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Is Lithium Undervalued?

March 23, 2017

Many factors determine the cost of a product, demand being a principle driver. The recent surge in the lithium carbonate spot price was caused predominantly by the surge in demand, but despite this surge suppliers have serviced the increased demand and are still producing an excess.

 

Normally a market would stabilise after a large and fast spike in a resource’s cost. An increasing price brings more suppliers into the market and makes more lithium deposits economically exploitable, decreasing the rarity of that resource and consequently its price. However, that mechanism assumes that demand does not continue to rise. In lithium’s case the demand is still rising, and so a stabilising price is unlikely.

 

Normally an increasing rate of demand tapers quickly off to a relatively constant level, and perhaps even a decline. However, the rate of lithium demand is expected to accelerate in the coming years, meaning that a price stabilizing affect is unlikely. To further undermine the notion that the lithium price will stabilise is an anticipated shortfall in supply, which is expected to occur about 2019. If a significant spot price rise occurred when supply could meet demand then an undersupplied market is likely to continue the appreciating trend.

Even if new lithium producing projects are included in the supply and demand predictions – even at very generous production rates – then demand will still outstrip supply before the middle of the next decade. The graph below demonstrates the supply and demand situation when lithium producing Greenfield projects are included in the estimates.

Source: GMP estimates

 

This model assumes a long-term lithium carbonate price of US$8,000/tonne, and though it demonstrates that near-term supply will meet demand this outlook is likely very conservative. The cost of making batteries is also likely to keep falling, making NEVs cheaper and more attractive to consumers. It is also worth noting that lithium carbonate prices have little impact on battery costs as lithium makes up 3% or less of battery cell costs, so any rising lithium prices will not affect its attractiveness to battery manufacturers.

 

The graph below demonstrates the falling cost of battery manufacture, which will only correlate to more price-competitive vehicles, and consequently increased sales and demand. Battery costs for electric vehicles, as measured by US$/kWh, have declined almost four-fold from $1,000/kWh in 2008 to US$268/kWh in 2015.

Source: IEA 2016, US DOE 2016, EV Obsession 2015, HybridCARS 2015

 

To further compound the anticipated lithium supply shortfall is the direction in which battery manufacturers are shifting, opting for batteries with greater lithium content. The table below demonstrates the anticipated 3 main battery types and their market share in 2015 and 2025.  Lithium richer batteries will have a much larger market share, meaning more lithium demand and probably supply shortfalls that will likely have a significant impact on the price.

 

Source: CEMAC, Albemarle, GMP estimates

 

In summary, it is very likely the Lithium Carbonate spot price will continue to increase, making deposits increasingly economically viable and existing projects far more valuable. The best time to invest in any market is before it booms; and all the evidence for lithium is pointing to a boom that will continue for at least the next decade.

 

- James

 

 

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