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Lithium demand stirs supply, price concerns

Date: 07/07/2016

Financial observers call it the “the world’s hottest commodity.” Goldman Sachs has reportedly dubbed it the “new gasoline,” according to a recent expose in The Economist. Most of us could end up calling it “gone” in our lifetimes.

Lithium is a substance most of us had not even heard of 30 years ago. Vast reserves of it lay dormant in mines across the continents of Asia, South America and Australia. That all changed when engineers devised a way to make it the core ingredient in rechargeable batteries.

Close to 40% of all lithium is used in batteries. Twenty four percent is used in glass production, with remainder used for lubricants, refrigeration, polymers, metallurgy and certain medical applications. This soft, silverfish substance is said to be the lightest and least dense of all solid elements, making it an ideal power source for mobile phones, power tools and laptop computers.

Though the world’s brightest battery minds insist lithium supplies will last another 360-odd years, it’s anyone’s guess how the planet’s insatiable thirst for energy will skew those projections. In fact, recent history is rife with stories of the relatively rapid depletion and extinction of animal species and natural resources. Ironically, humans’ desire to source alternatives to fossil fuels may greatly accelerate the exhaustion of lithium literally centuries ahead of schedule.

Gigawatt fever

Still, to channel Mark Twain, reports of lithium’s demise may be greatly exaggerated.

It remains one of the earth’s most abundant elements. It is sourced primarily in mines from the Australian outback to the salt lakes of the Chilean Andes and Chinese Himalayas. “There is no physical shortage of lithium in the long-term,” John Mothersole, director of research, pricing and purchasing service at IHS, tells us. “Everything I’ve read indicates that mineral reserves globally are ample. This does not mean that market ready supplies will be available in sufficient quantity to meet demand levels over the medium term – the next three to five years.”

But several trends are conspiring to make many observers to furrow their brows over lithium’s future.

Among them: the planet’s obsession with storing energy and the potential for rising costs of lithium extraction. According to IHS Technology, South Korea, Japan and the United States for the first time each exceeded a record 100 megawatts of annual energy storage installations in 2015. Other world regions are close to following suit.

And if electric vehicles put fossil fuel-powered combustion engines on the path to extinction, the current three centuries’ worth of the world lithium reserves could quickly shrink to zero in just 17 years, according to Greentech Media’s interpretation of mining data from the U.S. Geological Survey (USGS). That certainly isn’t a favorable amount of time for an energy-addicted planet to find and develop yet another source of power. Unlike solar and wind, lithium is not renewable.

In fact, many market observers are closely watching the evolving electric car market. If pioneering companies like Tesla can help it, it’s not going away. The lithium power plant in Tesla’s Model 3 sedan is the size of a door. And it’s no accident the company has built a massive “Gigawatt” factory in the Nevada desert just adjacent to the only known lithium mine in the continental U.S.

“Doing the back of the envelope extrapolations beloved by many, i.e. multiply Tesla projected cars sales by current technology use factors and assume additional Tesla like competitors in the U.S., Europe and especially China, all with similar sales projections, and a potential supply short fall looks incredibly large,” Mothersole adds. Such a phenomenon could justify the “stratospheric price levels as seen in oil, nickel in 2006-2007, palladium in 2001, or rare earths a few years ago. We even saw the same thing in rutile ore (basically beach sand) five or six years ago and in frac sand two years ago.”

A look at pricing

For now, lithium pricing is stable and attractively low, according to most observers. And it’s likely to remain so for quite some time.

In late 2015, IHS Technology projected price declines across global energy storage markets, led by price declines in lithium ion batteries. Moreover, in recent years, system prices have “significantly declined,” the firm notes in a recent report. Average lithium ion battery prices fell 53 percent, between 2012 and 2015, and by 2019 they are forecast to again decline by half again, according to IHS Technology. In fact, every doubling of production volume results in price drops of 6-9%, according to Greentech Media.

In China, the situation is quite different. According to Financial Times, lithium prices there in early January skyrocketed 60% as a result of surging demand for battery powered cars and consumer goods. Many observers seem to be hedging their bets on the impact any unexpected surge in demand could have on pricing.

An “exploding interest in the market” is one reason why IHS Technology hopes to begin forecasting lithium prices in the near future, adds Mothersole. And he doesn’t rule out a reversal in current price trends.

“A price spike is quite possible if buyers, fearing a shortage, rush to try and secure supplies,” he said. “But what inevitability will happen is that the surge in prices will discourage demand, that is, high prices will cause a re-evaluation of requirements and trigger a flood in supply, assuming there is, in fact, no physical scarcity given the geology of the planet.”

If that were to happen, Mothersole predicted such a “crisis would dissipate,” much like it did during the recent nickel, palladium, oil and rare earth metal demand spikes.

Advice for purchasing executives

In the near term, buyers would best be served keeping an eye on rare earth minerals, particularly if the electric vehicle market takes off. Battery University, for example, notes possible shortages of the permanent magnets used in electric engines.

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