Untangling multiple drivers of battery material markets

By IM Staff
Published: Thursday, 18 November 2021

The choice of battery chemistries, supply chain disruptions and consumer demand are a few of many factors with roles to play in the fortunes of battery raw materials markets this year. Fastmarkets expert analysts William Adams and Amy Bennett summarize the drivers at play and the outlook for lithium, cobalt, nickel and graphite in global battery production

Lithium booms

The lithium market started to turn brighter about a year ago – it has since become dazzling. Over the past 12 twelve months, the market has shifted from a state where the supply chain was destocked and stockpiles loomed to one where there is just no spare material around and extreme tightness prevails. Not surprisingly prices have shot higher, with those for lithium hydroxide on a cif China, Japan and Korea basis more than doubling since the end of 2020 (see chart).

Demand has grown considerably faster than the market was expecting and this has happened because government policy has stoked demand for electric vehicles (EVs) and energy storage solutions (ESS). Having to provide stimulus to their Covid-19-ravaged economies, governments have funneled money to boost their green agendas. In many countries, this has included generous incentives to buy EVs.

In Europe, automakers have also faced penalties if the average carbon dioxide output from the cars they produced is not below 95g/km. Combined, this has led to a strong rebound in Chinese EV sales and massive growth of the same in Europe (see charts). Sales in the United States have also started to climb strongly, albeit from a low base. 

On top of demand for EVs, the need for ESS is growing at a fast pace with the world relying more on renewable energy, which is generated intermittently. In the first nine months of 2021, Chinese EV sales were up by 200%; in the first half of the year, EU EV registrations were 168% higher; sales in the US and Canada rose by around 100% in the first half.

But the extent of the price gains is not just due to strong demand, supply has also been constrained. Despite the run-up in prices, producers’ responses have been limited. Idle production has taken longer than expected to restart. Indeed, at some plants, the decision to restart has still not been made because owners want to tie in the restart of mining to the commissioning of new downstream processing facilities. Expansions at existing mines and new capacity have been delayed due to fallout from Covid-19, often because restrictions on the international travel of key personnel, such as engineers, have hampered efforts to complete projects. As a result, supply has become extremely tight, with spodumene spot prices rising by over 500% to $2,250 per tonne, from the low price ($375 per tonne cif China) seen in late 2020 (see graph).

New supply is on the way. Indeed, a lot of new supply is expected to come on stream in 2022, which will help alleviate the tightness.

But, given that the supply chain’s stock has been depleted, the time it takes to ramp up new capacity, the qualification process that material from new production lines requires, and that every growing downstream production line will need increasing amounts of working stock, means the market is expected to remain tight next year, but perhaps not as tight as it is now.

Lithium-battery grade spot prices, cif China, Japan & Korea

Nickel consumption surges

While the amount of nickel consumed by the lithium-ion battery market is relatively small, with about 5% of nickel going into batteries in 2020, it is growing at a fast pace. Fastmarkets expects the EV market to consume at least 17% of nickel supply by 2025. 

Like lithium and cobalt producers, nickel miners face a massive challenge if they are going to keep up with demand, especially with demand for EVs continuing to surprise on the upside.

But nickel producers face an even bigger challenge since it remains unclear whether all types of nickel ore will be able to be used by the battery industry, or only the ores that tend to be used to make class 1 nickel products, such as metal and those that feed high-pressure acid leach (HPAL) and heap leach operations. About 45% of nickel ore would be suitable to make class 1 products, with 55% suitable for class 2 products, such as nickel pig iron (NPI) and ferro-nickel. If only the class 1 ores (nickel sulphite and limonite ores) can be used, then supply of nickel to the battery industry is likely to be tight and shortages could occur. But if all types of nickel, including saprolite ore, can be used then there will be less risk of tightness developing. 

We should get a better understanding of the situation in 2022 once China’s CNGR Advanced Materials and Huayou have trialed converting nickel matte, from class 2 ores, into nickel sulfate. When news emerged in late February 2021 that these companies were attempting this, nickel prices fell sharply because the market thought there would be less risk of tightness caused by demand from battery manufacturers. Prices have since recovered and moved past the highs seen in February, but that has been driven by supply disruptions in New Caledonia, Russia, Finland, Australia and Canada, strong demand from the stainless steel industry – as infrastructure projects start to unfold following last year’s government stimulus packages – and from surprisingly strong EV sales.

But, like cobalt, greater use of lithium iron phosphate (LFP) batteries, especially in China, which contain no nickel, has meant demand from the battery industry has not been as strong as it may have been, although stronger-than-expected growth in EV uptake in Europe and North America will no doubt have offset the weaker growth in China.

Nickel supply, suitable to make nickel sulfate, is expected to recover in 2022, as refined nickel, nickel matte and nickel mixed hydroxide/sulfide precipitate operations recover from this year’s disruptions and as new HPAL operations ramp up. This could be further boosted should China’s CNGR and Huayou also successfully produce sulfate from class 2 ores. While it might prove economically viable to make sulfate from nickel matte, the other consideration is whether it can be done in an acceptable enough, environmentally friendly, way.

LIB share of nickel market-percentage 

Cobalt crosswinds

Cobalt prices have rallied strongly this year with the Fastmarkets standard-grade metal price up by 73% at $26.45 per lb compared with the end of 2020 (see chart), but the market is being buffeted by both head and tail winds. Logistical issues due to Covid-19 precautions have kept the cobalt hydroxide market, one of the main cobalt feed sources for the lithium-ion battery market, tight as transport across land from the Democratic Republic of the Congo to South African ports remains disrupted. Also the sky-high cost of container shipping and the length of time material is in transit are other factors behind the tightness.

Some aspects of demand have become a headwind, notably the greater use of LFP batteries that use neither cobalt nor nickel (see chart). The greater use of such batteries, which is mainly being seen in China, has meant that demand for nickel-cobalt-manganese (NCM) lithium-ion batteries has not been as strong as it would have been had there not been a resurgence in the use of LFP. In addition, those using NCM batteries are tending to use batteries with higher-nickel and lower-cobalt weightings.

While cobalt use in batteries in China might not be growing as fast as was expected, the rapid growth rates in EV uptake in Europe and North America are expected to more than counter the headwind from China. For now, European and North American EVs are predominantly being fitted with NCM and NCA (nickel-cobalt-aluminium) lithium-ion batteries. In time, EVs in Europe may go down the LFP route, but we expect the models being rolled out now were designed to have NCM batteries, so it will take the roll-out of new models in a few years’ time that may be designed with LFP batteries, and these are probably going to be taken up by fleet and light commercial delivery vehicles.

Another present and near-term headwind for cobalt is the state of the consumer electronics (CE) market that has been negatively affected by the semiconductor shortage, which will have an impact on demand for lithium-cobalt-oxide batteries (LCO) that have a 60% cobalt weighting. About 26% of cobalt is used in the CE industry, so the slowdown here will have an impact.

While last year demand from CE ballooned as workforces and schools had to work from home, which boosted demand for laptops and mobile devices, this year was likely to see lower demand anyway. That has been made worse now as the chip shortage constrains manufacturing throughput. For example, Apple has cut its production schedule for the iPhone 13 by as many as 10 million units in 2021 owing to the chip shortage.

Cobalt standard grade, in-whs Rotterdam 

China's Li-ion battery production 

Graphite’s dependence on China

After exhibiting relatively stable price performance for much of the year, graphite prices have posted impressive increases in recent weeks, spurred higher by a combination of rising costs and tighter supply in China, shipping issues and higher freight rates, and stronger than expected demand from the EV battery sector this year.

Fastmarkets’ graphite spherical 99.95% C, 15 microns, fob China assessment was $2,769 per tonne in October, up by 22% from $2,275 per tonne in the same month last year. We expect graphite prices to remain elevated in the fourth quarter of 2021 and into early 2022 as rising electricity costs and reduced power availability squeeze graphite supply and diminish producers’ ability to stockpile material to sell over the winter months when extremely cold temperatures in northern China prompt graphite capacity closures.

Numerous challenges are ahead for the graphite industry as it develops to meet the needs of the rapidly growing EV sector. While debate persists around cathode chemistries, with LFP cathode gaining ground in China in recent months at the expense of NCM cathode, these various lithium-ion battery chemistries are all utilizing graphite anodes. In the coming years, exponential growth from the EV sector will propel the industry’s graphite requirement far above demand from traditional consuming sectors.

Unlike other battery raw material markets, notably lithium, where insufficient near-term supply is propelling prices higher, graphite supply is less of a challenge for the industry, as is reflected in largely stable price movements this year. Instead, the challenges for the graphite sector center on the relative advantages and disadvantages of synthetic graphite versus natural graphite, and the desire for US and European automakers to reduce their dependency on China.

From a performance perspective, EV automakers prefer synthetic graphite, citing its superior fast-charge turnaround as well as battery longevity. The manufactured nature of synthetic graphite also gives the material an advantage in terms of consistency of supply quality relative to natural graphite. Synthetic graphite, however, is costly, power-intensive, and environmentally unfriendly, with supply centered in China.

Natural graphite enjoys a cost advantage relative to synthetic graphite - natural graphite is roughly half the cost of synthetic graphite. Although natural graphite supply is also dominated by China, with approximately 62% of total supply in 2020, new natural graphite projects are more diverse, with numerous projects in Africa helping to diversify the supply base. Natural graphite lags synthetic graphite, however, in the key areas of performance and consistency.

Development of graphite projects outside of China targeting the EV anode sector is progressing, reflecting the desire of the EV and battery sector to diversify supply away from dependence on China and China’s dominance in the graphite sector. Although natural and synthetic graphite are produced in numerous countries globally, China produces well over 90% of the world’s graphite active anode materials (AAM), controlling the market for coated spherical purified graphite (cSPG). Investment in the AAM sector in North America and Europe and other areas is key to the desired localization of supply in these key regions, but progressing from mining graphite to producing AAM is a lengthy process, with China poised to maintain dominance in this area at least until the post-2025 period.

Graphite spherical 99.95% C, 15 microns, fob China $/t