Where are you positioned in terms of supply, demand, and pricing for lithium right now?
There’s a lot of division in the market as to whether we are oversupplied or undersupplied. As always, lithium is never dull. I think part of the problem is that people just look at aggregate supply and say there’s enough. Even in my models (and I’m a believer of a structural deficit), supply and demand this year, at an aggregate level, are the same.
However, not all lithium is qualified to go into a battery. When you pass out unqualified material, you end up with a shortage. That said, we predicted a shortfall last year. There was, but given the expected change in subsidies around the world, there was a buildup in battery and cathode inventory, and more than expected. So, the supply was actually even bigger as a shortfall.
Then, this year, we see Chinese operations drawing down on those inventories at those levels and causing a bit of a shakeout.
From the demand side, I’ve read some nonsensical things about China. The growth hasn’t been as much, it’s still well in the 30s after having had a huge year last year. In the first few weeks of September, electric vehicle (EV) penetration had reached 40%. If you look at EV sales growth in the US, Europe, and the rest of the world, everything is on track for roughly around 14M units. No surprises there. On the energy storage side, we are outlier bullish.
Whilst the US is growing more quickly and Europe’s on a similar growth pattern, China is still at more than half of EV sales and that’s LFP based. But the bottom line to your question is, I don’t know how inventories have held out this long. I’d be surprised if we don’t see some restocking at some point.
I have been surprised at the resilience of the inventory drawdown, but I still expect a slight shortfall on battery grade and qualified material. I feel like wherever we are at now ($160,000 Chinese yuan, or US$22,000 VAT inclusive) in China spot, it is obviously not all of the price. I do think that a lot of material comes off. Low-grade lepidolite (a source of lithium) doesn’t work at these levels, and non-integrated producers don’t make money at these levels. So, we should see a slow-down and hopefully a price rise.
Can you expand a bit on the challenges of lepidolite production, particularly with regards to ESG and other issues? What kind of impact do you think this is going to have on battery grade lithium supply?
I’ve seen some big bank analysis on this, and again, it doesn’t make sense. You can’t have low lithium prices and high production of low-grade lepidolite. It’s one or the other. You can’t cut it both ways. If lithium prices were to fall further, a low-grade lepidolite doesn’t make sense at these levels, and you need a very high number to produce a ton of chemicals. First of all, you’re having to dig up a multiple of what you would for spodumene. On the low end of lepidolite, three times the tons. We are talking about moving an enormous amount of dirt and then you’ve got to process that and its waste.
Now, the other industries that would typically take that waste don’t have infinite demand for it. At some point, how much can you scale it and can related industries absorb? They can’t absorb an infinite amount so you’re going to run into some trouble.
Aside from that, on the low-grade end of it, they just don’t make money below about US$30,000/t. Economically, it doesn’t make sense. As demand grows, does one then find a happy medium where they are the marginal cost producer and they can just keep going? Possibly, but it doesn’t solve your waste problem. I don’t see it as a fix-all of lithium supply in the longer term. There are limits, and if China wants to do any kind of crackdown on dirty mining or on limiting waste, they are going to slow that industry down.
You started to touch on the energy storage sector earlier in your outlook. How is this important for the lithium outlook? How does it weigh in and how will it compare to the EV sector moving forward?
At RK Equity, we are outlier bullish on energy storage. If you look at how much of the expansion in power production globally is coming from renewables, it’s a very large percentage and you need backup storage for that. You also need an emergency supply. We don’t agree on quite a few things in the lithium and battery side with Elon Musk, but I agree in terms of quasi-infinite demand for the Megapack. I think if you look at the economics of that versus peaker plants in providing short-term supply, energy storage is a great product. The only thing that can derail it in my forecast is if sodium-ion proves to be a material threat and scales quickly enough. In my forecast, I believe that lithium-ion battery energy storage demand can be a terawatt hour by 2030, which would compare to maybe four EVs. It could be a meaningful market.
You’re already seeing certain battery companies make specific format and higher amp hour cells just for that market. Tesla’s got Lathrop. They are ramping up to 40 gigawatt hours at some point either this year or next, and then they’re going to build a plant in Shanghai. They’ve gone from selling just over a gigawatt hour of energy storage to 80 gigawatt hours by the middle of next year. That should tell you what they see in it. And we know CATL and others are also operating in this space. The market consensus is probably around 500, maybe the most bullish, 600 gigawatt hours. But I’m at a terawatt by 2030 for that market.
Chile has some of the world’s largest untapped lithium resources and they now have a new government model for lithium mining. How does this impact the sense of resource nationalism that we’ve seen growing globally?
I’ve seen commentators go to great pains to say this is not nationalizing. They’re essentially saying we don’t have the expertise and we might not have the money, but we want to partner and possibly run the show. So, where does that leave the operator? SQM has done a great job of diversifying. They bought into Mt Holland and Azure Minerals at a great price.
I know Codelco is in conversations with LPI, but essentially you have almost tapped out the Atacama with Albemarle and SQM at their production capacity. I don’t think, from an environmental perspective, they can push the needle much harder than that. It’s very easy to say there is lots of lithium reserve in Chile, but they take environmentalism pretty seriously. Fresh water is an issue. I don’t have a problem with the government paying close attention from an environmental perspective because that’s fair enough. It’s important and there are a lot of communities that live there, but from an economics perspective, the royalties that SQM pay are eye-watering. Above US$10,000/t, it’s 40%. So, it’s a great earner for Chile.
From a marketplace and country that was struggling, to growing production above the immediate potential, I’m not sure that implementing this new policy is going to be an investment disincentive. If you compare it to Argentina (which at the macro level has a million challenging things going on), they seem to be able to run and inspire new investment even though there are currency controls and all sorts of things going on. The bottom line is that it’s going to secure new investment and appeal to people coming into the market if they can’t control the project or see a heavy hand of government involved. That’s going to be a disincentive, and it’s going to be an optical illusion how big the lithium reserves are, versus what they’re actually going to produce out of there. The talk is that Argentina is going to step over them as the next biggest producer, which in theory, given their challenges, is a real achievement versus what Chile’s doing.
Let’s look at some of the biggest threats to the overall EV thematic. Is it the supply chain issues, government regulation, consumer attitudes, or other factors?
I get sort of bashed a bit whenever I quote EV sales for BYD and other people because they include plugin hybrids, and everyone says that’s not an EV. It’s the way we measure EV sales. The problem is, for example, Cape Town, has 30 public charging stations in the whole city. So realistically there, and in many other places, plugins are likely to be the bridging gap between when infrastructure is ready to go and when it isn’t.
Even if EV adoption economically makes sense, you’ve still got to be able to charge it. In South Africa, they have loadshedding. From that perspective, range anxiety, infrastructure, or charging is going to be a challenge in the developing world because it’s not the same as in places like California. That’s not how it’s going to work in the developing world. They’re most likely going to be below-cost Chinese EVs, for example, that come in the same way that cars have taken market share.
I believe that lithium-ion battery energy storage demand can be a terawatt hour by 2030, which would compare to maybe four EVs. It could be a meaningful market
The second, of course, is price. The low hanging fruit of the very high-cost internal combustion engine cars that have a lot of margin built in around brand, you can then compete and sell in the upper end with a battery pack that’s efficient. Now the question is, can you compete in the real car market at around US$20,000 for a car? I noticed the latest price assessment of an average battery cell was under a hundred. It’s now US$96 a kilowatt-hour. So cheaper batteries are always going to make it better for EVs to compete. But you want range and choice at the lower end, and that’s always going to be harder.
Then, the question is if it swings Democrat or Republican in the US, is that going to cause an issue with the IRA and incentives? I don’t know if that is enough to derail.
Getting it cheaper is always helpful. It’s range, charging infrastructure, and price. Part of the problem in terms of getting people to embrace EVs, of course, is you need a lot less personnel and labour to build them. It has far fewer parts, complexity, and you need less servicing. In certain economies, like Germany, 13% of the labour force is auto related. You’ve got the UAW strike going on now in the US. Jobs are going to get lost in the shift to EVs, so how does that sit politically? Europe is now talking about doing an investigation (because China’s now got 20% of the EV market in Europe) of China-made cars. So, if you’re not careful, that number could run to any level.
Looking at the longer term cost, how the economics are going to look, impact to labour, and how it plays out politically in certain jurisdictions, there’s a lot to consider. China jumped, now they produce most of the cathodes and batteries, they make a lot of EVs – they’re well ahead. How do you now scale up in Europe or the US, to compete and export? It’s going to be very tough. Politically, that’s a headwind. I do think other applications are different, like two and three wheelers (regionalized markets), trucks, and energy storage. The US has taken a step in the right direction with the IRA, but it’s a tough road with a new technology when someone’s got a 10-year head start or more.
Looking forward, what are some of the major impacts on the market and what we should be looking for as we go into 2024?
We said it all along, everyone thought high prices will cure high prices and the market will do its own thing like it does in other commodities related to the auto industry. With OEMs, cathodes, battery cells; you need to secure supply and you need to secure price. There’s no good in just signing an offtake if you’re going to end up paying a fortune for that material. So, what we have seen and what we are likely to continue to see is a lot of M&A activity. You are going to see the downstream looking to secure supply and price in some shape or another. The other thing that we’re seeing is consolidation in the industry. You’re starting to see MinRes and Albermarle moving in on certain projects.
They’ve also worked out you can’t have unregulated, undisciplined production of raw material, specifically spodumene, where these big projects can just do their own thing and bring stuff to market. That’s a real threat. We’re seeing an attempt by ex-China and MinRes looking to make an intermediate product. Miners are looking to control the process by which their spodumene is converted and then sold. You’ve got Pilbara doing a deal with POSCO, and so on. The model of sending spodumene to China and hoping that they manage the market properly, that’s stopping, but that trend will continue. It’s not going to be easy to onshore your own supply chains in Europe and the US, but they are trying, and it is the right thing to do.
With respect to selling spodumene to third party producers, do you want tier two and three converters in China, possibly with weak balance sheets, to determine what the lithium chemical price is, or would you rather have Albemarle and MinRes, etc., do it? I’d much rather have a transparent listed integrated person who is motivated and can withstand some of the bumps in the road that invariably a very fast-growing commodity is going to have.
Continued M&A from downstream looking to buy up, continued M&A from incumbents looking to secure a bigger piece of the pie. SQM tries to keep 20% of global production in its hands. Albemarle is trying, and so is Danfin. I think the rise of bigger merged entities, Allkem and Livent, has done a deal. And then fingers crossed, my theory on inventory rundown is right and we should see prices have an uptick if demand stays firm. The Cybertruck is about to launch in mass production, and the semi, and so on. So hopefully that will bring a lot of demand and you’ll have more and more models coming on stream. In Europe in 2025, the carbon emission standard will adjust, so they need to also move some EVs. That normally comes in the year before. So, 2024 should see an uptick there.
