(L) Lithium★ Featured Topics​Commodities

Bearish Lithium News Overestimates Production, Underestimates Demand

Up until a few months ago, the general consensus was that lithium markets were dangerously undersupplied. The resulting lithium boom caused prices to double in the last two years, rising as high as $16,500 per ton. However, there are now some forecasting a supply glut. Such predictions have rattled the industry that is undoubtedly experiencing an uptick in miners’ discoveries and projects, but such a rapid reversal remains questionable at this point.

The most prominent projection of lithium oversupply came in late February from Morgan Stanley. The investment bank expects price per ton on battery-grade lithium carbonate to fall 45% by 2021. Their analysts attribute such a crash to new lithium projects and planned expansions by the largest producers in Chile who “threaten to add” around 500,000 tonnes per year to global supply by 2025. Only weeks later, commodities research house Wood Mackenzie released their own report, forecasting a decline in the price of cobalt and lithium this year which would turn into a rout from 2019 onwards.

Indeed, nations around the world are expanding or opening brand new mines, dedicating millions in new investment, but the two aforementioned reports seem to assume that all of them will yield ideal results. Considering lithium mining is still not a perfect process, this will most likely not be the case.

When extracting the ultra-light metal from brines in evaporated salt lakes (aka “salars”) – the most common means of lithium production – major capital costs for these lakes must be met to achieve a decent net evaporation rate. Additionally, setting up a brine field is a huge time investment that takes years. It took some seven years for the Olaroz brine project to complete the long course from exploration to first delivery of a product. Expanding a field and adding new ponds will require at least 9-12 months for each individual salar to mature and begin producing a concentrate that can be harvested and processed into lithium carbonate. Any kind of sudden shift in demand or supply gap due to miner strikes, natural disasters, etc., that may occur over the next few years cannot be quickly counteracted.

The other method of procuring lithium, hard rock mining, where the lithium is mined from granite pegamite orebodies, is even less efficient. Lithium products derived from brine operations can be used directly in endmarkets, but hard-rock lithium concentrates need to be further refined before they can be used in value-added applications like lithium-ion batteries. Production cost is roughly twice that of the brine exploitation process, but neither the Wood-MacKenzie or Morgan Stanley reports make a clear distinction between the procurement costs of brine versus hard rock.

Further, only one brine mining project and zero hard rock projects have been put into full production over the last two decades. And when done so, it’s been by the major lithium producers in just four countries – Chile, Argentina, China and Australia. This exposes something in the industry no one talks about – a lack of skilled personnel to get involved with mineralogy/metallurgy and the engineering of mining projects that many countries are not familiar with.

Overestimations of lithium supply have been made before. In 2012, thirteen major mining companies from around the world planned to add over 200 ktpa (thousand tonnes per annum) of production by 2016. When 2016 arrived, however, the total amount of added lithium supply from these companies totaled only about 10% of that goal.

Demand, the other side of the economic equation, may also be underestimated. Chilean miner SQM has projected demand for lithium carbonate to grow by 600-800kt (thousand tonnes) over the next decade, requiring at least $10 billion of investment over that time period to keep track with current demand.

And, considering the share of electric vehicles on the road will need to reach 12% in order to comply with international climate targets by 2025, we could see a sudden increase in EVs and plug-in hybrids on the road, perhaps up to ten times the current number. Many countries continue to step up legislation to achieve this goal as China rushes to secure lithium supply for the 1.3 million electric vehicles already on its roads, with sales increasing by double digit percentages each year. Annual electric vehicle sales are expected to hit 24.4 million by 2030. If China alone was to follow through on its 100% electric promise sooner than expected, this could disrupt the market with a minimum of 28.03 million lithium-ion battery packs for EVs per year, equivalent to the amount of all automobiles the country sold in 2016.

Finally, speculation that lithium-ion batteries may be replaced by an alternative such as sodium, zinc, or aluminum is becoming less likely as lithium becomes safer and more efficient. The lithium battery has been plagued with incidents of battery combustibility. The occurrence, compared to the massive number of lithium-ion batteries powering laptops, phones and other devices around the world, is extremely rare, but still being taken seriously. Lately, scientists have been using solid-state nanowires to increase the conductivity of a battery’s electrolytes and allow them to sustain more stress. Flammability was decreased when the nanowire was paired with the cathode and anode of the battery.

Other improvements to cathodes, including the replacement of some or all cobalt, have also ended up improving battery performance. Cobalt makes lithium-ion batteries less attractive because of its limited availability and ethical implications, since much of it is mined in the Congo, sometimes with child labor. Just recently, researchers found that disordered cathodes which use metals other than cobalt — such as manganese — in their cathodes are far less expensive than cobalt, and have 50% more capacity.

Investors can gain exposure to lithium battery technology via the Lithium and Battery Tech ETF (LIT). MRP added Long Lithium as a theme on October 2, 2017. Over that period, the LIT has fallen 12% against the S&P 500’s gain of about 4%. Negative reports have played a large role in the decline of LIT, but long-term fundamentals should eventually turn this trend around.

 

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