Explained: Why Lithium Prices Have Surged 400 Per Cent Despite The Planet Having Vast Quantities Of It

Lithium prices have jumped to their highest in more than three years thanks to an upsurge in electric vehicle sales and depleting stocks of the battery material in top consumer, China.

Price of Lithium carbonate in China extended its rally to 426,500 yuan/tonne in mid-February, marking a gain of 50 per cent so far in 2022. This translates to a whopping price increase of more than 400 per cent from 2020 and is attributed to an imbalance in global supply amid huge demand.

Boom bust Boom

Back in November 2017, the spot price for battery-grade lithium carbonate in China peaked at 175,000 yuan per tonne. The price increase was driven by China’s subsidy-driven roll-out of EVs. The collective supply response, particularly from hard-rock spodumene producers in Australia, then proved far too strong, leading to the price bust of 2018-2020.

The price bust meant that new mines had to be mothballed, expansion projects deferred and explorers backed out of new project pipelines. The result has been that producers are ill-prepared to meet the current demand surge.

Total global production, measured as lithium carbonate equivalent (LCE), was forecast in December at 485,000 tonnes in 2021, growing to 615,000 tonnes in 2022 and 821,000 tonnes in 2023, according to Australia's Department of Industry.

Credit Suisse analysts are more conservative, seeing 2022 output at 588,000 tonnes, and of 2023 at 736,000 tonnes, and forecast demand outpacing supply growth, with demand at 689,000 tonnes in 2022 and 902,000 tonnes in 2023, and about two-thirds of that for electric vehicle batteries.

Demand explosion

The surge in demand for EVs, whose sales have surged, is primarily behind the huge rise in lithium prices.

According to Adamas Intelligence, a record 25,921 tonnes of lithium carbonate equivalent batteries were deployed to roads during December 2021, a 68 per cent increase on the year and a 31 per cent increase on the month.

Lithium’s exponential usage curve simply mirrors the equally fast rise in global sales of EVs using lithium-ion batteries. Nearly 6.5 million electric vehicles (EVs) were sold worldwide in 2021, up 109 per cent from 2020, a new report said. Nearly 85 per cent of these were sold in Mainland China and Europe.

Chinese sales of new EVs rose by 157.5 per cent to 3.52 million units in 2021 - half of all electric cars sold worldwide, and 2 million more than were sold in the country in 2020.

The push to reduce cost of EVs using a form of battery that doesn’t include nickel or cobalt - lithium iron phosphate (LFP) - is accentuating tightness in the market for carbonate feedstock, and is fuelling lithium carbonate’s white-hot rally.

With EV sales poised to experience rapid growth globally, the demand for more gigafactories involved in EV battery production is rising. So-called gigafactories - a term coined by Tesla CEO Elon Musk - are facilities that produce batteries for electric vehicles on a large scale. Each needs to build up working stock before they can be delivered, translating into a huge but largely hidden call on lithium.

The Lithium criticality

This metal is third on the periodic table, the lightest solid element on earth, and an essential material in the lithium-ion batteries used for electric vehicles and energy-storage systems.

Lithium-ion batteries offer a longer life cycle as compared to traditional lead-acid batteries. However, the main reason for their high adoption in EVs is their high energy density. High energy density allows lithium-ion batteries to store more energy in less weight/volume, which is an ideal requirement for e-mobility applications.

However, because of its high reactivity, pure elemental lithium is not found in nature but is instead present as a constituent of salts or other compounds. Similarly, most commercial lithium is available in the form of lithium carbonate, which is a comparatively stable compound that can be easily converted to other salts or chemicals. Lithium carbonate, the main source for lithium, is a stable salt that is refined to produce lithium. According to Barrons, 5.3 tonnes of lithium carbonate can be refined to produce one tonne of lithium.

The source dilemma

There’s no geological shortage of Lithium. Global supplies of minerals for current battery chemistries are not considered to be resource constrained. Recent analyses indicate that for most key constituents, sufficient supplies should be available to meet projected increases in demand.

With respect to lithium, most studies indicate that supply can outpace demand based on significant reserves and a diversity of extraction technologies.

For example, a recent study by Bloomberg New Energy Finance data (BNEF) found no long-term issues with global supply of lithium. Under optimistic projections for lithium demand, only a very small share of extractable reserves of lithium will be required for global EV battery production through 2030. The lithium requirement to meet projected demand for EV batteries in 2030 is about 60,000 metric tons - just 0.7 per cent of known global reserves.

A recent study led by researchers at MIT, University of California Berkeley, and Lawrence Berkeley National Laboratory concluded that supplies of most of the key constituent elements of the current generation of Li-ion batteries, including manganese, nickel, and natural graphite, are sufficient to meet the anticipated increase in demand. Meeting all expected global battery needs through 2030 would require just two per cent of currently recoverable lithium reserves.

Structural shortage

While there is plenty of lithium on the planet, it isn’t being extracted and refined quickly enough to keep up with the rapidly growing demand.

Benchmark Mineral Intelligence (BMI) estimates a 26,000-tonne shortfall in 2022 and a 300,000 tonne by 2030, as miners struggle to keep up. A report from Emerging Tech forecasts a lithium deficit between 455,000 and 1.7 million metric tons each year by 2030.

Supply squeeze

Experts believe the world’s shortage of lithium would last for another three years at least, but the scrapping of Rio Tinto's Jadar project in Serbia could exacerbate the shortfall of the key battery mineral.

The Serbia government has revoked the licenses for lithium mining to Rio Tinto, an Anglo-Australian multinational mining organisation. The $2.4 billion project was scrapped after the country was hit by large-scale protests over significant concerns about the potential impact of the mine on the local communities of the Jadar valley.

The Jadar project in western Serbia near the town of Loznica, discovered in 2006, is Rio Tinto’s flagship project in the batteries minerals sector. At full capacity, the Jadar mine was expected to produce 58,000 tonnes of refined battery-grade lithium carbonate a year, making it Europe’s biggest lithium mine by output. The Jadar lithium project was planned to commence production in 2027.

The decision announced on 20 January shows how it’s getting increasingly difficult to build new mines - even for commodities at the center of the world’s efforts to decarbonize. With growing concerns about future supply of lithium, prices have spiked to records this year as demand surges.

Long-term Agreement

Lithium consumers in the EV battery supply chain are seeking longer-term contracts with producers to secure supplies for as long as possible in a market where shortages have propelled prices to their highest in three years.

The recent case is that of Australian battery materials company Liontown Resources which has signed a five-year agreement with leading electric vehicle maker Tesla to supply lithium spodumene concentrate to the later.

Under the deal, Liontown will supply up to 100,000 dry metric tonnes (DMT) of spodumene concentrate in the first year that will be produced at its under-construction Kathleen Valley Lithium Project in Western Australia. The supply will be increased to 150,000 DMT per annum in subsequent years.

The agreement with Tesla comes close on the heels of another long-term off-take agreement that Liontown signed with South Korean battery maker LG Energy Solutions. The company said that more than half of its planned production is now covered by long-term agreements with leading battery makers and EV companies like Tesla and LG.

Tesla also has a lithium supply deal with China-based Ganfeng Lithium, the world's top lithium company by market capitalization. The deal grants the automaker a three-year supply of battery-grade lithium, starting from 2022.

Will lithium production increase in the coming years?

The lithium shortage has been labeled as the great EV raw material disconnect by Simon Moores, CEO of Benchmark Mineral Intelligence.

The extent of the challenge can be gauged from the fact that it takes at least five to seven years to build a lithium mine.

The next big ticket lithium project that is expected to start in 2022 is Lithium Americas in Argentina. Located in Salta, Argentina, the Pastos Grandes lithium project started in 2011 and is under development. It’s a good example of how long these things take and why we need to carefully calibrate our strategy.