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.