We’re likely to see a lot more critical supply deficits in the near future. Can you give us some insight into what you’re seeing in terms of supply and demand?
It’s been a very interesting year in terms of the supply/demand gaps, or lack of gaps, in some materials. I think the major actor in this has been China.
If you look across the battery materials sub-sectors, I think China has come out of left field in a lot of these areas and really caught us by surprise. The obvious one is the nickel industry, where we’ve seen this huge investment in nickel laterite in Indonesia, primarily by Chinese companies, which has brought through a lot of supply. A lot of naysayers, myself included, said, well, it’s going to be very difficult for them to go the NPI/matte battery intermediate route because it’s very carbon intensive and dirty.
Of course, they’ve gone right through and done it. We’ve seen OEMs not bat an eyelid about the carbon intensity and negative greenhouse gas impact of that approach. So, the Chinese went left field last year in nickel, and they’ve gone left field over the last 12 – 18 months in the lithium industry, with a huge investment in lepidolite lithium production.
Now, China is increasingly investing in hard rock lithium assets in Africa. While we didn’t see an awful lot of increase coming through in Africa in 2023, the chances are we’re going to see a substantial increase in output in 2024. That’s going to have quite a significant impact on near-term supply and demand balances in lithium. It probably won’t impact the medium to longer-term situation too much (which we still see as pretty tight), but certainly in the near-term it looks like there’s going to be a lot more material than the industry was expecting coming out of Africa.
We’ve seen a similar situation in graphite, because the price of oil went quite low, we’ve also seen production increases in synthetic graphite, which have taken out some of the demand in natural graphite and natural graphite anode material this year. In cobalt, we’ve seen a similar situation to nickel, with a lot of material coming out of Indonesia. Then in manganese, we’ve certainly seen more material than we were expecting from China.
Of course, all of this is in a slightly lower than expected demand growth situation for these battery materials in 2023. At the end of 2022, we saw a substantial oversupply in cells, which brought forward a lot of the demand into the back end of 2022 and, going into 2023, we saw quite high inventory levels of raw materials, cathodes, and anode cells, through the system. That translated into much slower demand growth for materials, which is why prices plummeted at the beginning of the year.
So, this has been very much a supply and demand inventory-led year. There are signs that the next 12 – 18 months will continue to be driven by inventory restocking and destocking events, until we get a re-acceleration in end market demand.
How do you see all of that impacting pricing for these battery metals?
It’s a very difficult question. There’s a reasonable amount of cost curve support for some of these materials. I don’t see things going materially lower on the downside, otherwise we’re going to have to start to see production cuts.
In cobalt, we have a very interesting situation, because we’ve seen this higher-than-expected production come out of Indonesia. We’re now seeing production out of the DRC reopening and there’s a big stockpile that was there, which is now being processed in China, and then made available for the market.
What cobalt struggles with, is that it’s effectively a byproduct. There aren’t many pure cobalt operations in the world. At the moment, it’s certainly fair to say that there is an oversupply of cobalt in the system. Until we get an industrial recovery in China and the Western world, it’s likely that cobalt prices are going to be bouncing around the bottom.
In lithium, I see the next 12 – 18 months being very much a short-term cycle basis. The big issue is the marginal cost of production, and many commentators believe that the marginal cost is the cost of lepidolite production in China. But, we also have a situation where there’s another big clump of the industry (which is non-integrated lithium hydroxide conversion capacity in China), which uses spodumene source.
If spodumene concentrate prices go down, then cost of production is going to go down as well. There is a potential, if we do have a big surplus of spodumene concentrate next year, that lithium prices could go a little bit lower over the course of 2024 than they’ve bottomed at in the previous 12 – 18 months of this cycle. I do think it’s going to be quite volatile in the lithium market, and we may very well see prices fluctuating between US$20 and US$30/kg without putting in any major trends.
Graphite is also a very interesting one. If oil prices go up, as they have been over the last two or three months, then synthetic graphite becomes less economic vis-à-vis natural graphite again. And hopefully, we start to see a recovery in graphite demand.
So, I think it’s going to be a very interesting and differentiated in the next year or two, by material, because there are different drivers at play in all of the different battery raw materials.
How do changing battery technologies impact that demand forecast?
That is always the long-term issue when we talk to mining companies about coming into the raw battery material sector. They’re always, “well, how do I know in 10 years’ time that we’re going to be using the same materials?” Over the course of this year, we’ve seen a lot of speculation about sodium-ion batteries or high manganese lithium-iron-phosphate (LFP) batteries and that’s really changing the conversation an awful lot.
I’ve done a lot of work on sodium-ion batteries over the last six to 12 months, and I don’t really see large electric vehicles (EVs) being at risk of demand substitution. There is potential for demand substitution in small EVs and battery energy stationary storage, which may be the best applications for sodium-ion batteries. That could be relevant to balances, but not the be-all and end-all.
The big issue with sodium-ion batteries is that the bulk of them still use a layered metal cathode. The anode is a material called hard carbon, which has a very small market size. You’ve got to raise capacity in that market and it’s going to take several years to come through. So, all these doomsayers that suggest sodium-ion is going to jump in on top of lithium-ion in the next 12 – 18 months; it’s going to be extremely difficult to add capacity in that market.
The other interesting story we’re seeing is the adoption of high manganese LFP batteries. These batteries will have higher energy density than the traditional LFP batteries and potentially be cheaper. From the point of view of the high purity manganese producers, this could cause a very significant move in the industry that’s already looking at very tight medium and long-term supply demand balances. This could make those balances tighter still. So it’s very good news for the high purity manganese makers, if this technology moves forward the way we expect it to move.
How do you see governments and other financial institutions addressing these shortages? We’ve seen a huge influx of different government regulations coming out, most prominently the Inflation Reduction Act (IRA) in the US. Are they being impactful on the supply?
As with all things government, I’m afraid there’s a bit more hot air than actual action for now. We saw the IRA being announced a little over a year ago and we still see the bulk of the grants and loans going to midstream and downstream projects. There is still very little in the way of support in the upstream.
The issue with the upstream is not just finance either. The issue is planning, and we need to see streamlining in the planning applications, in the environmental approvals, in all these areas, which governments can definitely help with. At the moment, we’re just not seeing that help.
I know several projects in Europe that have been stuck in the planning process for four or five years now, just not moving forward. Indeed, there was an element in the European Critical Raw Materials Act talking about streamlined planning, but the “streamlined” planning was still three or four years. It wasn’t a rapid planning approval process.
We need to see support for the mining industry at the government level. There is a huge range of government engagement, but one of the issues companies are running into is that governments still don’t really understand the industry. They don’t understand the ins and outs and how impactful the planning bottlenecks can be on bringing forward a mining project. They don’t understand the huge upfront capital requirement of projects and how these delays can impact a company’s ability to raise capital.
It’s great that we are starting to see governments opening the financing taps, but we also need them to help the industry in other areas as well. At the moment, that’s not really happening. A few governments, for instance, the Canadian government is helping on the very upstream, on the exploration business with flow-through financing. Nevertheless, we’re still seeing relatively little support on the development side of the industry, which is very important for taking these projects through to fruition.
Then we also need support from the downstream industry, because if you want to build a mining project or processing plant in Europe or North America, you’ve got to understand that, that project’s operating costs are probably going to be higher than they will be out of China. Therefore, are the downstream parts of the industry going to support the development of an upstream supply chain in the Western world? That’s a big question as well.
One of the biggest discussion points right now is the regionalization of supply chains and making sure that the batteries are mined and processed within these borders. Can you comment on the impact of this regionalization or deglobalization trend that we’re seeing?
We’ve got the European battery passports coming in the next couple of months, and that’s going to be very interesting because it requires cell makers to derive a certain amount of material from local sources and a certain amount from low carbon sources.
We’re already seeing elements of the Chinese supply chain looking to be able to monitor and produce low carbon, environmentally friendly material. The Chinese part of the supply chain is adapting to that legislation that’s coming through, or its certainly trying to. The big question is, as that legislation matures and requires more and more clean and local material, how enforceable is that actually going to be? Because at the moment, there just isn’t lithium supply in Europe, and there isn’t that much in the way of supply of other metals, certainly not enough to supply a fair proportion of the industry.
We need to see proper buy-in, but we also need to see realism from the downstream. Operating in Europe and in North America is more expensive than operating in China, with the cost of regulation, etc. We either need to see a broad brush relaxation in regulation from the EU and North American governments (which I’m not convinced is going to be politically acceptable), or we need to see an understanding from the downstream that prices for products made in the EU and in North America with a lower carbon footprint are going to have to be higher.
At the moment, we’re not seeing that acceptance from the downstream industries. For instance, we’re seeing European OEMs bang down the doors to go and invest in Indonesian nickel operations, which are quite dirty and carbon intensive. But, we’re not seeing them investing in, for instance, Canadian or Brazilian sulphide nickel operations, which would be a lot cleaner.
We need an understanding from the downstream, and if that understanding is not there and they can’t afford that, then we need to talk about governments potentially subsidizing these operations. Because it costs a lot more to build a critical material project in Europe or the US and even more to operate. We’re not going to be competitive on a global basis unless we have either government or customer support.
How do investors or end-users take environmental impacts of things like Indonesian nickel into consideration when evaluating ESG? Is this part of the equation?
You have a huge range of ESG and normal investors, some of which are interested in ESG as well. At the major ESG part of the range, some ESG investors won’t invest in mining because it’s too dirty. Those who will invest in mining will absolutely differentiate between a high carbon intensity project and a low carbon intensity project, or a project with good social management and a project with poor social management, or companies that are exhibiting poor governance.
At the very strong end of the ESG spectrum, there is differentiation. Lower down the spectrum there’s a lot of lip service paid to ESG, and I think a lot of generalists just don’t really understand the ins and outs of the industry.
I will say from the point of view of the life cycle, for instance, of an EV, one of the things that we always bang on about with EVs is that you drive them out of the showroom and straight away you’re sitting on a very substantially higher carbon footprint for your EV than you are for your internal combustion engine (ICE) vehicle. You have to drive your EV for five to 10 years before you reverse that.
Now, if we can successfully regionalize our supply chain, deglobalize away from China, for instance, setting up a North American supply chain based on Canada or operations in western Europe that are much lower in terms of carbon emission, we can remove a lot of that carbon overhang.
It’s actually in the environmental interests of OEMs and consumers to invest in regional supply chains as well as it is from the point of geopolitical security. It’s going to be very interesting over the next five to 10 years to see what the carbon impact is of EVs that are manufactured using graphite, lithium, and possibly phosphate versus nickel, cobalt, and manganese that are mined in the West, for instance, and processed in North America using clean hydroelectric power. Then the cells are manufactured in Canada, the US, or Europe using clean hydroelectric or renewable power. Then, the EVs are manufactured in those regions as well. Also minimizing the amount of transportation between regions because that’s very carbon intensive.
What you will find, is that the carbon overhang on those vehicles is materially lower than the average carbon overhang for current EVs. Fingers crossed that can have a very positive impact on the space.
