Lithium outlook: Fluctuating prices and the role of techno-geopolitical factors in lithium-ion batteries

In the last half-decade, the soft, silvery-white metal, lithium, has seen a marked shift from occupying the fringes of niche investment portfolios, to becoming a prized commodity.

Spurred on by growing demand for electric vehicles (EVs), the mainstreaming of ESG and green electrification, elevated concerns around the sanctity of global supply chains and the narrative of limited under-the-ground resources, global investment began pouring into exploration and development projects.

Oliver Chapman, CEO of supply chain specialists OCI, noted,

…(many) minerals are not especially rare but have simply been too cheap to warrant much investment in their development.

In other words, contrary to the notion of globally scarce reserves, chronic underinvestment due to low market prices kept project developers away from lithium.  

However, more recently, policy support from various governments, targeted investment through public spending programs, national pledges to phase out conventional vehicles and the active electrification of fleets ensured demand forecasts remained more than healthy, fuelling an incredible bull run.

As a result, there was a flurry of junior miners who competed to build out new capacity.

Following the already explosive rally in 2021, lithium carbonate (an important derivative of lithium that is used in lithium-ion batteries) spot prices surged to a peak of CNY 597,500 (approximately US$80,000) per ton in mid-November 2022.

However, since touching this high, lithium carbonate spot prices in China have plunged 66.9% and breached the psychologically crucial CNY 200,000 per ton earlier this week.

Marking 98 consecutive sessions without an uptick in the price, the compound ended at CNY 197,500 per ton on 13^th April, shaving 40.6% off the spot price in a single month.

Just a couple of days before peaking, Goldman Sachs had pivoted away from a surplus-driven bearish view of the metal to expecting a deep shortage in global supply by the end of 2022, dramatically revising estimates of an 8kt excess downwards to a shortfall of 84kt.

Year-to-date prices are down a whopping 61.7% and have fallen by 58.8% in the previous 12 months.

The why of the fall

China’s long-lasting zero-covid restrictions decimated consumer demand, particularly for discretionary items, while macroeconomic imbalances dampened market forecasts among automakers.

Growth has remained relatively sluggish, retail sales have been checkered owing to the on-again, off-again pandemic restrictions, while big-ticket consumption has continued to be subdued.

However, China’s decision to wholly exit the heavy restrictions regime amidst reports of rising social tensions earlier this year appears to have led to an even faster transmission of cases.

The downstream effects on a beleaguered consumer travelled upstream and squarely landed on lithium producers, significantly dragging down the price.

Market sentiments around EVs cooled substantially in China, which accounted for nearly 52% of global sales in 2021.

Sales growth was particularly hard hit as government authorities rolled back cash subsidies and other incentives to support purchases by households.

An S&P Global report noted that passenger plug-in electric vehicle sales fell 55.8% on the month to 408,000 units in January.

Consequently, leading domestic automakers have been engaged in an all-out price war to win back the customer, further pressuring upstream developers.

Adding to the havoc, other reports suggest that given the severe divergence in spot and contract prices, some South Korean and Japanese buyers did not honour long-term purchase agreements.

Technology and the two-sided supply-demand curve

With prices rising sharply for much of 2022, Chinese EV subsidies encouraged the exaggerated production and stocking of batteries, squeezing lithium demand later in the year.

Chapman argued,

Supply chains adjust, they always do, and many onlookers make the mistake of looking at current issues without factoring in how supply chains are likely to react…both supply and demand react to rising prices – they always do. Higher lithium costs encourage producers of lithium-ion batteries to strive for greater efficiency, whilst lithium miners look at ways to increase production.

In short, higher prices drive lower prices.

With prices having zoomed to new highs last year, investment activity ratcheted up, bolstering mining operations and enabling a dramatic expansion in available resources.

For instance, Chapman points to the sizeable discoveries in Cornwall, UK.

In 2022, fDi Intelligence noted that combined estimates from British Lithium and Cornish Lithium suggest that hard rock production in the region could equate to 30,000 tons per year.

The discovery of such new deposits will likely ensure that supply bridges the gap with demand, keeping prices stable at lower values in the medium to long run.

In February 2023, the Geological Survey of India announced the discovery of a massive 5.9 million tons reserve in Jammu and Kashmir, which would likely go a long way towards making India ‘atmanirbhar’ in battery production, battery storage, solar and wind power.

In addition, the time-to-production is much more compressed compared to what is usually advertised, with Chapman noting that Cornish deposits identified in 2020 will likely yield 10,000 tons per annum by 2026.

Thus, prices have moderated sharply owing not only to the sluggish demand in China but due to the expansion of available reserves, a process which is likely to continue and sustainably pressure lithium prices.

If prices continue to decline, this may lead to a moderation in exploration activity in the following year, but the unlocking of new resources has already fundamentally changed the supply-demand equation for the metal.

Another crucial input that is often overlooked in favour of overweighting demand factors, is the consistently declining cost of technology.

Chapman argues that due to the gains led by consistent R&D, increased efficiency, and economies of scale,

Over the last three decades, the price of lithium-ion batteries measured in kilowatt hours has fallen by 97 per cent…. the cost of lithium-ion batteries per kilowatt hour was still likely to fall over time.  

Thus, lithium batteries are likely entering a sustainably lower price orbit which will continue in a downtrend as technological costs ease.

Geopolitical drivers

Today, the importance of geopolitics in redefining the lithium landscape cannot be overstated.

Key developments have included the passage of new US legislation, the response of European authorities and the discovery of fresh reserves in India.

The Inflation Reduction Act (IRA) is poised to have a transformative impact on global EV battery supply chains.

In particular, the legislation offers a $7,500 electric vehicle tax credit which would be available to consumers when 40% of the value of an EV battery is manufactured in the United States, or selected partner countries.

By 2027, this threshold is set to rise to 80%, providing a powerful impulse to shift manufacturing from overseas to domestic destinations.

Although China is the third largest producer of lithium, it accounts for 60% of the global lithium refining capacity for batteries, and in 2020, produced nearly 15 times the US’s total output of battery-ready lithium.

One can’t help but wonder if this is a leap that the US really can make, although the slowdown in China presents Biden and company with a unique opportunity to try to level the playing field.

Simon Moores, CEO of Benchmark Mineral Intelligence, notes,

…. (The IRA) has kind of connected battery makers or chemical makers with mining…the world is banding together to cut China out of the equation.

The legislation appears to have had a near-immediate effect, with General Motors investing $650 million into a Nevada mine to secure a source of lithium for future operations and sidestep rising geopolitical risks.

This is a huge injection of capital for an industry that is used to seeing projects and mergers in the tens of millions of dollars.

Similarly, Albemarle Corp is looking to build a processing plant for a whopping $1.3 billion in South Carolina, paving the way for considerably larger deals in the US lithium segment.

These developments have surely rattled the Chinese government, which has been forced to recently unwind EV subsidies, a powerful demand driver for lithium products.

To keep the competition at bay, Caixin reported that the Ningde-based Contemporary Amperex Technology (CATL), the world’s largest battery maker, has begun to offer automakers sharp discounts in exchange for exclusive long-term contracts.

USA-Europe tensions

The Ukraine war may have forced a realignment of European energy security priorities as well, with Moores noting that discussions on battery and storage technology have begun to take precedence over solar, wind and other cleantech projects.

Further, the EU’s decision to phase out conventional cars by 2035 is expected to keep demand high for lithium-ion batteries in the long term.

With the US positioning itself to take advantage of all major markets outside of China in one clean swoop, European administrators, battery manufacturers and automakers are feeling vulnerable.

Sizeable lithium reserves are present in Germany, Portugal, Spain, Finland and Austria.

However, the bloc has demanded additional benefits for industry, with the European Commission (EC) stating,

This scheme remains of concern to the EU, as it contains discriminatory provisions.

With tensions mounting, EC President Ursula Von der Leyen and President Biden met last month to discuss a yet-to-be-announced agreement to streamline an international EV battery supply chain.

Moores expects that when announced, a deal would likely allow investment in European mining to benefit from the IRA’s incentives in return for a fixed proportion of the production of chosen minerals, including lithium.

However, the EU is struggling to operationalize mines due to a convoluted permit process, as well as the competing interests of constituent states who may not find it convenient to comply with the supra-national entity.

Public opinion is also divided as safety and environmental concerns continue to plague lithium projects in the region.

Even though the US’s industry appears primed for rapid expansion, the USA-Europe coalition could prove to be a major geopolitical counterweight to China’s lithium processing industry, but only if leaders can secure more coordination at the sub-European level.

The outlook for the development of global supply chains in 2023 and beyond will to a great extent hinge on this relationship.

Outlook

Now into the second quarter, Chinese battery and EV purchases and consequently lithium demand is likely to stay subdued.

The increase in production capacity globally over the last couple of years is likely to weigh upon lithium prices, while entrenched fears of an escalation in pandemic protocols have kept consumers off-balance.

Given macroeconomic, public health and consumer uncertainty, the price trajectory is highly uncertain but owing to fresh lithium reserves and falling technology costs, Chapman expects,

…is likely to fluctuate (but trend lower) over time.

Soochow Securities estimated that prices may fall by a further 50% to CNY 100,000 per ton before recovering to CNY 150,000 in the summer.

This price consolidation forecast is likely due to factoring in improved car sales at the Shanghai Auto Show which takes place next week.

However, discretionary sales may remain muted despite cost benefits being passed on aggressively to end consumers by automakers.

Consumer appetite continues to appear bearish with the People’s Bank of China’s quarterly depositor survey finding that 58% of urban residents would prefer to save more than they did in Q1 2023.

In addition, a February study by ING Research found that EV demand as a share of total car registrations is likely to stagnate at 26% in China, while the growth of total car sales is estimated to decline by half this year.

This share was as low as 6% as recently as 2020 but surged due to generous government incentives, which are now being rolled back, adding to gloom for the domestic sector.

Weaker consumer demand and rising global capacity are likely to weigh on prices in the near term.

However, Moores noted that price support could come from an unexpected source,

I hear pension funds are coming in which is nuts. If pension funds want to invest you know, it is here to stay right?

Further out, demand for lithium in China’s EV sector should continue its upward trend with the same report noting that China will likely meet its 2035 target of EVs contributing to 50% of car sales a full five years ahead of schedule, possibly in part due to falling raw material costs.

Balancing these higher projections, are falling technology costs and significant investments in the exploration and establishment of upstream green field projects.

The metal’s demand is set to rise in the medium to long term, but the price trajectory of lithium will likely be much more accessible than even a few years ago.

Although consumer demand and technological effects are relatively predictable and will settle into a lower price trend, geopolitical factors remain a mystery.

For instance, the key threat to China’s industry comes with the rollout of the IRA, as Washington, D.C. looks to displace Beijing as the leading source for all things batteries.

Importantly, can Europe keep pace with the US? If they can not ink a deal, is this the end of critical minerals in Europe? How will China respond to the pressure being exerted on its market share? With CATL pouring billions of dollars into factories in Hungary, is Budapest destined to be the next great geopolitical frontier?

In a sense, all bets are off, and lithium supply chains could potentially see some radical shifts this year.

In the near term, as supply chains take time to realign and the global consumer remains edgy, prospects for lithium prices will remain negative.

By Q3, it shall become clearer if the lower price environment is helping demand for EVs recover this year itself.

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