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.
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.
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.
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.
