Automakers Will Increasingly Look To Partner Lithium Producers

BMI View : Although the growth in global lithium production has stagnated in the face of a well supplied market, we believe growing demand for li-ion batteries from the automotive and energy storage industry will create a surge in lithium demand in the coming years. While brine producers enjoy a cost advantage, most of these deposits are located in politically volatile regions, which we believe, will push more automakers to enter into partnerships with lithium producers to secure supplies of the raw material.

In this piece, we highlight the emerging opportunities within the lithium industry amid our expectation for a surge in demand for the metal in the coming years. The key driver of this will be the greater usage of this metal in the automotive industry, as well as the smart grid and energy storage industry, for the production of batteries.

At present, demand for batteries makes up about 29% of global lithium demand, according to the United States Geological Survey (USGS). With lithium being a key material required in the manufacturing of lithium-ion (li-ion) batteries, we expect demand from battery makers to grow significantly as sales of hybrid and electric vehicles (EVs) rise in the coming years, albeit from a low base.

Battery Production Will Be Key Driver
Lithium Use By Application

BMI View : Although the growth in global lithium production has stagnated in the face of a well supplied market, we believe growing demand for li-ion batteries from the automotive and energy storage industry will create a surge in lithium demand in the coming years. While brine producers enjoy a cost advantage, most of these deposits are located in politically volatile regions, which we believe, will push more automakers to enter into partnerships with lithium producers to secure supplies of the raw material.

In this piece, we highlight the emerging opportunities within the lithium industry amid our expectation for a surge in demand for the metal in the coming years. The key driver of this will be the greater usage of this metal in the automotive industry, as well as the smart grid and energy storage industry, for the production of batteries.

At present, demand for batteries makes up about 29% of global lithium demand, according to the United States Geological Survey (USGS). With lithium being a key material required in the manufacturing of lithium-ion (li-ion) batteries, we expect demand from battery makers to grow significantly as sales of hybrid and electric vehicles (EVs) rise in the coming years, albeit from a low base.

Battery Production Will Be Key Driver
Lithium Use By Application

Market Remains Well Supplied Currently…

With industrial processes also making up a large proportion of lithium demand, the global financial crisis unquestionably created a sharp drop in demand. As the accompanying chart highlights, there was a more than 25% decline in global lithium production in 2009 to 18,800 tonnes, as producers adjusted to weaker end demand.

Suppliers Need To Gear Up For Upcoming Demand
Global Lithium Production Volume, tonnes

Moreover, while demand has steadily grown since 2009, the global lithium market remains well supplied at the moment. In fact, with prices of the metal remaining flat in recent years due to a good balance between demand and supply, certain producers, which are no longer able to sustain the economic viability of their operations, have scaled back their production. The upshot is that output of global mined lithium grew by merely 0.4% in 2013, to 35,320 tonnes.

…But Demand Is Poised To Increase

However, we believe the surge in demand for li-ion batteries in the near future is poised to disrupt the demand-supply equilibrium in the lithium market.

To be sure, there is 10-30 times more graphite than lithium in a li-ion battery, which in itself will create massive opportunities for graphite players in the future ( see 'Rising Auto Industry Demand To Shake Up Graphite Market', April 3). However, due to the much smaller quantity of lithium mined globally compared with graphite, any big ramp-up in demand for batteries will also have wide ramifications for the lithium market.

A case in point is Tesla Motor's upcoming gigafactory in 2017 (see 'Arizona And Nevada Best Placed To House Tesla's Gigafactory', March 26). Tesla is expected to consume up to 15,000 additional tonnes of lithium carbonate a year (a key compound required for li-ion batteries) once its gigafactory operations are in full swing. This is almost 10% of total global demand for lithium carbonate in 2012, of roughly 160,000 tonnes. Unless supply manages to keep up, this development will create significant upward pressure on lithium prices.

Brine Producers More Cost Competitive

Currently, there are two ways through which lithium is typically mined. The first is traditional hard-rock mining, which is generally used by North American and Australian producers. However, this method is time, energy and cost intensive.

In recent years, to keep up with rising demand, lithium is being extracted from brine deposits. This method is becoming increasingly preferred due to its efficiency and cost effectiveness. This mode of extraction is utilised by producers in Chile and Argentina. As the accompanying chart shows, these brine producers are on the lower end of the cost curve.

Brine Producers More Cost Competitive
Production Cost Of Lithium Carbonate By Region And Type (USD tonne)

However, this method also has its limitations. Brine producers cannot easily increase their capacity without risking the collapse of the water table in the surrounding area.

However Political Risk Remains On Investors Radar

We believe the rising need for lithium in automotive applications by EV and battery manufacturers in the near future will see them partnering with producers to develop projects jointly, in order to secure a stable and steady source of lithium.

Furthermore, the uncertain political climate in the largest lithium producing countries will mean that automakers will increasingly look to ensure end-to-end control of their raw material supplies. As the accompanying chart shows, almost 50% of lithium production comes from Chile and Argentina, two countries with some of the largest brine projects and lithium reserves in the world. However, the fragile business environment in these two states will make it prudent for carmakers to establish strong supply chain relationships with a number of different producers.

Large Supply In Politically Volatile Regions
2013 Lithium Production By Country

The near-term demand for lithium from automakers is likely to be fulfilled by established suppliers with projects that are already yielding or are in the late stage of development. That said, in the long term, some junior miners in the early stage of production may get a chance to supply to the global market if their projects manage to secure the necessary funding to reach the production stage.

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This article is tagged to:
Sector: Mining, Autos
Geography: Global, Argentina, Australia, Chile, China
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