Price: Like Salt on the Salad

“Our [battery] cells should be called Nickel-Graphite, because primarily the cathode is nickel and the anode side is graphite with silicon oxide… [there’s] a little bit of lithium in there, but it’s like the salt on the salad.” – Elon Musk, Tesla CEO

Presently, the battery accounts for 25–35% of a fully electric vehicle’s cost.  Battery costs, the biggest obstacle to wider adoption, have fallen an astonishing 73% per unit of energy from 2008 to 2015.  With investments into battery research and development accelerating, we expect lithium-based battery (LiB) costs to continue declining, speeding up adoption.  The global battery production capacity is to increase by over 5x over the next few years, with more than $20 bn of plant capital already committed.

Lithium accounts for 3–8% the cost of an average LiB.  Thus, price fluctuations will have limited impact on demand.  While lithium of different composition and specifications get priced differently, lithium carbonate (LC) has been the benchmark to gauge where demand and supply balances.  We expect long-term lithium carbonate prices to average ~$10,000/t, up from ~$5,000/t for much of the early 2010s.

Supply security of this critical material has become a top priority for global technology companies.  Developers with quality assets can get project funding for offtake agreements. 

Demand: Step-Change with Electric Vehicles

“As the world moves towards an electric future, [battery] raw materials [like lithium] are likely to play as important a part as oil did in the 20th century.” – Henry Sanderson, Financial Times

Lithium is the lightest of all metals and has great electrochemical potential, resulting in an unbeatable power-to-mass ratio.  Lithium is also the least dense solid element and has high heat capacity.  Historically, lithium was used in ceramics, glass, lubricating greases and other industrial processes.  However, rechargeable battery growth has elevated lithium from a mature industrial chemical into a fast-growing critical material.  Merely two decades after Sony introduced the first LiB, lithium-based chemistries have come to dominate batteries that power portable electronic devices (Exhibit 2).  LiBs have superior energy density, rechargeability, energy efficiency and environmental impacts.  For mobile applications where weight is a major consideration, LiBs can expect exponential growth ahead.

Exhibit 3 below explores how the lithium market is in the early stages of a demand shock.The amount of lithium required in EVs is orders of magnitude higher than that for smartphones, laptops and power tools.While the number of EVs sold remains minimal, its demand is impacting lithium markets.Over the next decade, we expect the EVs to CAGR at 20–35%.Partially driven by emissions standards, manufacturers like Nissan, BYD and Tesla are bringing EVs with long-enough range and affordable-enough price to appeal to the mass market.As part of China’s bid to tackle its pollution crisis, the government has introduced subsidies to achieve a target of five million EVs on the roads by 2020, including 0.2 million electric busses.

The market for batteries in grid electricity storage systems could also be sizable, due to the rapid rise of renewable power generation.  Electric grids can generally accommodate low levels of intermittent supply.  However, at higher levels of renewable penetration, grids struggle to match variable demand with intermittent supply.  As energy storage becomes critical, utilities are starting to use giant battery packs for stationary storage, charging them during periods of excess solar/wind generation and releasing short bursts of electricity at peak demand.  Goldman Sachs expects all-in costs of a LiB system to reach parity with ‘peaker’ natural gas plants by 2020.  Between 2000 and 2014, the global solar photo-voltaic capacity multiplied by 126x and wind capacity increased by 23x.  Over the past six years the per-unit cost of wind and solar electricity fell 61% and 82% respectively (Lazard Levelized Cost of Energy – Version 9.0).  Best-in-class unsubsidized renewable power is now cheaper than fossil fuel alternatives, and further cost declines are accelerating renewables adoption.

Supply: Higher Cost Production Needed

Lithium is a relatively abundant resource but low-cost supply has been unable to keep up with the hectic pace of demand growth.  Cheapest lithium comes from the ‘Lithium Triangle’ of Chile-Argentina-Bolivia, which holds 60–70% of the world’s identified reserves.  Brine from sub-surface reservoirs are pumped into ponds and allowed to evaporate before chemically extracting the lithium.  Chilean politics are complicating production additions and Bolivia – keen on indigenous development – has rejected international capital markets to expedite the process.  Investors are just warming up to Argentina after the election of a business-friendly government in December 2015. 

 In 2016 more than half the world’s lithium will come from hard-rock operations, prominently Australia and China.  While hard-rock mines can be brought online faster, they generally have higher cost and lower mine life (Exhibit 4).  Mined lithium provides a price umbrella that allows new projects to achieve a quick payback.  Lithium can be recycled from batteries, a practice on the rise but still costs ~$20,000/t.

In time, disruptive lithium extraction technologies (from clays, brines without evaporation, the Salton Sea in California) and recycling may help drive battery growth.

One reason for lithium supply to lag demand has been poor execution of development projects and expansion plans.  In 2004, three large chemical companies provided 85% of the world’s lithium.  Beyond the political challenges identified above, these diversified industrials did not aggressively pursue growth and are losing market share.  The lithium market remains too small to attract the major mining conglomerates.  Projects pursued by junior mining companies over the last decade have failed or been delayed due to undercapitalization and/or lack or expertise.  Australian developer Orocobre in Argentina, RB Energy in Quebec, Simbol Materials in California and others have struggled with cost overruns, commissioning delays and project failures.  Thus, each operator’s abilities have to be carefully weighed against valuations before investing in this sector.

Beyond its culinary appeal, salt was a payment mechanism that enabled some ancient economies to function, hence is the root of the word 'salary.'  However, contrary to the idiom, salt was probably never worth its’ weight in gold.  Lithium salts that enable batteries are fast becoming a key to our high-energy future.  Markets are just starting to realize lithium’s worth as long-term contracts converge with elevated spot prices.

(Editing by Pablo Ruiz)