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.
But few, if any, green metals have witnessed a price explosion as epic as that of lithium.
Fastmarkets currently estimates the spot price for battery-grade lithium carbonate in China at 400,000-430,000 yuan, up 47% barely two months into the new year; nearly 2.5x the 175,000 yuan per tonne they commanded during the last major lithium boom of 2017 and an astonishing 8x higher than it was at the start of 2021.
Many investors who got burned by the last lithium price bust of 2018 have probably been watching on the sidelines, not sure what to make of the current mega-rally.
To be fair, China's spot market, where small tonnages can have big price impacts, may be accentuating the scale of this mega-rally, but make no mistake about it: this is no false flag, with everything from mined spodumene to high-purity hydroxide, and every component of the lithium processing chain experiencing a wild price surge.
The price explosion tells you that lithium supply is simply nowhere near enough to feed this demand surge.
Demand Explosion
The last lithium boom five years ago was attributed to a failure by producers to anticipate the demand wave emanating from China's subsidy-driven roll-out of EVs.
The subsequent supply response, particularly from hard-rock spodumene producers in Australia, proved to be overkill leading to the price bust of 2018-2020.
Consequently, new mines were mothballed, expansion projects were deferred and many explorers folded operations and left to try their luck elsewhere.
Then suddenly, in a classic boom-bust-boom commodity cycle, it happened: lithium producers have been caught flat-footed again, ill-prepared to meet the current even stronger demand surge fueled by the global energy transition and EV revolution.
According to Adamas Intelligence, a record 25,921 tonnes of lithium carbonate equivalent (LCE) were deployed onto roads in new passenger vehicles globally in December 2021, good for a 31% M/M and 68% Y/Y increase. The exponential usage curve mirrors the equally fast rise in global sales of vehicles.
EV and new energy vehicle (NEV) sales in China jumped 157.5% to 3.52 million units in 2021, marking robust growth in an otherwise lackluster domestic automotive market.
Many electric buses in China have switched to lithium iron phosphate(LFP) batteries. Two years ago, Tesla Inc. (NASDAQ:TSLA) introduced LFP batteries in its standard range Model 3s in China and dropped the starting price from 309,900 yuan ($48,080) to 249,900 yuan ($38,773). Last year, the EV kingpin Tesla announced that it's switching battery chemistry for all standard-range Models 3 and Y from nickel cobalt aluminum (NCA) chemistry to an alternative, older technology that uses an LFP chemistry. CEO Elon Musk has revealed that the improving energy density of LFP batteries now makes it possible to use the cheaper, cobalt-free batteries in its lower-end vehicles so as to free up more battery supply of lithium-ion chemistry cells for Tesla's other models.
Unfortunately, despite LFP formats becoming popular due to lower costs, Chinese battery-makers are discovering that you can play around with the metallic cathode mix as much as you want, but you'll still need lithium.
A similar scenario is playing out in Europe, where the NEV sector is booming while the ICE sector continues to contract. According to the European Automobile Manufacturers' Association, new registrations of plug-in hybrid vehicles on the continent jumped 71%, with pure battery vehicle sales increasing by 63% in 2021 relative to 2020.
Alternatively-powered vehicles accounted for almost half (47.8%) of the EU car market from October to December 2021, with over a million units registered in total, ACEA said.
The lithium demand explosion is only going to accelerate: according to the U.S. Department of Energy, 13 new battery cell gigafactories are expected to come online in the U.S. alone by 2025.
Apart from Tesla's new 'Gigafactory Texas' in Austin, Ford Motors (NYSE:F) has lined up 3 gigafactories; one in Northeast of Memphis, TN, and two in Central KY, with the latter two being a joint venture between the company and South Korea's energy holding conglomerate SK Innovations.
General Motors (NYSE:GM) plans to build no less than four gigafactories, with one being a JV with LG Chem (OTCPK:LGCLF) and the other three being JVs with LG Energy Solution (LGES). LGES is one of the world's top electric vehicle battery makers, supplying the likes of Tesla and General Motors. LG Energy Solution has applied for preliminary approval of an IPO that publication IFR says could fetch $10 billion-$12 billion, easily South Korea's biggest-ever listing. LGES has announced plans to invest more than $4.5 billion in its U.S. battery plant by 2025.
Meanwhile, SK Innovations plans to build two battery factories in Northeast of Atlanta, GA; Stellantis N.V. (NYSE:STLA) is teaming up with LG Energy Solution and Samsung SDI to build two factories in yet to be determined locations while Toyota Motor Corp. (NYSE:TM) and Volkswagen (OTCPK:VWAGY) plan to build a gigafactory apiece in Southeast of Greensboro, NC, and Chattanooga, TN, respectively.
Meanwhile, EV sales are expected to grow exponentially, with BNEF projecting that nearly 60% of new car sales must be zero emissions by 2030, to stay on track for the Net Zero Scenario.
Annual Sales of Passenger EVs (Battery Electric Vehicles (BEVs) and Plug-in Hybrid Electric Vehicles (PHEVs))
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Source: U.S. Energy Department
Slowing the EV Revolution
Unfortunately, ballooning prices of the lithium and other commodities needed for renewable energy - a trend known as 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.
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 by 2026, two years later than its earlier forecast.
By Alex Kimani for Oilprice.com
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