone, the annualized value of lithium in EVs has gone up more than 1,000%.  

But rising prices of the commodities needed for renewable energy, aka greenflation, is increasing the costs of setting up new green power projects, which could slow down the pace of the transition. 

This trend is problematic because falling costs have been a major driving force of the clean energy boom.

Over the past decade, the price of solar electricity dropped 89%, while the price of onshore wind dropped 70%.

Meanwhile, rapidly falling EV battery prices have played a big role in helping electric vehicles go mainstream. As per Bloomberg, over the past decade, EV battery prices have fallen from almost $1,200 per kilowatt-hour to just $137/kWh in 2020. For an EV with a 50 kWh battery pack, that adds up to savings of more than $43,000 in real terms.

But now BloombergNEF predicts a 2% rise in battery pack prices this year, potentially pushing out the point at which electric vehicles will reach cost parity with conventional cars to 2026, two years later than its earlier forecast.

Overall, clean energy has actually reached an economic tipping point: A 2019 report from the nonprofit Rocky Mountain Institute found that it was cheaper to build and use a combination of renewables like wind and solar than to build new natural gas plants. Another 2020 report from Carbon Tracker found that in every single one of the world's energy markets, it's cheaper to invest in renewables than in coal.

But this remarkable trend has now gone into reverse gear, with prices of metals such as tin, aluminum, copper, nickel, and cobalt, which are essential to energy transition technologies, climbing between 20% and 90% over the past year thanks to massive global supply chain disruptions.

Big Leverage

However, the experts are saying that rising green energy costs are only a short-term problem that will be counteracted by another friendlier trend: Falling costs of funding.

According to Chaturvedi, declining costs of funding for renewable projects will act as a "big leverage" that will counter the increase in underlying costs–and he is not alone.

Gauri Singh, deputy director-general at the International Renewable Energy Agency (IRENA), has argued that despite ongoing inflation and supply chain disruptions, decreasing financing costs helped generate a record 260 gigawatts of energy from renewable sources in 2020.

"You will not actually get cheap money for anything that's a climate risk. Whereas for renewables, the market is softening," Singh has declared.

These experts seem to be supported by solid research:  Allied Market Research has projected that the global renewable energy market will grow from $881 billion (€781 billion) in 2020 to nearly $2 trillion (€1.8 trillion) by 2030.

Indeed, metals have been tipped to become the oil of the future.

By Alex Kimani for Oilprice.com

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