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Why lithium demand looks set to double in the next decade

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After several years of stagnant production and depressed pricing, lithium demand is again growing strongly. With its future fundamentally tied to the growth of Electric Vehicles (EVs) and hybrid cars, forecasts suggest lithium demand is set to double over the next decade. The extent to which this will translate into higher lithium prices, however, requires the consideration of several other factors, including lithium production rates, transport adoption patterns, and battery base substitutability.

The future of lithium demand

After exhibiting historically low prices and sluggish production for several decades, the demand for lithium has taken a turn for the better in recent years. Primary demand for the metal began to grow in 2007, but it is the dramatic demand rise that has occurred since 2015 which has really caught the attention of institutional and retail investors. Is this growth is set to continue in the upcoming years?

The future of lithium demand is fundamentally tied to the continual growth of the EV and hybrid transition, with 71% of current lithium demand allocated toward batteries and EVs predicted to consume 61% of all Li-ion battery demand by 2030. Over 150 different hybrid models from various car makers are due to be released over the next three years, which has led to global lithium demand growth being forecast to double over the next decade. As long as EV and hybrid car uptake continues to grow at its current rate, lithium demand, and its price, should follow.

The only headwind facing EV demand in the short-term is the global semiconductor shortage that has forced various automakers such as Toyota and Volkswagen to temporarily idle production lines whenever they run out of supplies. A new surge in chip demand, driven by changing habits fuelled by the pandemic, has exacerbated existing shortages that are not expected to be resolved until mid-2022, or early 2023.

Could a lithium shortage be on the horizon?

An immediate supply reaction was required following the primary lithium demand growth seen from 2007 onwards. Using existing geological models and other extraction methods, lithium exploration operations started to be undertaken. Displaying a classic supply response, additional Lithium Reserves and Resources started being delineated from 2009, resulting in a 19.5% CAGR (Compounded Annual Growth Rate) between 2009 and 2019e compared to a 2.1% CAGR from 2000 to 2008, as illustrated by the graph below. This significant and sudden rise implies that there is capacity to further increase lithium supply over the coming years, which suggests a lithium shortage is not on the horizon.

Growth of Lithium Reserves And Resources
Source: USGS (2021), FD

It is important to consider the geographical distribution of lithium production and how this has evolved through time. In 2013, production was dominated by Chile and Australia, however, substantial nameplate capacity was added from 2015 onwards which has led global production to increasingly be dominated by Australia. This position is expected to be challenged in the near future by new and existing facility expansions, primarily in South America. Recent production capacity increases have been driven more recently by Japan and Korea, propelled by EV Li-Ion battery demand which accounts for more than 71% of global sales.

Global BEV adoption patterns

As we have mentioned, demand patterns for lithium are heavily dependent on the evolving nature of the EV transition. It is therefore necessary to look at how global adoption patterns of Battery Electric Vehicles (BEVs) have developed in recent years, and what lies ahead.

Approximately 6% of new vehicles sold in Europe are now a BEV, with 745,000 sold in 2020. The general consensus suggests BEV sales in the continent have increased by over 40% to around 1.05million in 2021, with the market’s relatively stable compound growth set to continue. At its current growth trajectory, there is a possibility that the European BEV market will be larger than China’s inside three years, representing an important step forward for Europe in this regard.

Not unlike China recently, for the moment it appears that BEV sales in the United States have peaked, but this may be an aberration, and we await further environmental policies from the new Biden administration. Looking behind the rhetoric of Biden’s recent $2.3 trillion stimulus package (over a 15-year period), only $1 trillion has a physical asset development bias. This includes $174 billion dedicated toward EVs, which would be primarily used to build around half a million charging stations across the country. However, just establishing recharging infrastructure is insufficient to transform US EV sales to the desired level.

Overall, a decade after the BEV were initially introduced, general uptake has been extremely muted to-date, with adoption rates ranging from 2 to 6% in major markets. Through government policy, more must be done to sustain existing subsidies whilst increasing legislation and reinforcing relevant regulatory frameworks in order to induce consumer choices.


External factors to consider

Although lithium demand and supply is largely on the rise, the consideration of external factors must take place in order to comprehensively assess what lithium’s current and future economics are.

It is a reasonable assumption to believe that recycling will inevitably play an important part in the overall global lithium supply-chain. Lithium batteries have the capacity to hold and generate considerable amounts of energy and would therefore pose a significant explosion risk if left in storage for prolonged periods of time. Despite this, the effective recycling of Li-ion batteries does not yet exist. It is hard to imagine a future reality whereby a modern society would allow Li-ion batteries to build up indefinitely without a disposal solution, concluding that eventually some form of recycling will be mandated. Ultimately, this would increase lithium supply capacities.

In addition to near-term recycling, the inherent substitutability of lithium is also likely to play an important role in determining the metal’s future supply and demand levels. The reason why lithium-based batteries are not a certain long-term bet is the enormous speed at which scientists and engineers are experimenting with new combinations of materials to lower costs and increase capacity. It is entirely unclear what the base electric car battery will look like in several decades’ time and which commodities they will rely upon. One of the most potent future materials is graphene – a lightweight and durable carbon allotrope suitable for high-capacity energy storage.

Nevertheless, Li-ion batteries are likely to be around for many decades yet.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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