Liam Montgomery - Dealer
Global Investment Markets Team
16 Nov, 2022

Lithium has become one of the hottest topics over the past 18-24 months, with many listed lithium companies seeing meteoric rises in their share prices over this period. The supply and demand issues have been widely reported during this time, leaving lithium spot prices to skyrocket. In the past year we have started to see varying reports on what the future of the landscape looks like in terms of supply and demand, making some wonder if we’re in a lithium bubble or not. In this note we will cover the consensus forecast for lithium supply & demand, how exactly lithium fits into the electric vehicle (EV) space and the challenges users of lithium face as lithium prices continue to remain elevated.

Supply & Demand

Demand for lithium is expected to continue to grow at a steady pace, as demand for EVs continues to rise. Global EV penetration is currently being forecast by the street to reach somewhere between 30-55% by 2030. This is leaving supply as cause for concern, as to whether demand can be met before lithium prices become uneconomical for those requiring it.

While demand is expected to increase as EV penetration forecasts suggest, there is risk to the demand side where demand may end up softer than expected due to cyclical factors – namely in Europe, as recession fears heighten.

Lithium supply is expected to ramp up markedly as producers try to come to market, to capitalise on the significant increase in demand over the past few years. Some forecasts are suggesting an increase in global lithium supply of 44% YoY, however it is worth noting that some of the supply forecast globally will be coming from either unproven jurisdictions or hasn’t even been commissioned yet. In some of the cases where lithium price forecasts are incredibly bearish, they forecast significant supply shortages which don’t marry up with the price forecast. Given these potential issues surrounding the quality of the lithium and whether the lithium will be mined with no delays, it is worth taking some of the heavily increased supply forecasts with some scepticism.

All in all, market tightness is expected to remain, keeping prices elevated. This tightness has been highlighted by the fact that we have seen some recent reports that some miners have been selling low grade spodumene as downstream users are looking to get their hands on any quality lithium compared to the more normal standards.

Lithium & it’s role in the future of EVs

As the world of EV’s evolve, most people have an understanding that lithium is a key component required to manufacture the batteries that are required.  But it is worth while discussing how varying types of lithium end up in batteries to help gain a better picture of the flow on effects.

There are two main ways to get lithium, either through a brine or through mining hard rock or spodumene. When miners go down the brine path, they generally produce lithium carbonate – the less preferred lithium compound, however they can turn it into lithium hydroxide through some further processing, which has been the case for some Australian miners. The alternative to brine in hard rock mining of spodumene allows producers to go straight to lithium hydroxide, this is more capital intensive than brine, but it is faster and producers a more high-end product.

The extracted lithium will then generally end up in one of two battery types, lithium carbonate ends up in Lithium Iron Phosphate (LFP) batteries, while lithium hydroxide ends up in Lithium Nickel Cobalt Manganese (NCM) batteries.

LFP and NCM batteries each have their own advantages over the other, however LFP batteries have an advantage in their cost competitiveness due to the use of lithium hydroxide and other expensive metals like nickel and cobalt in the creation of the NCM battery. This cost advantage has seen LFP batteries have larger demand growth (primarily out of China) in recent times compared to the demand growth of NCM batteries.

NCM batteries have a lithium intensity advantage over LFP batteries, however this advantage has been combated through the ability for LFP battery packs to create modules that are packed into the battery pack. This modular technology isn’t available at this stage for NCM batteries due to issues surrounding the stability of the chemistry from lithium hydroxide. However, forecasts believe that in the long-term, hydroxide producers will outshine their carbonate counterparts as these hurdles are overcome.

Challenges ahead

The supply side challenges are well documented, and they do pose a threat to the economic viability of the use of lithium in EVs. As lithium batteries in EVs currently make up about 40% of the car cost and with lithium making up over 35% of the cost of the battery, this is a significant increase from 2 years ago where this was 4-5%.

Recycling of the batteries also poses a significant challenge to the industry. There are three key issues associated with recycling:

  1. the cost of recycling – mainly due to labour
  2. the recycling itself and quality control
  3. potential legal issues regarding battery ownership

The battery packs are made to be incredibly difficult to break, this means a lot of hours has to go into breaking up the battery pack before the contents can be recycled. Currently there is no uniform battery pack meaning it’s near impossible to add significant amounts of automation to this process meaning increased labour and time is required.

Once the battery has been broken down there is still the actual recycling of the metals to be completed, metals either have to be resynthesised or have their surface cleaned. The cleaning of the surface makes it very hard to maintain quality control in the metals.

The final challenge is the potential for legal issues. In some cases when an EV is purchased, you actually lease the battery and own the car, while others you own everything. Consumers will feel the right to have their battery recycled in a low-cost manner after the battery has ran its life cycle.

Ways to invest in lithium

Australia has many listed lithium producers including AKE, MIN, PLS. There are also various international producers such as CATL, ALB, SQM. In addition, there are ETF (Exchange Traded Fund) options as well that provide a wider breadth of exposure to the lithium sector from battery metals to EVs. Examples include ACDC.ASX and LIT.US

The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.