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Electric Car Demand is Driving Up Lithium Prices to New Highs

As prices for lithium continue to rise, auto manufacturers are scrambling to secure supplies of the metal, raising concerns that a shortage could impede the adoption of electric vehicles.

September 21, 2022
7 minutes
minute read

As prices for lithium continue to rise, auto manufacturers are scrambling to secure supplies of the metal, raising concerns that a shortage could impede the adoption of electric vehicles.

Prices for lithium carbonate in China, the benchmark in the fast-growing market, have increased almost four times over the past year and are just below the record set this March, according to price-assessment firm Benchmark Mineral Intelligence.

Lithium prices have bucked the trend in commodity markets, which have broadly retreated in recent months. This is in line with the gloomier economic outlook, which has been dimmed by the Federal Reserve's interest-rate increases and stuttering growth in China and Europe. Brent crude oil and copper prices have fallen by around 15% and 7% respectively this quarter, while European natural gas prices have dropped by 10% over the past month.

Lithium prices have been on the rise due to increased sales of electric vehicles in China. After Shanghai lifted its Covid-19 lockdown in June, car sales jumped, resulting in increased demand for lithium-ion batteries. The China Passenger Car Association is forecasting that six million new EVs will be sold in China this year, which is double the 2021 level.

According to Edward Meir, a metals consultant at ED&F Capital Markets, the lithium market is following the Chinese EV market closely. Meir believes that this is just a preview of what could happen in the US EV market.

The recent heat wave in central China has caused a shortage of refined lithium carbonate and hydroxide, which are used in battery cathodes. Suppliers in Sichuan province, which has a third of China's lithium processing capacity, have closed factories for several days and run down inventories to meet their sales commitments, according to Rystad Energy analyst Susan Zou.

There is a growing expectation that demand for lithium will increase significantly in the coming years, as more and more car manufacturers move away from internal combustion engines and switch to electric vehicles. Companies like General Motors, Ford, and Volkswagen are all investing billions of dollars in electric vehicle production, in an attempt to catch up with Tesla, who are currently leading the way in this area.

Many companies have struck deals with lithium producers to secure supplies of this scarce metal. According to Daisy Jennings-Gray of Benchmark Mineral Intelligence, more than 80% of lithium-ion batteries are used in electric vehicles (EVs), and this is expected to rise to 90% by 2030.

As prices for lithium continue to rise, more and more companies are looking to get in on the action by setting up projects in Latin America and Australia, the two biggest-producing regions. However, analysts say that it will take years for these projects to reach full capacity and ease the shortage, in part because left-leaning South American governments are seeking greater control over their countries' natural resources.

According to analysts at Citigroup, regulations like California's tax on lithium extraction are likely to delay mines in the U.S. and Europe. They forecast that demand will outstrip production by 4% this year. Concerns about the impact of lithium mining on water supplies and other environmental issues have also hindered efforts to develop new deposits.

High lithium prices are a boon for the small group of companies that dominate global supply and have reported surging profits. U.S.-listed shares of Albemarle Corp. have jumped 23% this year while those of Sociedad Química y Minera de Chile SA have more than doubled. The S&P 500, in contrast, has dropped 19%.According to Matt Tuttle, chief executive of Tuttle Capital Management, he is looking to add more lithium stocks to his portfolio with the expectation that they will continue outperforming the broader index this year.

A big issue in the lithium market is refining capacity. China dominates this part of the supply chain, and two big producers in Russia have been shunned by Western companies since President Vladimir Putin invaded Ukraine, reducing global capacity. This has created a bottleneck in the market and has driven up prices for battery-grade lithium carbonate and hydroxide.

Tesla CEO Elon Musk has urged entrepreneurs to enter the lithium refining business, saying that there is a great opportunity to make money in this area. He noted that while lithium is found in many places, it must be refined into battery-grade lithium carbonate or lithium hydroxide in order to be used in batteries.

Auto makers and government officials are concerned about the security of supply given the scarcity of material and China’s pivotal position in processing lithium. The Inflation Reduction Act signed into law by President Biden last month sets thresholds for the amount of lithium and other minerals that must come from the U.S. or its free-trade partners for EVs to qualify for tax credits. This is intended to reduce dependence on China for these critical materials.

In a sign of the high demand for lithium, an auction of Australian spodumene—a rock that contains unrefined lithium—fetched a bid of more than $7,700 a dry metric ton on Tuesday. This is equivalent to a production cost of $74,000 a metric ton of lithium carbonate, which would mark an all-time high, according to consulting firm Rystad.

According to Kevin Smith, managing director for energy-transition metals at commodity trader Traxys, the market for these metals is very competitive. He notes that demand is outstripping supply at the moment, and that the market is still not in balance.

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