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Why lithium has turned from gold to dust for investors

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Why lithium has turned from gold to dust for investors

Trade frictions and geopolitical uncertainty have made 2019 a challenging year for commodities investors in general. However, few resources have been trickier to fathom, or more unpredictable, than cobalt and lithium.

Before the advent of modern electric vehicles (EV), lithium was known for decades as a medicinal cure for depression. But plummeting prices for the commodity – a crucial raw material in the manufacture of high-powered lithium-ion EV car batteries – have given investors the blues.

Lithium carbonate prices assessed by S&P Global Platts have tumbled more than 20 percent this year to around $10,000/mt amid a global glut of supply, which has outstripped demand for EVs. Once dubbed the new “white gold” when prices peaked at a record over $25,000/mt in 2017, lithium is now being branded “white dust” by some companies burned after overinvesting in its large-scale production and processing.

“Lithium supply is growing far quicker than lithium demand and this can be said for all battery materials as the EV pick up rate is not expected to really start increasing until the early to mid-2020’s,” said Marcel Goldenberg, manager for metals and derivatives at S&P Global Platts.

PLATTS LITHIUM CARBONATE AND LITHIUM HYDROXIDE, CIF NORHT ASIA

Platts lithium carbonate and lithium hydroxide , CIF north asia Chart

Investment bank Morgan Stanley now forecasts prices could fall by a further 30% through to the end of 2025 as suppliers race to bring on new production and refining capacity. Shares in the world’s largest producers such as Albemarle in the US and Chile’s SQM have also taken a hit from the slump. Meanwhile, Ganfeng – China’s largest lithium producer and a supplier of carbonate to Tesla – said this week that first-half profits tumbled almost 60%.

Inefficient production

First used commercially by Japan’s Sony in the early 1990s to power video recorders, lithium-ion batteries have become the gold standard for EVs because they store more power per unit of weight compared with alternatives such as nickel-cadmium. The trade-off is cost and the toxic process to refine the material along with producing the batteries. Materials such as lithium, cobalt, nickel and graphite account for about a third of total EV battery costs. The rest is gobbled up by inefficient manufacturing processes and elongated supply chains.

“Overhead costs for producing an EV battery are still large and economies of scale have not yet been established meaning that the price of the raw materials used in a battery has a limited impact on the overall price of the battery,” said Goldenberg.

Go deeper – S&P Global Platts 2nd Annual Battery Metals Conference

Underlying the slump in lithium is the continued consumer distrust of EVs and their limited range when compared with the internal combustion engine. British motorists remain largely unconvinced by the technology, despite the government’s desire to promote plug-ins at all costs. Sales fell in June for the first time since 2017. Only one in every 17 cars leaving UK forecourts is powered by electricity. It remains to be seen how EVs will compete once generous subsidies to induce consumers to purchase these predominantly luxury vehicles are reduced over time.

Sales may be growing globally, but they are also modest when compared with the total fleet of cars on the roads. EVs only accounted for 2.5% of total passenger vehicle sales last year, according to the S&P Global Platts Analytics Electric Vehicle Sales & Policy Scorecard. However, sales are expected to reach 24 million by 2030 and accelerate beyond that as more governments introduce legislation to reduce emissions to net zero by 2050.

Cobalt risks

At the other end of the battery metals spectrum is cobalt. The world is dependent on the Democratic Republic of Congo for supply of the rare mineral, which makes it unpredictable and highly susceptible to political risks. Kinshasa is aware of the critical role its mines now play in the market for battery metals and last year it labelled cobalt a “strategic” substance in order to justify tripling mining royalties.

Meanwhile, Amnesty International’s claims of children toiling in hand-dug mines and facing serious health risks in the DRC hardly fits in with the “greenwashed” narrative many advocates of the EV industry like to promote.

“Global cobalt mine supply is at risk of disappearing in 2020,” said Benedikt Sobotka, CEO of Eurasian Resources Group. “Some of this will be replenished with ramp-ups at major industrial projects, but not enough to close the gap. Some may be supplied by existing stockpiles, but these are held in stable hands and will fall to critical levels over the course of 2020.”

Despite these challenges gambling on lithium and cobalt as the future of passenger transport remains a bet many investors are willing to take.