Following the spike in Chinese spot prices experienced from the end of December 2020 through to the end of January, research agency Fitch Solutions Country Risk and Industry Research expects broad lithium prices to soon normalise.
Chinese spot prices for battery-grade lithium carbonate and lithium hydroxide have witnessed a rally since the end of last year owing to tighter supply. The rally intensified in January as Chinese lithium producers, such as Jiangxi Ganfeng, forecasted limited supply during the first two months of the year owing to increased downstream demand ahead of the Chinese Lunar New Year.
Despite rising by between 50% and 80% (based on lithium hydroxide or lithium carbonate) between the end of December 2020 and the end of January, lithium prices remain significantly lower than the highs experienced in 2016 and 2017 before they crashed in 2018, attesting to the remaining supply glut, Fitch Solutions says.
For instance, prices of high-grade lithium carbonate in October 2018 are still about 1.5% higher than the same spot price experienced during the present rally.
Lithium prices are, meanwhile, positioned to benefit in the medium term from the accelerating uptake of electric vehicles (EVs), underpinning the agency’s bullish outlook for a sustained recovery in prices.
Lithium is a critical raw material (CRM) necessary for the transition to a green economy, with applicable uses in lithium-ion batteries which are commonly used in EV manufacturing, as well as in electric devices or alongside solar panels to store excess solar energy.
In contrast to previous excitement surrounding overblown expectations of steep and sustained lithium demand from 2016 onwards, the global economy has made significant policy steps and environmental commitments during the previous year which will set the tone for reliable demand growth moving forward.
“Our automotive team currently forecasts the global EV fleet to average 23.6% year-on-year growth between 2021 and 2030, reaching 83.6-million EVs on roads worldwide by 2030 compared with 10.3-million in 2020,” Fitch Solutions comments, adding that, owing to this, it expects global lithium supply to wane in the coming years, as demand consistently rises, placing upwards pressure on prices.
Within this context, Fitch Solutions says significant investment in lithium developments is necessary to prevent a supply deficit within the decade.
According to news agency Barrons, it requires about 60 000 t of lithium carbonate equivalent (LCE) to produce one-million EVs, with the US Geological Survey reporting global yearly lithium production of about 410 000 t of LCE in 2019.
Assuming no growth in absolute lithium production and the Fitch Solutions automotive team’s yearly EV sales forecasts, the agency expects lithium supply to start running into difficulties managing demand for the automotive sector alone within the next five years, with a likely deficit by 2027 when global EV sales are forecast to reach 10.9-million.
While the automotive team presently forecasts EV sales to reach 14-million units in 2030, Tesla CEO Elon Musk stated in September 2020 that he expects EV sales across the industry to reach 30-million units by 2030.
At about 60 000 t of LCE needed to manufacture one-million EV units, Fitch Solutions says Musk’s goal requires the lithium supply stocks to reach 1.8-million tonnes of LCE, about 439% larger than global production in 2019.
Should industry demand rise this high, Fitch Solutions notes that it would expect global lithium supply to “likely be unable to accommodate such growth at the present project development rates”.
This presents considerable upside risks to lithium prices in the latter half of the decade, the agency laments, though it notes that the concerns over supply “are not new” and say that countries have been stepping up initiatives to strengthen their supply chains.
Financial support and investment incentives will continue to be critical for upstream producers to advance current lithium projects which have experienced delays stemming from dampened investor sentiment following the steep decline in prices beginning in 2018.
Recently, on January 26, the European Union (EU) approved $3.5-billion in subsidies for 12 member countries as a part of the European Battery Innovation project spanning the entire battery production chain, including extraction.
“We expect that government-led initiatives will help bolster lithium supply, alleviating some supply concerns. Additionally, we expect lithium hydroxide to overtake lithium carbonate usage in the longer term, benefitting from increased supply from hard-rock mining projects.”
Lithium carbonate will remain more-commonly used in battery-development in the short term, the agency says, noting that demand is evidenced by Chinese spot prices for lithium carbonate surpassing lithium hydroxide during the recent price rally for the first time since April 2018.
However, lithium hydroxide is likely to experience stronger growth in the coming years, aided by an increase in hard-rock lithium developments in Europe and Australia and advances in battery technologies favouring lithium hydroxide cathodes.
Lithium-rich spodumene extracted from hard-rock mines is able to be initially processed into lithium hydroxide, whereas lithium brines common in Latin America must first be processed into lithium carbonate before being changed into lithium hydroxide at an additional cost.
Moreover, Fitch Solutions says a rise in lithium hydroxide supply will also help narrow the price gap between the two forms of battery-grade lithium. An increasing desire to advance the performance of lithium iron phosphate cathode material will also support increased lithium hydroxide production, as auto manufacturers seek to reduce battery pack prices below $100/kW.
“We highlight an increased focus on sustainability in the entire value chain as a possible threat to lithium carbonate demand and thus prices down the line.
“As major economies extend the range of sustainability concerns upstream, water-intensive, carbon-emitting lithium brine operations could lose favour to greener lithium hydroxide practices such as carbon-neutral direct lithium extraction being developed in Germany,” the agency says.
It adds that the EU is also seeking to implement a carbon border tax to prevent ‘carbon leakage,’ which would likely raise the future cost of lithium carbonate imports from Latin America.