Lithium and the EV Revolution

Lithium is an essential raw material in the batteries that power electric cars. Demand for the metal will soar as the electric car market is expected to boom. Lithium is a rare metal. It’s not as rare as gold or platinum, but it’s rare enough. It’s found mainly in three countries: Chile, China, and Argentina. Lithium is not only used in electric vehicle batteries but also in smartphone batteries, it also has other industrial uses but the highest demand for lithium comes from the battery production units.

EV Market Growth

The net-zero emissions target is the most recent indicator that is driving a global transformation for the green and sustainable economy. A major sector of this economy is the electric vehicle industry which is up in competition to replace its fossil fuel based cousin.

According to StoneX, a financial services firm, a quick look at the growth rates of both lead-acid batteries and lithium-ion batteries shows us how the market demand is shifting towards electric vehicles. Between 2016 and 2018, the growth rate was 1% for fossil fuel powered cars with lead-acid batteries and almost 49% for electric vehicles with lithium-ion batteries. StoneX forecasts that by 2025, 10% of global fossil fuel based vehicles will be replaced with electric vehicles, this figure will rise to 27% by 2030 and 58% by 2050, which is the tentative date to achieve net-zero emissions.

Another recent report by Bloomberg New Energy Finance (BNEF) predicts that, by 2040, electric vehicles will be able to compete with conventional vehicles in terms of total cost of ownership. According to BNEF, by 2040, electric vehicles will be about 35% cheaper to own than conventional vehicles. This will be the main driver for electric vehicle sales.

The projected growth can be read in multiple ways. Firstly, this clearly indicates that the global car industry is going to see a massive transformation and shift in favour of electric vehicles. The electric car revolution is expected to significantly accelerate in the next decade, when manufacturers like Tesla, Nissan, BMW, and General Motors will be selling large numbers of electric vehicles.

Secondly, this indicates that the demand for all components used in electric vehicles is going to rise significantly in the future. Electric vehicles use more or less the same raw materials as their fossil fuel powered cousins but there is one raw material that is different and significant and that is lithium.

Rising demand for Lithium

Fossil fuel powered cars use lead-acid batteries whereas electric vehicles use lithium-ion batteries. The projected rise in demand for electric vehicles is going to create a surge in the demand for lithium as a raw material, which will have its own implications up the supply stream.

With the demand for electric vehicles set to almost double by 2050, the market for lithium-ion batteries is also expected to expand by over 50% as the number of electric vehicles and related components grows.

Lithium however is a finite resource, which has to be mined and processed before it can be used in lithium-ion batteries. At present lithium is still considered a very small market, in 2020 around 315,000 metric tonnes of lithium were mined compared to over 2.4 million metric tonnes of nickel.

But the electric vehicle revolution is pushing the lithium market towards expansion. A few years ago, when the demand-pull on lithium supply was not there, lithium contracts were negotiated once a year directly between the buyers and sellers. But the rise in demand for lithium has resulted in short dated contracts because of frequent price fluctuations.

Supply Squeeze and Rising Prices

Lithium is geologically abundant on earth but this means nothing for the electric vehicle industry because raw lithium is of no use. Firstly, lithium extraction needs to be economic and secondly, it needs to be processed either into lithium carbonate or lithium hydroxide before it can be used in batteries. Latin America, Australia, and China are among the lithium rich countries in the world with China having over 80% share of the lithium hydroxide processing, which gives China the competitive advantage in lithium hydroxide supply to electric vehicle manufacturers.

This is also a concern for electric vehicle manufacturers in the USA and EU because China not only has the biggest lithium hydroxide supply capacity but it also has an absolute advantage in cobalt mining and production, which is one of the key minerals used in lithium-ion batteries. Without cobalt, lithium-ion batteries cannot function.

According to Benchmark Mineral Intelligence, the historical prices of lithium hovered around $5 per kilogram before the electric vehicle revolution but 2016 saw prices rising to $20 per kg as demand increases caused supply bottlenecks. This was followed by capacity expansion by mining companies, leading to increased supply causing the prices to stabilise around $7 per kg for the present. Lithium mining companies are planning to increase their output and explore more locations for lithium deposits, as the demand for lithium is expected to more than double in the coming decades.

According to Reuters, the US President Joe Biden has recently pledged 174 billion dollars to boost electric vehicle sales and related infrastructure. The European Union has announced similar plans, in a bid to overtake China as the global lithium supplier.

According to research from RBC Capital Markets, this will not be enough for the global electric vehicle revolution, and more lithium is expected to be needed in the future. The CEO of Livent Crop, the lithium supplier to Tesla has said that the electric vehicle industry is at a turning point which is being driven by the investment and rise in demand but the lithium production in the short and medium-term is not going to be enough to meet the rising demand. This is going to put upward pressure on lithium prices.

This pressure on lithium prices has already helped big producers such as Albemarle in Australia and Ganfeng Lithium Co in China post high earnings recently. Benchmark predicts that by 2025, the demand for lithium is expected to outstrip supply by over 200,000 metric tonnes, which is going to push the prices upwards to incentivise more investment into the lithium mining and production industry.

Environmental Impact of Lithium

As the electric vehicle revolution takes over, the emissions from fossil fuel powered cars are going to reduce but will the net impact be positive? As the number of electric vehicles on the road rises, so will the demand for electricity to charge those vehicles. This means that countries will need to invest more in electric grids based on renewable energy sources, otherwise setting up coal powered plants for electric vehicles will wipe out all of the gains.

The solar charging stations of Tesla are a good way to look at the charging problem but can these solar stations be scaled up globally?

Furthermore, is lithium mining sustainable in the long run? Questions have already been raised by concerned quarters about the environmental impact of large scale lithium mining. There have been protests in Tibet where lithium mining activities have increased by China. Locals have protested against the toxic spills from lithium mines, which have contaminated freshwater lakes. Similarly in Chile, protestors are complaining about the contamination of water sources and damage to the natural habitat of animals which is caused by lithium mining operations.

Although lithium is advertised as sustainable, the truth is that it is not yet completely sustainable. Yes, lithium-ion batteries can significantly reduce the greenhouse emissions from vehicles but researchers are of the opinion that unless we can figure out a way to recycle lithium batteries, we cannot call it completely sustainable. Akira Yoshino, the Japanese researcher who created the first lithium-ion battery and got a Nobel for it, is of the opinion that recycling lithium batteries is the key to meeting the industry demand of lithium for electric vehicles.

Investor Takeaway

The takeaway from this discussion is that investors should keep a keen eye on lithium stocks because regardless of the recyclability of lithium, billions of dollars are going to be invested into the lithium mining, production, and electric vehicle industry in the coming years. This investment will drive market demand up. As the forecasted supply bottlenecks come into play prices will rise up, which will result in windfall profits for investors who can invest now and hold their investment in the medium term. The electric vehicle boom is happening now, and Lithium stocks are the best way to invest in this revolution.

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