Nick Butler writes in the Financial Times about the changes that are taking place in the market for lithium used in more effective, long-life batteries. Butler questions whether this market boom will last. What do you think?
Lithium: is the hype justified?
After two years of unrelenting gloom it is good to see that at least one part of the global energy business is booming. The price of lithium carbonate in China has risen by 253 per cent in the past year and there is intense takeover activity among the limited number of companies that control lithium production. Goldman Sachs has called lithium “the new gasoline”. Is the hype justified?
Lithium is a soft white metal that provides a small but for the moment essential element in battery technology. Production comes from mineral rock or from salt water, with supplies concentrated in Argentina, Australia, China, Chile and the US state of Nevada. That production is controlled by a very small number of companies, led by Albemarle, FMC and Chile’s Sociedad Quimica y Minera (SQM) in Chile. Between them they produced 90 per cent of total supplies outside China last year.
Recently Citic, the Chinese company, has been showing a very strong interest in SQM — as well as buying the leading electric vehicle manufacturer in Hong Kong.
Lithium-based batteries typically store three times more energy, and have a higher energy density to weight ratio, than any existing alternative. This makes them attractive for a range of products, including mobile phones and computers, but also for the larger batteries used to power vehicles. The volumes of lithium involved are small, and output from the top five producing countries in 2014 amounted only to 35,000 tonnes. So, in terms of scale, lithium is hardly the new petrol. Goldman Sachs would be more credible if it cut out the marketing hype.
The increase in the lithium price is explained by a surge in demand driven by the growth in the number of electric vehicles. For as long as I can remember electric vehicles have been about to break through and to take a significant share of the world market for light vehicles. The reality has repeatedly lagged behind expectations. Despite many attempts — remember bankrupted American-Israeli start-up Better Place? — and much public policy support there were only 665,000 electric vehicles in operation at the end of 2014, according to a recent authoritative study by the International Energy Agency. In almost every country expansion has been limited by the costs of the vehicles and by the limitations of recharging facilities.
But the market is changing. According to the latest reports, there have been almost 400,000 orders of the new Tesla model, at a cost of $35,000 each. After a long period during which China failed to establish a significant electric vehicle market, sales rose fourfold in 2015 to over 300,000. The problems and the prospects are described in an interesting new study from McKinsey. China’s ambition in this area appears to be significantly increased and the country’s official 12th five-year plan sets a target of 5m electric vehicles on the road by 2020.
In terms of the overall car market this is still fractional. At the end of 2014 electric vehicles accounted for just 0.02 per cent of the global total. Total global car sales in 2015 amounted to 74m — the overwhelming majority using internal combustion engines. On most measures electric vehicles are still not competitive, even with high levels of fiscal subsidy in place. A big change in costs, or mandatory regulation, is needed if they are really going to penetrate the market.
This is the context in which to judge the hype around lithium. The price of lithium will rise as demand for electric vehicles and the batteries that power them increases. But there is a limit. We do not yet know how much extra lithium can be produced. The competition for known existing resources suggests there are serious constraints. If that is so lithium will become more expensive to the point at which its cost becomes a barrier and a constraint on electric vehicle sales. That in turn can only hasten the process of substitution — the development of materials that can displace lithium in batteries. Markets always have ceilings set by the ability and willingness of consumers to pay what is being asked, and by ever advancing technology. Petrol is a prime example of a product that keeps selling in vast quantities because it is readily available and its price is not too high.
At the moment lithium is one of the very few commodities for which there is an increase in price. The existing owners are no doubt dining out on the increased economic rents they are collecting. They should enjoy the good times while they last.