William Adams considers recent trends and the global outlook
in present uncertain economic times.
We are still at the dawn of the lithium battery era
– the tipping point for electric vehicles (EVs) and
energy storage systems lies ahead. But while we know that
demand for lithium-ion batteries will start to grow
exponentially before long and that supply will subsequently
struggle to keep up, the present situation is very
Demand is facing headwinds, in China and to a lesser
extent the United States, and supply is being reined in due
to oversupply and weak prices. These negative developments
will in time mean even stronger demand growth later when
pent-up demand is unleashed; producers will have an even
greater challenge to make up for the time they have lost by
having to put projects and expansions on hold.
This stop/start evolution is typical of commodity markets,
especially when demand is relatively small, but mining/brine
projects by their very nature tend to be large. For example,
lithium demand in 2016 was around 200,000 tonnes of lithium
carbonate equivalent (LCE), but new projects coming on stream
at the time had an average capacity of around 20,000-25,000
tonnes per year. So when five new projects started to ramp up
in a period, as was the case between 2015 and 2018 when
Orocobre, Pilbara Minerals, Altura Metals, Alita Resources
(formerly Tawana Resources), and AMG Lithium started up, it
is easy to see how the market became oversupplied.
Worsening matters is that this oversupply has coincided
with a fall in demand, caused for the most part by a
structural change in China - in the second quarter of 2019
the Chinese government revised its subsidies for EV
manufacturers. Subsidy changes in the previous year caused
sales to dip before a strong rebound (see chart). Sales
slumped between July and November last year, however, after
the second set of subsidy changes.
There were three core reasons for this. First, EVs with
ranges of below 250 km per battery charge received no
subsidy, which effectively increased the cost of the cheaper
EVs, and those with bigger drive ranges received a reduced
subsidy. Second, China’s economy was suffering
from the prolonged US/China trade war. And third, growing
numbers of reports of battery fires and EV recalls had
started to reduce buyers’ enthusiasm.
China’s sales dropped by 4% in 2019 from 2018
after they had risen in that year by 62% from 2017.
The outbreak of the novel coronavirus (2019-nCoV) has
further hit EV sales and production hard, with sales in China
over the first two months of this year falling by 62% from a
In the US, EV sales remain erratic – they grew by
40% year on year in 2016, by 22% in 2017 and by 85% in 2018
before falling by 10% in 2019. We wait to see what impact
2019-nCoV now has on sales. The collapse in oil/petrol prices
may prove another headwind for EV adoption in the
Given that EVs have been the main focal point for
lithium’s demand outlook and China has been the
market leader in EV uptake, the drop in sales in China has
unsurprisingly knocked confidence in the lithium market. The
slowdown in the US has also proved a drag.
Change in front runners
Another structural change set to benefit demand for EVs,
this time in Europe, is the phase-in of tighter vehicle
emission rules in 2020-2021. These will force auto
manufacturers to reduce carbon dioxide emissions from the
vehicles they sell – carbon dioxide output per
vehicle must average below 95 g/km, with high penalties for
exceeding this threshold.
This means original equipment manufacturers (OEMs) will
target battery-only EVs (BEVs) and plug-in hybrid EVs (PHEVs)
to compensate for the petrol and diesel vehicles they sell
that have high carbon dioxide emissions. Ahead of the change,
European EV sales were gaining momentum – plug-in EV
(PEV) sales grew by 45% in 2019 to 564,206 units from 2018.
The outlook is exemplary – once Europe has either
overcome the virus or acclimatised to it.
With EV sales in Europe now likely to gain market share at
a fast pace for many years ahead of a ban on sales of
internal combustion engine (ICE) vehicles, two main drivers
seem set to emerge for EV growth and therefore lithium
demand: Europe and China.
We expect the slowdown in EV sales in China to be
temporary given Beijing’s focus on cutting
pollution, its desire to lead the world in EV technology and
because the auto market in China is not yet saturated. Car
ownership per 1,000 people is 173 in China compared with
about 600 in Europe’s four largest countries,
590 in Japan and 837 in the US.
The introduction of a wider choice of EV models alongside
price falls stemming from new battery technology and
economies of scale means that sales in the US and rest of the
world are likely to grow. We therefore remain very bullish
for lithium demand from the EV sector, especially since EV
penetration rates are low. Globally, PEV sales accounted for
3% of total vehicle sales in 2019, so there is huge room for
Although the lithium market is currently
oversupplied, low prices are forcing producers to rethink
their production plans, which has already led to output cuts,
producer stockpiling and the halt of some expansion work. The
production cuts will help to rebalance the market, which
should start to cushion the price fall, and delays to
expansions should again bring forward supply shortages.
While the former is constructive, that is by rebalancing the
market, the latter is a potential problem given that the
demand outlook is for exponential growth in a few years. As
well, halting expansion plans runs the risk that producers
will not be in position to raise output to keep up with
While new downstream capacity can be built relatively
quickly – in one-to-two years for an OEM EV
production line (Tesla, for example, built its Gigafactory 3
in Shanghai in just under a year), with similar times
required for battery, cathode and precursor factories
– it generally takes 5-10 years to bring on new
greenfield raw material supply. Judging by the difficulties
encountered by incumbent producers to expand brine output, it
can take between two and four years to raise production.
The raw material then needs to be qualified for all
downstream use, which can take some parts of the supply chain
more than a year to complete. The upstream part of the
industry is therefore the biggest area of concern.
Hardly a week goes by without an announcement of billions
of dollars of investment in downstream capacity while lithium
junior producers are struggling to raise development cash.
Although some of the large incumbent producers have bought
into some junior projects – SQM’s
investment in Kidman’s Resources’
Mt Holland project, Albemarle’s buy into Mineral
Resources’ Wodgina project and Ganfeng Lithium
taking a majority share in Lithium America’s
Cauchari-Olaroz projects, for example – other global
diversified miners have not significantly bought into the
lithium space. Many lithium juniors are therefore struggling
to advance because they are struggling to secure funding.
The three projects listed above have combined capacity of
about 100,000 tpy of LCE; according to our model, demand will
rise by 50,000 tonnes in 2021, 70,000 tonnes in 2022, 100,000
tonnes in 2023, 145,000 tonnes in 2024 and 220,000 tonnes in
2025. To meet this demand growth, many more new projects and
expansions will be required. The industry appears to be
cutting it fine to ensure availability of enough raw material
in a timely manner.
While the low lithium price environment over the past year
or so has delayed investment decisions, 2019-nCoV is piling
additional stress on to financial markets, which is likely to
delay those decisions further.
In summary, the environment of low prices is leading to
production curtailments – a necessary development to
help rebalance the market. Although the outlook for demand
had been for stronger growth this year, the coronavirus
outbreak is likely to delay this outcome. This could mean
prices stay low for longer, thwarting investment decisions
for longer. As well, the global fallout from the coronavirus
may further delay urgently required investment decisions if
supply has any chance of keeping up with demand once EVs and
energy storage systems become more mainstream.