Battery raw materials hit by a triple whammy

The lithium-ion battery industry is having a difficult time as over the past two years it has been hit by a triple whammy.

Troubles started in late-2018 with a surge of supply in cobalt and lithium as a number of new producers came on stream at the same time that existing producers were expanding capacity. The second hit came from weaker-than-expected demand for electric vehicles (EVs) in China after the government cut subsidies that came into full effect in the second half of 2019. The third shock was the demand hit that the Covid-19 virus dealt. 

A spot battery grade lithium carbonate price ex-works China at an equivalent of $5.65 per kg, as assessed by Fastmarkets, is the lowest the price has been since the battery grade series was first assessed in June 2015. Fastmarkets’ standard grade cobalt price, which is the industry benchmark price, has fallen to $13.75 per lb, which is the lowest since August last year, with prices down from a year high of $17, which was where prices were in late-February.

For nickel, metal prices fell by around 25% as the market reacted to the pandemic, but prices have since rebounded and were recently just 6.5% below where they were before the Covid-19 crisis struck. But spot nickel sulfate prices in China, as assessed by Fastmarkets, were at one-year lows and were down by around 9% since the start of the year. The nickel sulfate price has not rallied in line with the nickel metal price, which implies there is little concern about insufficient nickel sulfate supply. 

The short-term and long-term outlooks for the battery raw materials are polarized – the current situation is depressed, but the outlook for demand is second to none. Ironically, government policies to stimulate demand that the Covid-19 crisis has damaged so badly looks set to lead to EVs gaining market share at an even faster pace as governments offer incentives to buy them.

This has some interesting ramifications – while the low price environment for battery raw materials is delaying investment in new production capacity, a faster than expected uptake in EVs, as and when new vehicle sales start to recover from their Covid-19 hit, could bring forward supply deficits. 

In the United Kingdom, while new car registrations fell by 39.9% in June year on year, sales of battery-EVs (BEVs) and plug-in hybrid EVs (PHEVs) increased by 262% and 100% respectively, and accounted for 10% of total vehicle sales. In Germany, Europe’s largest auto market, plug-in EV sales accounted for 8.4% of the market in June, up from 3.4% in June 2019. EV sales in China totaled 104,000 units in June. The average monthly sales in 2019 were 100,500 units, so sales have recovered and upward momentum is expected to continue now.

Shortages longer term?
While there is no shortage of any of the battery raw materials now and the build-up of unwanted inventory, due to the demand hits, combined with idle capacity and some ongoing expansions, means there is unlikely to be any shortage over the next few years, the investment delays of today are likely to be sowing the seeds of supply shortages in the second half of the decade. This is especially likely given that we expect EVs to be much more mainstream after 2022-2023.

For now, the oversupply situation means that there is plenty of room for demand to recover and indeed grow before supply starts to get tight again, but there is little room for complacency. Ever more stringent environmental regulations, resource nationalism issues, and the desire to have shorter supply chains mean that the planning, permitting and construction of new capacity can take five to eight years and more to the point that getting finance is an uphill struggle in this low-price environment. 

Progress at many lithium projects has halted as developers have struggled to raise finance and investment decisions at nickel/cobalt projects are suffering the same fate. Glencore’s giant Mutanda mine that the market expects to be brought back on stream in 2022 may not be brought back on time if the market and political conditions in the Democratic Republic of Congo do not warrant the investment at this time.

It is interesting that for nickel, the new high-pressure acid leach (HPAL) plants that are being built in Indonesia, mainly by Chinese/Indonesian joint ventures, to serve the lithium-ion battery industry, are being financed by the Chinese using Chinese business practices. When the plants were announced, commentators generally thought that the plants were not economically viable. The Chinese obviously have a different way of making business decisions and have invested in anticipation that by the time the plants are operational, the extra class 1 nickel will be needed and the economic viability will not be in question.

The lithium market may need to think outside the box if financing is to be available in time to avoid shortages down the road. If financing is hard to come by under western business models, then maybe EV manufacturers (OEMs) will need to follow a different model by investing in operations directly, even if that does not make economic sense in today’s climate. OEMs are spending billions on EV capex, so they may need to make sure there is sufficient lithium and other battery raw materials to supply their plants. Buying into mines may bring with it other benefits since it would secure consistent supply and lock prices for the life of the mine. But this may be too far outside OEMs’ comfort zone.

Production climate
In the present climate, oversupply has weighed on prices, as has weak demand, but demand does look set to change for the better. Even if this is the case, prices are likely to remain fairly capped for a considerable time as there is significant excess supply capacity as well as stockpiles of lithium materials.

For lithium, Pilbara Minerals and Galaxy Resources have both reduced spodumene production due to weak demand and low prices, Alita Resources has halted output completely and is on care and maintenance, and Orocobre is matching production to its customers’ demand. SQM has said it will stockpile material to help meet demand increases in the years ahead and other producers who have not cut production are also believed to be building inventory as customers request shipments be delayed. The combination of idle capacity and inventory build should ensure producers are able to supply the market in a timely manner for a good few years, but if this leads to low prices, it further increases the risk of shortages down the road.

For cobalt, the production halt at Mutanda cut some 17% of global production, which would have helped balance the market had it not been for the drop in demand. On top of the weaker demand from the EV market as a result of Covid-19, cobalt demand has also suffered as some EV manufacturers in China, including Tesla, have opted to use lithium-ion phosphate (LFP) batteries that do not use cobalt. Given that Tesla’s Model 3 has accounted for 23% of the overall EV sales in China in June, the fact that going forward most of these Model 3 sales in China will not be using cobalt or nickel in their batteries will have dented the demand outlook for these two metals.   

The road ahead
Low battery raw material prices are expected to either lead to further production cuts or at least to existing cuts remaining in place until supply and demand are more balanced and excess stocks have been worked off. The good news is that there does seem to be a recovery under way in EV sales and that is expected to gain momentum as EVs gain a bigger share of the market.

The battery raw material supply chain seems out of sync with the outlook for the EV market. While EV manufacturers can build new capacity relatively quickly (Tesla built and got operational its Shanghai factory in less than a year) and battery, cathode and precursor manufacturers need one to two years to add capacity, the same cannot be said about building new greenfield raw material production – it can take between five and eight years. 

As such, a lot of new investment is needed to ensure that enough raw material is available in the second half of the decade. We know roughly where supply will come from for the period out to 2025 – when the lithium market is likely to grow from 300,000 tonnes LCE to around 800,000-900,000 tonnes – but where the second million tonnes that will be needed by 2030 comes from is less certain. It seems odd that few of the major metal and oil/energy producers have put their hat in the lithium ring yet, but maybe they have held back until they can enter cheaply.