Part 2 of 3: How climate politics will influence the lithium market
Few markets are so riddled by politics, subsidies, fear and prophetic promises as those for lithium and other battery metals. This means that as investors, we should look not only at market forces, but weigh carefully the words of politicians, lobbyists and other figures who guide public opinion.
André Ufer
Founder of Explorado Invest
PUBLISHED DECEMBER 2023
In Part 1 of this 3-parts series, we have looked at the drivers for lithium demand. The majority of this demand will be driven by batteries, more specifically by the large batteries needed to power electric vehicles (EV). By 2030, more than 90% of all lithium demand will be stemming from that industry.
We have further dived into the numbers, and by comparing different approaches it seems that an annual growth rate of around 25% in lithium demand seems realistic over the next years.
PART 2: Battling for control - how climate
politics will influence the lithium market
In the second of the three part series, we will analyse the role of politics concerning the future of EVs and the associated markets for lithium. While politics certainly has a large influence here, it should not forget that market forces can not simply be sidelined.
2.1 Enter (climate) politics
I have to state at the beginning that with lithium and the other battery metals, we do not talk about neutral markets. The big difference in supply forecasts with regard to lithium (and also other key ‘battery metals’) is this one: Demand is underpinned by political regulations and laws.
Make no mistake: At the moment, economies are faced with binding climate targets, that will directly influence markets (at least for a time)
For us as investors, this is important to know, because normal growth projections are always highly speculative. The reason for the political/regulators underpinning of lithium demand and as such supply (the annual 30%) in most industrial economies is the ‘fight against climate change’. I am not going into pro-and-cons argumentation here, but we all can agree that this set of policies is pretty much dominating a lot of policy making in most OECD nations.
When we talk about gold price forecasts, we usually have to apply all kinds of estimates about economic, monetary, fiscal, geopolitical and other complex factors for them to make sense (and they still often don’t). But with lithium and the other battery metals, politics was so kind and simply provide us with required demand projections: The EU for example simply declared a deadline for the sales of fossil-fuel propelled cars – by 2035 (we just saw that this most likely will be impossible. EVs most likely will not make up significantly more than 50% of market share by then). Within the EU, there is also the overarching framework of the net-zero goal by 2050. Other economies have similar objectives and similar deadlines in place.
2.2 Wanna stay legal? Use lithium!
Is this realistic? I don’t know. Probably not. Most likely not. Neither concerning the 2035 nor the 2050 deadlines. But fact is that for the moment these policy objectives are enacted and valid, until they are changed. Hence, energy-, heat- and power producers, car producers as well as energy users are all obliged to implement changes in their methods of production simply to stay in line with the legal requirements. Following that, one can (more or less correctly) predict the demand for battery metals that will be needed to realize this trajectory. In other words, when an economy has produced X amounts of Gw for electricity by coal until 2023, that X needs to transformed into wind- and solar based energy production.
When wind energy needs to be increased by law, so do the ingredient materials - in the case of wind, it is rare earth. In case of EVs, it is lithium and other battery metals. Source: EU JRC, 2022
The picture above makes this point clear, even though I have used the example of wind energy, and thus wind turbines. Magnets are an important part within such turbines. Out of the legal requirement to install a certain number of GW, one can simply calculate the required amount of rare earth elements (REE) that are contained in a magnet motor. For EVs, it works somewhat similar, but we have of course different batteries, that contain different quantities of 'battery metals'. But it is ok for now - just nodd. We want to get the idea right.
2.3 Did politics keep everything in mind?
No. I hope you are not surprised. It is politics. If these guys wouldn't forget things, they'd all become engineers. Ok, here is the thing:
Because unlike wind turbines, EVs go to consumer that like to have a choice! Hence, there are some caveats, that the calculations we used in part 1 leave out:
- Changes in battery technology and substitution of certain metals with others. The drive for substitution is higher, the higher the prices for the metals are
- Consumer demand. Maybe fewer people than anticipated want an EV. Or can afford one. Future prices of electricity will come into play here (most likely, regenerative energy will be more expensive than nuclear or fossil-fuel based energy).
- Relevant infrastructure bottlenecks, such as EV recharging stations
- Do we have the relevant mineral resources and/or can they be mined economically?
- Etc
Markets are taking back some power in the lithium space. What does that mean for the lithium industry, for EVs, and...for investors?
This is for you to know and to understand, so that you can always apply some levels of fun-spoiling thoughts to demand figures. The second bullet is of specific interest. If you don’t offer what people want, you have a problem in a free-market economy. And consumer sentiment isn’t too happy at the moment with EVs. Ford then, did recently announce to delay a further electrification investment package of USD 12 billion, which included new models, new production lines, investment in battery building capacities etc (for the full article, see for instance Business Insider here).
Source: Business Insider
Ford is explicit is saying they aren’t calling off the package. But they are delaying it. In any case, it means that NOT following the noisy investment mainstream (everything will be electrified, from your toothbrush to your car to the plane by 2030) is probably a good idea. Again, my mood is that things are going in that direction, but it will all happen slower than anticipated. I believe with the approx. 25% growth rate, we have applied a sense of rationality (see part one of this blog series).
At Explorado, where my goal is to transform you into a knowing and successful minerals investor, I will of course follow these developments (especially the fourth bullet above, and interpret what that means for you (and me).
For the moment the fact is: Politics has decided, but there is a number of factors that we do not know or understand. For the next five years or so, demand for batteries will grow substantially (as calculated above). This is because corporations do follow the course as long as they can afford it and see a business model for them. The Inflation Reduction Act of the US will surely underline such business model, allowing everyone active as producer or investor in the ‘clean-energy value chains’ bigger than usual profits. For this, I am actually sure. As an example, the construction of nine gigafactories has been announced to be built until 2030, for well over 300Gw of production (see part 1), S&P analysts say.
And policy making can employ a number of tools to make certain goods attractive, and others less attractive. Think for instance about pollution taxes: Once applied, they make it much less attractive to dump waste water into the nearest river, since taxation cost now suddenly meant it would be cheaper to clean the waste beforehand. There are numerous examples of this. As far as mobility is concerned, subsidies for EVs on the one hand, and increasing prices for fossil fuels, tax disadvantages etc. on the other are probably largely responsible for the positive uptake of EVs in the market. Increasing emission standards is another tool policy makers like to adopt, and this is true for North America, the EU and even China.
Taxes can ruin everything - even your efficient diesel! Image by fxquadro on Freepik
In any case, despite the growth figures as calculated will most likely occur over the next years, there is still a lot of homework to be done. This is true for both the car industry as well as governments (through investments in supporting infrastructure). Before that, EVs will not become a real alternative for the MAJORITY of customers, and thus going beyond 40% market share and higher. It may happen, but when reading these forecasts, always apply this sense of…well, it could be true, but maybe also not entirely so.
2.4 What does this all mean for the lithium market?
Such an increase in demand, if it were to be met, would require an additional investment of 10 billion dollars over the next few years.
Part of the investment in the lithium segment is going to happen by way of closer cooperation between producers and end users, battery manufacturers and also the automobile companies themselves. The latter often also take on an important role as financier or co-financier for producing operations or even for exploration properties that are in transition to producing mines. This is, on the whole, quite a determined approach, rarely seen otherwise by end-users. For example, there is a sales agreement between the highly successful Australian lithium producer Pilbara Minerals and the Chinese car manufacturer Great Wall Motors. Toyota (Tsusho, a Toyota Group member) is also in the game, buying 15% of Orocobre. Tesla wants to become involved in advanced exploration projects in Nevada, and General Motors just did the same, by investing $650 million in Lithium Americas Corp (LAC.TO) and help it develop Nevada's Thacker Pass lithium mining project (Source: Reuters).
German manufacturers too are looking for such targets. VW, in particular, is probably already drawn here, having tried unsuccessfully a few years ago to secure cobalt supplies for the next few years through a tender. This strategy, which should also be new territory for the automobile groups, is understandable. I am sure that we will see more deals of this kind in the next years.
2.5 Supply dynamics
Anyway, let us have a look at the supply side to derive at the overall picture until end of the decade. Prices for lithium have shown a modest increase from 2010 – 2018, and a slump between 2019 – 2021, whereas a large portion of that slump was due to the corona pandemic. In 2022 however, prices jumped to their highest level, and with USD 37,000 per tonne of lithium-carbonate equivalent (LCE), more than doubling the second highest level of 2018 (USD 16,000 / tn lCE). And prices are a strong driver for investment.
Was Nevada chosen by Tesla for the nearby lithium deposits? Not sure, but certainly the availability of the light metal fits into the thinking of Tesla's (and GM's) managers. Source: Future Battery Metals Inc
The blue line provides prices from 2010 to 2018; note the hike from 2016, at a time when EVs got some traction. Source: Standard & Poor
Lithium prices between 2019 and 2023. Source: Statista
2.6 And why did prices suddenly implode?
Did they? Ok ok, yes, falling from USD 60,000 per tonne of LCE (= Lithium Carbonate Equivalent) is more than falling, it is almost imploding. On the other hand, they are still higher than when they prices came down in 2019, at the onset of the pandemic. We need to be aware that the lithium market is hot = i.e. there is also a lot of hype and speculation going on (remember; lithium will save the world etc.). But it is also not very mature yet. It tends to react fast to changes, be they political or economical. 2023 saw weakening subsidies for EVs in China, and a lot of EVs placed in garages waiting for customers in the same country. On the other hand, the previous years of solid prices saw investments into exploration and mining going up, leading to raising outputs. Time for hypers to get panic and leave.
But I am optimistic that prices will not continue to implode, rather raise again, even though most likely more moderate. Note that in the table where we depicted future growth of lithium production (see Part 1), the annual growth from now on each year is (or has to be) bigger than the whole global lithium market in 2015 or even 2016!
2.7 Lithium supply outlooks
On the one hand, it is true that in an (expected) bull market, many lithium projects will be generated because they can be marketed well. So the market has become more crowded and the future will produce more lithium. And the supply from Australia, Chile and Bolivia in particular is likely to increase in the next few years. The International Renewable Energy Agency (IRENA) estimates that Australia will increase its production by 139%. South America by 200% as against 2020 values until 2025, yielding a total of 1,15mio tns of lithium supply. If we look at the demand figure from earlier above, it could happen that the years before 2025, when the e-mobility boom is likely to really take off, will be characterised by oversupply. However, the supply story almost stops here: For one, this is the amount that at current circumstances can be economically brought into the supply chains over the next years. When taking into account that not all of this material will be battery-quality, while on the same time annual demand for battery quality lithium is growing at a higher scale every year, the market could face a deficit towards the end of the decade, but more likely after around 2027/28.
Opinions like this will be sufficient to keep lithium markets on its toes for the next few years. Source: IEA
2.8 Conclusion
Few markets are so much influenced by politics than that for lithium and for battery metals more general. For the moment, the market has decided it will play the game. Huge investment packages are being set aside to fulfill legal requirements and political visions.
But as the Ford example above shows, this has its limits. I have my doubts if political-bureaucratic visions to 'transform' something as complex as a global economy can be successful in the long term. In the end, people will accept things when they see something brings them benefits, and that for an affordable price. So, that battle needs to be carefully monitored by investors for the next years.
However, similar as in part one, I am optimistic that at least for the next few year, good returns can be made by investors in the lithium market, as money does flow in this direction, and everything from exploration to mining to refining is set for growth.
What are the best ways to profit from lithium markets then you will finally ask! This, we will discuss in the third and last part of this blog series on lithium.
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