Update: We will NOT run short of lithium

This blog-post is largely an update on my previous entry on the market situation of EVs and the repercussions on lithium markets.  from spring 2024. In the earlier version, I also mentioned a taming of the market situation for lithium, but was focussing more on the demand side. I will leave the entry from that blog attached below.

The shift on the demand side was, amongst other issues, caused by….caused by car manufacturers to meet reality. It sounds a bit odd, no? Well it was and it is.

What we saw from roughly 2020 onwards was the believe a few groups of bureacrats and politicians tried to mold reality according to their liking, independent of underlying physical, technical, economic and institutional realities. The tone was set that the most complex systems within our very complex economies needed to be ‘transformed’. This included the whole energy system, as well as the transport system. Ok, no worries, all good. Just press some buttons and things will change.

Well, they won’t. First the easy part: Consumer buy according to their preferences, and they prefer that what they buy meets what they need. While electric vehicles (EV) are by now available in a lot of categories and price segments, they can not (yet)

• Deliver lots of cargo over long distances (i.e. mid-sized transport vehicles and trucks)
• Allow driving regular long distances without having to spend hours recharging
• Be sold as second hand vehicle due to the short live of the battery (except with massive losses).
• Be offered with low price tags that make them attractive for a true mass market

EVs are, in short, a niche product. Attractive in some aspects for sure, but I have yet to hear (and understand) an explanation why fully mature products like diesel-powered cars that allow to drive for 600 miles or 1000 kilometers without refueling, and that are available in basically all price categories, now suddenly are obsolete and need to be replaced with a technology where we are still in infancy stage.

Again, I don’t want to demonize the whole EV story. The interesting part about new technologies is that a lot can, and most likely will happen with regard to regular new developments. We will see EVs by 2030 that will totally outperform a 2022 model, including range and recharging time. But 2030 is not now, and if you want to buy a car today, you might consider an EV, or choose an option that works just much better for your individual situation.

This is called freedom of choice, a term which is increasingly unfamiliar to politicians and policymakers alike.

And consumer choose. While EVs are being sold, and more of them every year, the numbers fall substantially short of original scenarios. Car manufacturers did react, and postponed development of certain models and factory facilities. Most now took a U-turn from previous announcement to go 'all-electric' by 2030, or 2032 or any other date. An increasing number of automotive CEOs stated that the future will hold both, EVs and internal-combustion engines (ICE) (Read more about the mood in the car industry further below).

More moderate demand meets stronger supply

Hence, demand for lithium, a key component of EV batteries, will not increase as drastically as statistics from lets say 2020 had anticipated. The other mechanism that is about to mature lithium markets is supply. Of course, the whole hype about lithium also made lithium exploration one of the few exploration spaces where Junior Miners were able to do well between 2016 and 2020, when there was otherwise very little activity. That of course also led to a number of projects in an advanced stage which might come online (i.e start producing) until the late 2020s, early 2030s.

Europe and the US ramp up

Two pieces of news led me to update this blog article, because they are really positioned to change the mid-term supply outlook in Europe and the US.

The first came from a project that occupies a very special place within one of the largest global mining corporations: I talk about Rio Tinto’s Jadar property in Serbia, where the company has invested over USD 2,4 billion to bring it into production. The project is not only of importance to Rio, being the first major lithium operation of this giant, but also to Serbia. The Decree to greenlight Jadar was signed by the President himself, underlining its significance.

Above: Rio Tinto wasn't really very fond of lithium so far. True, Jadar is a mixed boron-lithium mine, but its envisioned lithium production is rather substantial. For the wider lithium market, the inclusion of a true mining giant into its rows will help to consolidate markets and drive away a lot of its speculative elements. In addition, Jadar's lithium output after 2028 will also boost Europe's supply security, further reducing hypes that are grounded on perceived under-supply. Foto copyrights: Rio Tinto

But the mere fact that Rio wants to incorporate lithium into its assets are yet another sign for the maturity of this metal, as the miner shows no interest in potentially attractive, but otherwise erratic metal markets.

The third level of strategic importance of Jadar is that of Europe’s lithium supplies. While there are some exploration projects ongoing in the Nordics, Portugal, Germany and the Czech Republic, the EU was busy signing critical raw material partnerships with so-called 3^rd countries to gain some form of control over global mineral assets.

While that will not change, Jadar is significantly changing the supply position of Europe nevertheless. To give you a perspective about the mine’s capacity, this excerpt from the market intelligence piece that I received says it all: ‘Rio estimates Jadar could produce as much as 58,000 metric tons of lithium carbonate, most likely to be refined into hydroxide in Europe, and believes that it can open the mine in 2028. If that production materializes, it would exceed the total raw material supply from within the EU forecast to come to market through 2030’ (S&P Capital IQ, Metals and Mining Research). The graph below highlights that significance in a graphical way:

The second piece of news came from the Department of Energy of the US, and its  commitment to a US$2.26 billion loan under the Advanced Technology Vehicles Manufacturing program towards Lithium America’s Lithium Nevada mine, also known as Thacker Pass, including for processing facilities. The US government has been generally quite active in pursuing the goal of decreasing its dependence on critical minerals, including processed ones, for instance through financially well-bolstered initiatives like the  Inflation Reduction Act. Coupled with direct financial support for certain strategic projects this is poised to significantly bring projects from the development pipeline into production.

Interestingly, the Government’s own calculations estimate not only supply security for most battery metals, lithium included, until end of the decade, but even see the US to become a net exporter by around 2034.

Taking these two news snippets together we get a picture that support my notion that lithium markets are in the way to maturity.

What does this mean for lithium investments?

I will restrict my answer largely to the Junior Mining space. Will things change here for the hungry investor?

Yes. What you won’t see are projects that are hyped just because they moved into the lithium space. This is something that one sees regularly in markets that have become hyper-speculative. It happened to cobalt a few years back, and to lithium as well. As I have mentioned on other occasions, I have seen lithium projects that gained hundreds of percent just by adding lithium into their exploration programme. Others gained because they leased a territory next to another successful lithium exploration project (such as Lithium One, which became a tenant next to Patriot Battery Metal’s Corvette project). Numerous companies didn’t have to turn a single rock in order to increase substantially in market value. That was easy money for a while – say goodbye.

Now, the examination will be a bit more rigorous. One will still be able to make money with lithium explorers, but projects need to show that they have some quality, and that the team is able to exploit this quality. As such, lithium will become similar to lets say silver, nickel, and many others. Focus now on project that have high grades, are in good jurisdictions, have low mining costs, etc. If you want to make money, you now need to have a lithium project that is, simply spoken, above average. Those projects however will continue to be of value for investors. What we will see is the death of plenty of so-called ‘lithium projects’ whose only purpose it was to bet on an erratic market. Again, while one could have made some quick gains, it is quite alright now that the market cleans these guys off.

From here on, this blog is replicating my spring outlook on EVs and lithium market:

Why not everyone fell in love with EVs:

As I posted on Facebook a while ago, Mercedes-Benz was one of the more prominent producers of EVs to basically say ‘EVs are great – but maybe not that great’. The wider buyer sentiment in the European and North American markets underlined that statement. EVs are being sold, and every year more of them. As I wrote in my lithium blog, the story of EVs is not as bad for a new, disruptive technology. Because developing such technology is one thing, enabling it to penetrate markets another.

Lithium is a key ingredient for batteries in general, and for the so-called energy- and transport transition specifically. The markets for the light metal are quite complex, but outlooks for investors, while largely positive, not without challenges

But there are two downsides to the EV story: One is that electric propulsion requires a whole new web of supporting infrastructure in the form of decentralized charging stations. And here, not only are costs a problem, but also regulatory aspects, often boiling down to the question of who is responsible (cities, or car manufacturers)? More, the raising demand for electricity is pulling heavily on the capacity of power suppliers and power grids to produce and distribute this increased demand. At least, due to the increasing demand for electricity, prices for it are likely to go up, changing the economics of buying an EV in the first place. On the other hand, diminishing demand for petrol may lead to lower prices that has to be paid for crude.

Old and new problems: Range and value preservation

Other technical issues are at the level of an individual car, with still more than mediocre range, which is further diluted when the car has to carry heavy loads, has to go uphill or operates in the cold. If all three factors come together, your daily range is almost down to the level of a donkey cart. Given that many EVs are still in the luxury range in terms of prices, an increasing number of buyers gets frustrated when their neighbour in his 20k petrol car tells them that they had managed the 750 kilometer/500 miles holiday trip in 8 hours, instead of 11 – whereas the time difference was accrued thanks to multiple charging stops.

Doing recharging stop number 5 on this longer business or holiday trip can be time consuming, considering one stop can take around 20 to 30 min.

Last but not least, a new problem recently emerged, which wasn’t that much visible in previous year. And that has to do with introducing EVs into the used-car markets. Now that EVs are slowly on the road in serious numbers, it becomes also much clearer how they will behave as a second-life product. The short answer is…well, not too good here either. Anyone owning a laptop or mobile (so almost everyone) has made the experience that after 3-5 years, depending on usage, the power of the battery gets less and less. Meaning you have to recharge more often, whereas durability is decreasing. Since most EVs are leased cars, they enter the used car market after 3-4 years. Hence, this weakness might not have become obvious in their first ‘used-car life year’, but after the second or so.

Their already questionable range gets further reduced. Few people would be willing to buy a car for still 40k (dollars or euro), that barely does the 150 miles / 200 kilometer distance – under optimal conditions that is. This will further push prices down, making it more and more risky for leasing companies who are responsible for a lion share of the EV fleet to acquire these cars. This is because the used car price has to be factored in in order to calculate the monthly leasing rate. The other alternative is to substantially increase the monthly leasing rate for EVs – but that will further reduce attractiveness to buyers.

Don't underestimate human ingenuity

Hence, individual unit level issues as well as structural problems provide a serious challenge for EVs. On the other hand, as I have pointed out previously as well, one should also have confidence in the power of human ingenuity. While personal not the biggest fan of EVs (yet), I am still open to follow this development and optimistic that engineers will come up with solutions to ever increase the range of batteries. Hence, EVs that are up for sale in 2027 or 2028 will most likely show vastly different capabilities in range than seems possible today. Also, the web of charging stations will increase, making it less of a hassle to recharge also outside of urban areas.

The hope is that cities will be looking less flashy than this example, but...your EV in ten years will most likely show a totally different performance than that of 2023.

So, like with the introduction of any new technology, hick-ups are normal, but they can be come by with improving supporting technology along the road. If you just compare the many of perils with flying in the 60s and even the 70s, where large-scale accidents with hundreds of passengers dead were not that uncommon with flying after the 2000s, you know what I mean. Using planes as a means of mass transport was still quite a new technology in the 60s, and many areas where not well known or understood. It took humanity a while to work that through before arriving at the safest mode of travel that commercial flying actually constitutes today. no

Not an uncommon sight in commercial fyling for many decades: hefty accidents. technology and processes need time to adapt and to get perfected.

Luckily, ridiculous ranges and low used-car prices won’t result in equal numbers of deaths. It is just a severe problem for the car manufacturers, but as I wrote, commercial pressure will push the range of new developments.

The Electric Vehicle (EV) reality revisited: Political aspects

The biggest problem though for car manufacturers however is another one: While there was SOME demand by customers for EVs, the issue with giving birth to this segment was its political roots: Politicians in North America and Europe pushed for ‘transformation’ of, according to whom you would like to listen to, the transport sector, the transport & energy sector, the whole economy, our whole ways of life and so on.

A key challenge of lithium markets and the associated industry is that demand-supply patterns are significantly influenced by 'climate politics'. Read to understand what this means now - and for the future of lithium. 

Become enlightened about lithium and climate politics

I will spare you discussing the usefulness of transforming ‘everything’, especially coming from people who could hardly transform a non-working lawn mower into an operating one. Transforming even a whole sector is all but easy, and history provides few examples where state-guided transformation was anything but a disaster. Ok, early communism in Russia was actually not without success in transforming a backward, illiterate agrarian society into a largely industrialized one – if you don’t bother about a few million victims along the road.

Simply put, politicians neither understand much of technology and engineering, nor about market mechanisms, and how innovation, market mechanisms and demand/supply systems and signals are interconnected. Fuzzing around in such complex systems is a receipt for disaster. But back to the EV market: Unfortunately for the car industry (or maybe they don’t deserve our pity since they naively left all principles that made them successful corporations in the first place behind them), they followed political scene-setting without much interference. A few years back, you could see all the billboards by various carmakers reading along the lines of ‘all future is electric’. Maybe they forgot to add ‘and we don’t care about customers tastes’. A number of CEOs stated at what time they would carry their highly successful and popular diesel and petrol engine to their graves. Some at 2030, as the EU wanted them to do, but some even envisioned earlier dates. Complying with politics seemed more important than with customer tastes.

Based on that, the demand scenarios for battery metals such as lithium, cobalt and others were projected. And that was not wrong, because politics commanded this tough form of ‘transport transition’, simply because it felt powerful enough to do so, and, as outlined above, industry followed like a flock of sheep. For that reason, we had seen this enormous hype in key battery metals, first and foremost in lithium. Questions around ‘will we have enough metals in the ground to feed this market?’ were replied even before the 2020s with ‘no – we don’t’. We would have seen most likely a much stronger and longer run for lithium were if not for the corona policies which made a rough cut. But the run re-ignited again after 2021, as the political commands came back, as did negative supply projections for lithium.

Re-shaking the cocktail: Will car manufacturer CEOs let markets and customers rule again?

So, now the big, multi-billion question is this: Does the recent pull-back (note: it is not a pull-out) by Mercedes, Ford and others ring the bell for lithium and battery metal markets, and for profitable investments in these sectors? Should investors stay away from this market?

Here comes the multi-billion answer: Hmmmmmm!

Ok, now seriously. As I explained above, I don’t see the death of the EV industry, but rather a realignment with reality, and…surprise, with market forces. This sad chapter of industry leadership, where highly educated engineers simply follow the orders of a bunch of politicians without giving a thought to customers, infrastructure requirements, availability of raw materials, and, last but not least, their own tradition, success stories and cultures is hopefully over, or at least it will be readjusted

As such, most car manufactures will continue to build, and to develop so-called internal combustion engines (ICE) models, but also continue to develop their EV range, in which the hybrid-lines (i.e plug-ins that combine an ICE with an electric engine – requiring considerably less metals than a 100% electric model) will become more prominent again. That will lead to better batteries, and more competitive prices, as we will see more models by more suppliers. For the next 10 years or so, EVs will not become a mass-product, but their share in the total automobile sector will increase. And since this sector is huge, and growing, EV production will continue to grow substantially over the next 10 years as well. This is what I have been writing about the penetration of EVs into global automotive marktes before, based on claims by the International Energy Association, the Global Battery Alliance and McKinsey:

Around 50% market share for EVs (as percentage of sales, not stock) by 2030:

According to the EIA, the share of EVs on the total automobile market (in terms of annual sales) is going to be around 50% by 2030. Applying the estimated growth rate of this market yields around 52 mio units,roughly a 270% increase in total, or 25% per year increase. Such figures are supported by McKinsey and the Global Battery Alliance, which calculate 25% - 30% annual raise. We argued in the text that EVs will become better over the years, and more models will also result in cheaper models, supporting the market share thesis.

50% is not 100%, and indeed, increasing the share from 50% onwards will get slower the closer we get to the 70% to 75% range. In my sense, this assumption is pretty much in line with the Mercedes' CEO assessment we talked about in the beginning.

The unavoidable growth of the EV market under market conditions

Hence, ICEs won’t be replaced by 2030, nor by 2035. EVs will not be available in sufficient quantities to allow that, and not all of the issues I have outlined initially will be made away with. But independent of that, EVs might well cover 50% or more of total annual sales between 2030 and 2035. Industry will push for this, supported by subsidies and similar measures, but all of that will proceed at a lower pace, and less aggressively than originally anticipated by some.

Profiting from battery metals under 'realistic scenarios'

Coming back to investment options: Even this slower, or lets say, market-oriented growth will require significant increases in the production of key battery metals like lithium, copper, nickel and graphite. Because meeting even the 50% market share, a rougjly 25% - 30% annual growth in lithium production will be required. This is again from my previous article on lithium:

Lithium growth still substantial until 2030 / 2035:

Finally, we have applied the 25% - 30% figure to the growth in lithium production. Taking 130Kt that was produced in 2022 as a starting point, and annual 30% increase yields almost 1,780 KT in 2032, which is more or less what is needed as minimum to propel the EV fleet of that time.

Hence, the 25% - 30% annual growth in lithium production required seems to make sense!

As such, there is profit to be made when investing in these metals, either directly, or by buying shares of miners, or my favourite option, by getting involved in their exploration process.

Lithium One increased from 9ct in August 2022 to 76 cents in February 2023. That is almost 750% in just half a year. The main ingredient next to a good management and a hot lithium market at the time, was to buy a property next to one of the most successful lithium projects of recent years.

But when the EV industry gets more market oriented, mining or metal investors need to do the same: While between 2016 and 2018 almost any lithium exploration project could manage share price increases at least for some time (and again so in 2022-2023), investors in the Junior Mining market now need to look a bit closer at the quality of their projects: Not just any project is good enough, and markets (i.e. lenders) will be much more selective. But what is clear is this: A lets say lithium project that actually will provide battery-grade lithium (as far from every lithium deposit has this distinct quality), has an above-average resource or reserve, is low-cost and located in a safe jurisdiction, the chances for making sound profit are still high. Again, one need to be more careful what is being selected.

How to profit from lithium

And there is one other, very important aspect that investors need to be aware of in the battery market: Technological change and the drive for substitution. This is a key issue in this industry. It is not requited to be a technical battery specialist, metallurgist or anything. But one should read regularly (at least monthly) in a respected news provider on this topic about upcoming essential trends. This is what pushed cobalt out of the record price level a while ago: The metal got so expensive, and given its supply delicacies (the bulk came from the DR Congo, which has a notoriously bad reputation for mining standards), innovators pushed hard for reducing the role of this metal in EV batteries. Lithium for instance will not be pushed out tomorrow, but it MIGHT have a reduced role in batteries that are being developed in a few years, and that would come onto the market another few years later. So, follow these developments regularly and you will still find plentiful opportunities to strike it big in the Junior Mining sector for battery metals.