In our July piece, Is This a Turning Point for Lithium Demand?, we discussed our belief that we are in the early stages of a dramatic shift in lithium demand. The main driver: the acceleration of electric vehicle (EV) sales. In this piece, we seek to address three key questions relating to electric vehicles, lithium, and batteries:

• Why Now?
• What does this Growing Demand Mean for Lithium Prices?
• Do Rising Lithium Prices Hurt Battery Producers?

Why Now?

While electric vehicles have previously been viewed as a gadget for affluent early adopters, EVs appear to be on the verge of going mainstream. A major driver of this change is a major reduction in battery costs, which has made EVs much more affordable relative to traditional combustion engine-powered vehicles. Bloomberg’s New Energy Finance unit found that lithium-ion battery costs fell by nearly 50% from 2014 to 2016 as battery producers raised output and competition increased.¹ Falling battery costs along with simpler engine designs and cheaper ‘fuel’ are making consumers around the world seriously consider EVs. Nowhere is this more apparent than in China, which made up over half of the world’s EV market in 2016, and a quarter of the world’s plug-in hybrid sales.²

Another important catalyst for EV sales is government policy. Some governments have historically helped improve the economics around EVs by providing generous subsidies to car buyers. But now regulations are being taken to a whole new level by setting end-dates for the sale of combustion engines. Here’s a list of countries that have recently implemented these policies and the number of new cars sold in these countries in 2016:^3,4

• Norway (0.2m cars): new passenger cars and vans must have zero emissions by 2025
• India (3.7m): will ban the sale of new gasoline and diesel cars by 2030
• UK (3.1m): will ban the sale of new gasoline and diesel cars by 2040
• France (2.5m): will ban the sale of new gasoline and diesel cars by 2040
• China (28m): recently announced it will ban the sale of gasoline and diesel cars (official date still pending)

Falling battery costs combined with meaningful government regulations has caused many organizations to revise their forecasts for electric vehicles. For example, OPEC’s new forecasts estimate five times more EVs in 2040 than originally expected, while the International Energy Agency recently doubled its forecasts.⁵ To give a sense of what these higher EV sales estimates mean for lithium, consultants at Roskill now predict total demand for the white metal will triple over just the next 8 years.⁶

What does this Growing Demand Mean for Lithium Prices?

Like other commodities, lithium prices are ultimately determined by supply and demand. What makes lithium somewhat unique is the time to market for new supply. In the oil markets, for example, producers can usually bring a drilled well to completion in 4-9 months, resulting in relatively dynamic supply chain responses to changes in demand.⁷ Lithium supply, however, is much slower to react. Much of lithium is produced through a brine method that requires waiting for pools of salt water to evaporate, leaving behind concentrated lithium deposits. This is a slow process that can take years until new lithium is ultimately added to the market. Given the slow time to market for lithium supply, sharp changes in demand can have a profound on lithium prices in the near term.

Over the long term, lithium producers should be able to meet heightened demand as they ramp up production. According to the US Geological Survey, world reserves of lithium top 47 million tons, while consumption of lithium was just 37,800 tons in 2016, implying plenty of availability of the natural resource.⁸ Yet approximately 90% of 2017’s lithium supply is concentrated among just four producers.⁹ Given this high concentration of supply, some suspect that lithium’s ‘big four’ have little incentive to flood the market with cheap lithium, and instead may limit production to support higher prices- a move may seem all too familiar to oil market watchers.

It’s also important to remember that lithium producers derive revenue from the price of lithium times their output. Therefore investors with exposure to lithium producers should consider both spot prices of lithium as well as changes in overall output. For example, output could increase proportionately with demand, keeping lithium prices stable, but still represent a positive financial outcome for lithium producers given increased unit sales.

Do Rising Lithium Costs Hurt Battery Producers?

Some might expect that rising lithium costs would hurt battery producers by increasing the cost of raw materials. Yet in reality, lithium makes up a very small portion of a battery’s overall cost to produce. Bloomberg estimates that a 300% increase in lithium prices would only increase battery costs by 2%.¹⁰ Therefore, battery producers are relatively insensitive to changes in lithium prices. Even if lithium prices were to spike dramatically, we believe improvements in other areas of battery production, such as increased scale, new technologies, and intensifying competition, could continue to drive overall battery costs lower.

Conclusion

Falling battery costs and new government policies are propelling electric vehicles into the mainstream. We believe lithium miners and battery producers are well positioned to potentially benefit from this trend as the rise of EVs could cause substantial changes to global demand for lithium and batteries; perhaps even sooner than everyone expected just months ago.

Related ETFs

LIT: The Global X Lithium & Battery Tech ETF invests in the full lithium cycle, from mining and refining the metal, through battery production.