Lithium is rapidly becoming one of the most important elements on earth due to its use in Lithium-ion batteries. The demand for electric vehicles (EV) and consequently the Lithium required for their batteries has skyrocketed recently but the price of the element has remained low due to a surplus in supply. Whilst the explanations behind EV and their impact on Lithium prices are relatively simple, the implications for investors rely on market predictions which can be unpredictable.
Whereas Lithium-ion batteries are used in multiple different devices such as phones, tablets or laptops, the rising popularity of EV is expected to be the driving force behind Lithium demand (Figure 1). This is simply because the large charge capacity of car batteries means that larger quantities of Lithium are required. In fact, a Tesla model S uses approximately 63kg of Lithium whereas a typical laptop battery uses just 4.8g. With Tesla targeting delivery numbers in the region of 500,000 cars in 2020 alone, it is clear that much more Lithium will be required to supply all EV manufacturers.
Currently, Lithium prices are extremely low due to a surplus in supply, with the element’s extraction historically dominated by five major players (in order of market share: Albermale, Ganfeng, SQM, Tanqi, Livent Corp). These companies have the industry infrastructure and technical knowledge to benefit from an increased demand for Lithium. However, the push towards a carbon-free society is motivated by social pressure and not the advancement of technology facilitating progression. This means that the methods for mining Lithium are not yet efficient enough to reduce the overhead costs of extraction. Also, as the predicted demand for EV is yet to materialise, the required economies of scale for Lithium extraction are yet to be established which narrows the margins for an already expensive process.
This makes Tesla’s announcement that they had acquired a 10,000-acre plot in Nevada to begin Lithium extraction an unusual move. The firm refused to confirm whether this decision was to encourage the market leaders to increase production and therefore win Tesla’s business, or whether it is a genuine move towards vertical integration. Regardless of the motives, the impact on the markets were clear with US companies Albermarle and Livent Corp facing increased competition and as a result losing 1.7 billion USD in market value the following day.
Tesla clearly feels that whilst at present Lithium supply exceeds requirements, that may not remain the case in the future which could lead to higher Lithium prices. Currently, EV still only account for roughly 1% of the global fleet but Bloomberg predicts that by 2040 31% of global vehicles will be electric. Social concerns for the environment, cheaper running costs and a COVID-19 induced desire to avoid public transport are thought to be the major catalysts for growth in this sector.
COVID-19 has also caused the predicted growth in demand to be delayed with EV sales dropping 79% in February from years prior whilst Lithium extraction has continued, further reducing prices. Even before COVID-19 Lithium carbonate prices were falling from the high point of 25,000 USD/megaton (mt) in 2017 to around 10,000 USD/mt today. Morgan Stanley is predicting prices to plummet by a further 30% through to the end of 2025.
Despite this, energy consultancy firm Wood Mackenzie suggests that 50 billion USD of investment will be required to meet the anticipated demand for Lithium. Tesla, among other EV manufacturers, are eager to keep these prices low in order to manufacture cheaper and therefore more appealing cars. This position is helped by estimates for the quantities of Lithium hidden below the Earth’s surface (Figure 2 – The Economist) thought to be conservative, with actual stocks much higher. This makes it difficult for companies to restrict production and manipulate prices as there are opportunities for companies like Tesla to mine for the element themselves in alternative locations.
Given that the automotive market is predicted to drive Lithium demand (FT), and that sales of EV are forecast to grow, the price of Lithium is expected to be heavily dependent on EVs. However, this explosion in demand is yet to occur. The current lack in demand coupled with large quantities of Lithium yet to be mined has driven prices even lower. With EV manufacturers hoping to maintain cheap costs, and Tesla even suggesting mining for the element itself, there is no guarantee that Lithium prices will increase alongside the predicted demand for electric vehicles. This makes the implications for investors incredibly difficult to analyse with most choosing to invest elsewhere until there is more data available.
Analyst: Taylor Alexander
Sector Head: Daniel Aliwell
Editor: Harry Forbes-Nixon