The automotive industry is on the verge of an electric revolution. The International Energy Agency has predicted the number of electric vehicles on the world’s roads will triple to hit 13 million by the end of the decade – and by 2030 that number could soar to 125 million.
New industries are powering demand for batteries, which has thrust a number of little-known metals into the spotlight
Meanwhile, the rise of renewable energy generation has boosted demand for battery storage, which can balance intermittent power from green energy sources. The global energy storage market is expected to grow to more than 300GWh between 2016 and 2030, according to Bloomberg New Energy Finance (BNEF).
These new industries are powering demand for batteries, which has thrust a number of little-known metals into the spotlight. This has led to the price of lithium – a key component in lithium-ion batteries – doubling between 2016 and 2018. Meanwhile, the price of cobalt – a by-product of copper or nickel mining that is used in battery cathodes – has more than tripled since January 2016 (see Fig 1).
The surge in the value of these crucial components could be reaching its limit, however. In fact, as cobalt prices already start to drift lower and lithium stabilises, some analysts have suggested that the metals are on the brink of a crash.
Supply and demand
The market for lithium-ion batteries is growing rapidly. Used in everything from iPhones to electric vehicles, the power units are made up of a mix of metals, such as lithium, cobalt, nickel, manganese and graphite. The lithium industry is projected to grow from 100GWh of annual production in 2017 to nearly 800GWh in 2027, according to Cairn Energy Research Advisors.
As the chatter around electric vehicles evolved from speculations to tangible predictions, it has become clear that global lithium supplies are lacking. Lithium can generally be produced from one of two sources: spodumene hard rock, or brine. Producing lithium through brine in Central and South America is a “very, very simple operation”, and it is also relatively cheap, according to James Mills, a mining analyst at SP Angel. The process is time-consuming, however, taking between 12 and 18 months.
While the market waits for those supplies to come online, the gap is being filled with spodumene production in Australia. The country has seen a rapid move to extract these hard rocks, so much so that this year it overtook the ‘lithium triangle’ – Chile, Argentina and Bolivia – as the largest producer. This process is more expensive, however, and produces lower-grade lithium that must be shipped away, typically to China, to be upgraded into a battery-ready product. As a consequence of this, Mills said future supply is not expected to come from Australia, but from the large brine producers, like Chile-based SQM.
The deluge of investment into new projects is expected to meet demand forecasts for at least the next five to seven years, according to BNEF. However, in a recent report by Bank of America Merrill Lynch (BAML), analysts led by Head of Metals Research Michael Widmer predicted a glut of lithium on the market could cause the price of lithium to plunge by more than half to $10,000 a tonne by 2025. Producers are expected to add 815,000 tonnes of lithium to the market, surpassing a 460,000-tonne increase in demand.
Widmer told World Finance that, because supplies are ramping up gradually, prices will not fall every quarter – instead, over the next year or two they will start to “normalise and come a bit lower”. But to balance the market beyond 2020, Widmer opined that 50 percent of mines would need to be idle.
Panellists at a recent mining conference hosted by S&P Global Market Intelligence added that a major correction could happen as soon as 2021, due to lower-than-expected demand for lithium. Arnab Sen, Chief Investment Officer at investment firm Harbour Capital Management, said in the next three years, demand would “surprise the market to the downside” compared with current expectations. Paired with the pipeline of new lithium supply coming online, he said a price “reset” was on the horizon.
However, analysts at Goldman Sachs said the fears – and the resulting sell-off in lithium producers’ share prices – have been “overdone”. Analysts at the bank said it will be more difficult to develop new lithium mines than many people think, and at the same time demand will rise fourfold by 2025.
Despite the increase in new projects around the world, Goldman Sachs wrote: “We expect lithium markets to remain sufficiently tight to handsomely reward incumbent producers.” The share prices of US producers Albemarle and FMC in particular could rise by a further 34 percent and 30 percent respectively, the analysts added.
New battery chemistry
There are two big uncertainties for the future of battery metals, according to Widmer. The first is how quickly electric vehicles will penetrate the automobile market. This relies on improving consumer appeal by creating convenient re-charging infrastructure and advancing battery technology to boost vehicle range. But Widmer implied the eventual uptake in electric vehicles is inevitable: “In the end, it’s still a market where [electric vehicles] will ultimately become more important.”
Lithium and cobalt have been the stars of the battery metals market because of their stunning price movements
The remaining uncertainty is the chemical make-up of electric vehicle batteries. Cobalt is an important element in a lithium-ion battery, as it essentially extends the cell’s life cycle. Although it can be replaced by nickel – which is more widely available and cheaper – this could lead to a fire hazard as cobalt keeps the cell from overheating and combusting.
Despite this, battery makers are increasingly looking to distance themselves from the costly metal after prices surged based on fears that a supply shortage would come as soon as the early 2020s.
Elon Musk, the founder of Tesla, famously claimed he would reduce the amount of cobalt in his electric vehicles to “almost nothing” by increasing the amount of nickel. Although Tesla does not publicise the composition of its batteries, it reportedly uses a lithium-ion battery with a cathode primarily composed of nickel, cobalt and aluminium. According to S&P, these batteries are typically made of 85 percent nickel, 10 percent cobalt and five percent aluminium.
Panasonic, which makes the batteries used by Tesla, added in May that it plans to begin developing electric vehicle batteries that use no cobalt. Kenji Tamura, who is in charge of Panasonic’s automotive battery business, told analysts: “We are aiming to achieve zero usage in the near future, and development is underway.”
It is expected that cobalt-free batteries will take years to develop, but Tesla and Panasonic have already reduced their cobalt usage by about 60 percent. Some analysts fear that reducing it further could create engineering problems.
But the threat could still impact long-term cobalt prices, Widmer said: “If you take a little bit of supply growth coming through together with engineering cobalt out of the market, you end up in an environment where cobalt looks to be oversupplied [in] the coming years.”
Cobalt prices have already started to fall in the last few months, and according to Wood Mackenzie, supply will exceed demand by 652 tons this year. Next year, that gap will widen to 20,842 tons, which could cause prices to drop 23 percent from this year’s forecast to an average of $62,502 a ton. By 2022, the energy consultancy expects the price of cobalt to average just $44,585 a ton.
A high price is not the only factor pushing battery producers and car manufacturers away from cobalt – geographical and ethical issues are also on the table. Global cobalt reserves are largely concentrated in the Democratic Republic of the Congo (DRC). The central African nation accounts for more than 60 percent of the world’s mined output of cobalt, which, according to Widmer, brings “a whole load of problems with it”.
Predicted number of electric vehicles on the world’s roads by 2020
Predicted number of electric vehicles on the world’s roads by 2030
The DRC has a turbulent relationship with the mining industry, having increased taxes and royalties on cobalt in January. The government then declared cobalt a “strategic mineral” just a few months later, meaning it can raise royalties paid to the government from cobalt mining up to 10 percent from a previous cap of two percent.
Those looking to source their cobalt from outside the DRC will struggle. The world’s reserves and resources outside the country are geographically diverse, with no region in a position to replace production if supply in the DRC is disrupted.
What’s more, the DRC has also faced criticism for using child labour in its mines. Approximately 20 percent of cobalt in the DRC is mined by hand, and Amnesty International has said children as young as seven are among those working in the narrow, man-made tunnels of these small mines. Last year, Amnesty accused major electronics and electric vehicle firms such as Apple, BMW and Tesla of not doing enough to stop human rights abuses entering their supply chains.
In addition, the London Metal Exchange (LME), the world’s largest metal bourse, is said to be strengthening its scrutiny of companies that source their cobalt from the DRC. According to the SP Angel 2017 Commodity Research Book: “The LME, Amnesty International and consumers of DRC exports are probing into responsible mining practices, and demanding increased transparency toward ethical supply.
“Restricted tolerances on the supply chain are aimed at reducing the demand on the 20 percent supply from artisanal mines, which are employing an estimated 40,000 child labourers.”
There are also some efforts to use blockchain technology to securely track cobalt from mine to manufacturer to give firms a guarantee that children did not mine the cobalt they use.
But with cobalt already down 20 percent from its all-time high and battery producers scrambling to find replacements, the metal may have a tough few years ahead. In the coming quarters, Widmer expects cobalt to fall back to the level where it started before the electric-vehicle-induced rally.
The forgotten metals
Lithium (see Fig 2) and cobalt have been the stars of the battery metals market because of their stunning price movements, but there are a number of other metals in the mix that are potentially more interesting.
“They’re called lithium-ion [batteries], and everyone just assumes they’re mainly lithium. They’re actually not,” Mills said. “There’s other metals in there which are very much undervalued, and their time is going to come.”
Graphite, for instance, makes up almost 50 percent of the mass of lithium-ion batteries, but Mills said this goes unappreciated: “The price is just starting to come up, and you’re going to be in a position where the growth in terms of demand is going to be huge and you don’t have enough graphite to support the market.” Research by market research firm MarketsandMarkets said the graphite industry is expected to be worth $29.05bn by 2022.
Nickel is another underrated battery metal, Widmer said, because for every gram of cobalt removed, the nickel content of the cathode must be increased. “And that’s exactly what has been happening,” he said, referring to moves by the likes of Tesla and Panasonic to eradicate cobalt.
However, over the past few years on the nickel market, a number of big mines run by giants like Norilsk Nickel, BHP Billiton, Glencore and Anglo American have burned through a lot of cash. Widmer explained: “They didn’t close their mines down, but they had to cross-subsidise a lot of those operations, and because of that we have seen virtually no growth [capital expenditure] going into the industry.
“So you’re now in an environment where the mining industry has stopped spending on operations at the same time as you’re actually seeing the demand increase coming through.”
Currently, nickel looks set to be one of the strongest metals fundamentally. According to Widmer, it is the raw material that BAML says gives the best exposure to the rising popularity of electric vehicles. “It looks very, very bullish,” he told World Finance. Prices have risen steadily, and as of July they were up about 40 percent over the previous year, even taking into account a sell-off due to various global trade disputes.
The case for many battery metals continues to look strong. Although there will be some oversupplies in the lithium market, its position as a key component of lithium-ion batteries means long-term demand will stay strong so long as demand for electric vehicles rises. Cobalt’s future, however, looks bleak.
Due to its concentration in a politically volatile country and the proliferation of child labour in the supply chain, many manufacturers have decided to engineer the metal out of their batteries. But until a transformational next-generation battery is developed, metals like graphite and nickel, which have yet to gain the same level of attention from investors, may be the ones to provide the most noteworthy price spikes in the months and years ahead.