LONDON – Even the mining industry’s super commodity of the future may be unable to avoid the Achilles heel of all mineral producers – a recurring habit of busting a boom with too much supply.

As miners of everything from copper to iron-ore wrestled with losses driven by global surpluses, prices soared for lithium, the light-weight metal used in rechargeable batteries. It’s easy to see why. Booming demand outpaced production thanks to the faster-than-expected growth in global electric-vehicle sales and the aggressive expansion plans of Elon Musk’s Tesla Motors Inc.

But a lot more lithium is on the way. The four largest producers – Rockwood Holdings Inc., Soc. Quimica & Minera de Chile SA, Albermarle Corp. and FMC Corp. – control as much as 90% of the market. With prices surging, those companies may now look to increase output, while a host of newcomers are racing to get into the business of producing lithium, which can be extracted from mines or by evaporating brine in salt ponds.

“We expect to see the peak in prices coming pretty soon,” said Robert Baylis, a lithium market analyst and managing director at London-based Roskill Information Services, who predicts prices will peak in the second quarter of 2017. “Normally these things don’t tend to last too long. You get a supply reaction in lithium. There’s more material coming on the market.”

So far, the big four have been producing below capacity even as prices rose, partly because lithium is a small part of their businesses. For example, FMC generated just 7.3% of its revenue last year from lithium, with the rest coming mostly from chemicals used in agriculture, health and nutrition. But with new players jumping in, the top suppliers will be forced to expand output to protect market share, according to Macquarie Group Ltd.

Expanding Capacity

Philadelphia-based FMC announced last month it would expand its lithium hydroxide capacity after signing a new supply agreement with a “major manufacturer” of electric cars. By 2020, the company expects earnings from lithium will double from this year.

Demand for lithium remains strong. Tesla, a maker of electric vehicles that will start selling its Model 3 sedan late next year, is close to completing a giant battery plant in Nevada dubbed the “ gigafactory.” Musk has sped up construction on the $5 billion facility to meet his goal of making 500 000 cars by 2018. That means the plant, a venture with Panasonic Corp. that will boast the largest footprint of any building in the world, will need to be making batteries for cars by the end of this year.

“Eventually, we will all be driving electric cars,” said Jeremy Wrathall, head of global natural resources in London at Investec. “We are definitely seeing a sea change.”

While lithium makes up only 2% of the material used in the Tesla batteries, and was once described by Musk as “just the salt on the salad,” the auto market represents a major shift in demand. Goldman Sachs Group Inc. estimates a Tesla Model S battery requires 63 kg (139 lb), compared with as little as 5 g (0.2 oz) for a mobile phone.

Prospects for increased demand are luring additional supplies outside the control of the big four, with higher prices making some projects more viable. Four new mines will start production next year, and as many as 15 more are on the horizon, according to Liberum Capital Ltd.

Demand for lithium in batteries is expected to double by 2020 from this year, according to Macquarie. As consumption grows, the market will need an additional 100 000 tons of annual capacity by 2020, according to Benchmark Minerals Intelligence Ltd., an industry consultant that specializes in the lithium-ion battery supply chain. Just over half the additional output will come from existing producers, requiring new entrants, said Simon Moores, Benchmark’s managing director.

While prices and demand have jumped, “supply has also responded more quickly than we thought it would, from Chile and Australia in particular,” Macquarie analysts wrote in an Aug. 8 note. “The latter should be a concern to market bulls because we previously assumed a market share battle would only ensue late next year.”

The market could be “significantly oversupplied” from next year, Macquarie said. One of the most significant additions has came from Orocobre Ltd., an Australia-based mining company that has begun producing from its Olaroz project in Argentina. Orocobre’s shares have surged 83% this year and touched a record in June.

Price Outlook

FinnCap Ltd., a London-based broker, estimates the price of lithium carbonate surged 30% in the past year to about $8 000/t, while some fetched as much as $25 000 on the spot market. Deutsche Bank AG forecasts that lithium carbonate will peak at $7,369 next year before trading in the $6 000-$7 000 range through to 2023. Macquarie predicts a rally above $8 000 next year and then a softening toward the end of the decade. Benchmark Minerals sees an average of $14 000 this year before dropping to $10 000 by 2020.

The expected moderation of prices reflects forecasts of supply increases that eventually will create a surplus, though analysts disagree on when.

While there was a lithium deficit last year, Macquarie expects a surplus this year that will last through 2021. Supply will grow 24% in 2016 and 30% next year, according to this month’s report, outpacing demand gains of 8% and 10%, respectively. CRU Group, a commodity researcher, predicts the surplus will arrive in 2019.

Car batteries are driving demand now, but tighter supplies may emerge again if the market develops for renewable electricity systems in homes, like Tesla’s Powerwall.

“The question you have to ask is how quickly can supply respond?” CRU’s Rebecca Gordon said.