Re-energized Battery Industry Waits for Lithium Supply to Charge

Estimated reading time: 4 minutes

Lithium: Global Industry, Markets & Outlook, 13th Edition, 2016 is now available from Roskill Information Services Ltd, 54 Russell Road, London SW19 1QL UK. Click here to download the brochure and sample pages.

Tesla has already had an impact on lithium, but it's not just hype 

Tesla and its Gigafactory has been dominating press coverage of the lithium market in recent years, but while the company's plans for a mass-market electric vehicle (EV) could strongly impact demand going forward, this story has masked underlying issues within the lithium industry - partly caused by Tesla's success to date - that are now starting to influence supply availability, and in turn prices.

Rechargeable batteries were the leading use for lithium in 2015, accounting for 37% of total global consumption at around 66,000t of lithium carbonate equivalent (LCE). Growth in lithium-ion battery use in the early 2010s was dominated by smartphones and tablets, but since 2013 the automotive market has started to have a much larger impact, with EVs accounting for 30% of the lithium-ion battery market in 2015.  The Chinese EV and e-bus market surged in 2015, adding to the 25% share of the EV battery market built up by Tesla. Meanwhile European and Japanese manufacturers have been rapidly hybridizing their fleets amidst the emissions scandal that has engulfed them.

Battery-grade lithium hydroxide is now the fastest growing lithium product, as high-nickel-containing and liquid-phase-manufactured cathode materials have evolved to meet the change in lithium-ion battery performance requirements.  As lithium producers in China and the USA chase this higher priced and higher margin market, supply of technical-grade hydroxide and lithium carbonate (a feedstock for hydroxide production) has tightened.  Contract prices for hydroxide jumped by around 20% in 2015 and carbonate consumers are experiencing similar rises in 2016, with non-contracted (spot) material increasingly expensive to source.

M&A activity and project delays add to price strength 

When Rockwood announced its intention to acquire Talison Lithium in 2013, the reaction from Talison's largest customer and distributor Tianqi Lithium, faced with losing control of feedstock supply to a downstream competitor, was to outbid them.  Other Chinese plants breathed a sigh of relief. However, now highly leveraged, Tianqi sold 49% of Talison to Rockwood in 2014 and began processing more material captively.  Rockwood, with its brine expansion in Chile delayed for several years, has capitalised on its Talison stake by increasing its downstream supply through greater tolling in 2015.  With supply of mineral concentrate to other converters decreased, competition in China, typically a weight on commodity prices and lithium's swing supply, has been dramatically reduced.

The previous lithium boom catalysed several new projects into development, and the additional lithium supply from them would have been more than sufficient to meet the recent increase in demand and address the growing supply imbalance, had it not been for financial and technical hurdles.  These claimed RB Energy (Quebec Lithium) to bankruptcy in 2014 and delayed Orocobre's ramp-up in Argentina in 2015.  Galaxy also stuttered in China before Tianqi stepped in to further add to their conversion capacity by acquiring its Jiangsu plant.  Oversupply in the early 2010s, which negatively impacted pricing alongside the brief 2009 consumption downturn, has quickly turned into a deficit which is expected to deepen in 2016 as supply growth fails to keep up with surging demand.

Uncertainty surrounds future growth levels  

While demand from the battery industry is forecast to almost triple by 2025, weighing down lithium's future growth potential is a group of industries driven by macro-economic trends: ceramics, glass-ceramics, glass, grease, metallurgical powders and polymers.  Roskill's overall base-case growth forecast is 6.4%py through 2025, but this could rise to 9.3%py if lithium requirements for EV and energy storage system (ESS) battery increase.

The upstream and downstream battery supply chain will remain a largely Asian phenomenon, despite the Gigafactory and similar large-scale battery plants planned or underway elsewhere, meaning Asia will remain the growth engine for lithium demand going forward. China, Japan and Korea could account for 70% of consumption by 2025.  Hydroxide demand will continue to outperform carbonate, as cathode makers focus on the EV and ESS markets, but from a lower volume base, meaning carbonate demand growth will still be significant. Product flexibility will be important, especially as battery technology evolves, with sulphide and metal potentially becoming more important lithium products longer-term.

Existing producers' assets have some expansion potential, but cannot meet all future supply requirements, necessitating additional suppliers. If incumbent producers are to retain market share, further M&A activity is inevitable, as exemplified by SQM's joint venture with Lithium Americas in Argentina.  Argentinean brine projects, now with several deep-pocketed companies like SQM, Eramet and POSCO involved in their development, plus integrated mineral-conversion projects, are next in line, but with both sources relying on new processing routes, delays are still possible. In the short-term, demand will be met by increased mineral conversion in China using output from existing and new Australian mineral supply, supply from Orocobre and the ramp-up of Rockwood's additional Chilean capacity.  Price growth should ease in 2017 and 2018 as supply catches up to demand, but with a high-degree of corporate control remaining, and rising costs, especially for new projects using unconventional technology, a correction is unlikely.  End-users and the battery supply chain will have to think cleverly about incentivising supply, beyond loose off-take agreements, such is the growing importance of lithium to their own success.