Electric car makers brace for cost headache as battery-grade lithium price set to rise 50% within a year.
Electric vehicle producers and suppliers could be facing a major cost headache starting this year as prices for battery-grade lithium are poised to skyrocket. Prices for the metal are already trading at a record high of $35 per kilogram in Asia, and are likely to keep climbing to $50 per kilogram in the second half of 2022 and trade at around $52.5 per kilogram in January 2023, a Rystad Energy analysis shows.
Interest in lithium iron phosphate (LFP) batteries has taken off among manufacturers since early 2021. Rystad Energy therefore expects the supply of lithium salts to remain tight through the first half of 2022 at least, due to lagging production in China and South America. Producers appear reluctant to sell significant volumes on the spot market, as supply constraints and the ongoing logistical issues caused by the pandemic create bottlenecks in the trading market for lithium salts.
Chinese producers are hesitant to sell lithium salts on the spot market due to constraints caused by a slowdown in lithium carbonate production in Qinghai province in recent months. Similarly, suppliers in South America’s lithium triangle are reluctant to allocate volumes outside long-term contracts despite their planned ramp-up in 2022, taking a cautious stance because of the ongoing logistical challenges.
This supply tightness for lithium salts, combined with the optimistic demand outlook for LFP batteries that typically feed on lithium carbonate, is expected to keep lithium carbonate prices high and support a notable premium over the price for lithium hydroxide in early 2022. However, Rystad Energy estimates this premium will gradually narrow after seasonal supply bottlenecks ease in China and a ramp-up plan in South America materializes.
“A fresh new driver for China’s lithium market are lithium contract prices on the Changzhou Zhonglianjin exchange platform. Launched some six months ago, the futures contracts have driven sentiment in the market to some extent, especially over the past two months. This has contributed significantly to the current momentum in lithium prices in China and made trader-suppliers who have attempted to destock in January hold back from selling for now,” says Susan Zou, senior analyst on Rystad Energy’s battery materials team.
Changzhou’s lithium contract price for February 2022 hit an intraday high of CNY 418,500 per tonne on 10 January, up 14.34% from CNY 366,000/tonne at the close on 31 December 2021. The contract price then dropped to CNY 345,500/tonne at close on 12 January. However, it is still too early to say whether Changzhou’s lithium contract price will repeat the success of the cobalt contract on Wuxi, which has long dictated cobalt prices in China’s physical market, Zou said.
Rystad Energy’s monthly price index suggests that prices for battery-grade lithium carbonate ex-works China rose to CNY 300,000/tonne in early January 2022, up nearly 43% from CNY 210,000/tonne a month earlier. The price for battery-grade lithium hydroxide ex-works China rose to CNY 290,000/tonne in early January from CNY 192,000/tonne in early December.
Copper supply deficit of 6 million tons by 2030 threatens renewables, EVs, as investment lags demand. Global demand for copper, an essential component in manufacturing electric vehicles (EVs) and consumer electronics, will outstrip supply by more than six million tonnes by 2030, Rystad Energy projects. A deficit of this magnitude would have wide-reaching ramifications for the energy transition as there is currently no substitute for copper in electrical applications. Significant investment in copper mining is required to avoid the shortfall.
Copper demand is projected to rise 16% by the end of the decade, reaching 25.5 million tonnes per annum (tpa) by 2030, compared with a supply forecast showing a 12% decrease versus 2021 levels. Estimates based on current and expected projects show supply will clock in at 19.1 million tpa, falling well short of the quantity needed to meet demand.
Investment in copper mining is risky as current operations are near peak capacity due to ore quality and reserves exhaustion, exerting upward pressure on production costs and emissions. However, copper prices are currently high, which could encourage investors to accept a greater level of risk.
“Lackluster investments in copper mining are stumping supply, as the pandemic-driven market instability encourages investors to hold on to their capital. As the energy transition continues at pace and EV adoption grows in populous nations like China and India, the copper mining industry requires significant investment to keep up with demand,” says James Ley, global energy metals expert and Senior Vice President with Rystad Energy.
The growing renewables and EV markets have pushed copper demand higher, causing prices to soar. Prices have risen 70% during the pandemic. The current spike in infection cases, due mainly to the spread of the Omicron variant, is causing further supply chain bottlenecks, leaving prices at all-time highs entering 2022.
The outlook for copper investment paints a bleak picture for future supply, indicating a significant supply deficit could emerge from 2023 onwards. The expected demand increase is due to the market growth of renewables – solar, onshore and offshore wind, among others – EVs, construction and electronics. With India’s projected economic growth and the buildout of EVs from China, the demand projection could end up being conservative and the supply shortfall even more severe.
Copper mining is an energy-intensive process that produces a large amount of carbon emissions. The government of Peru, one of the world’s largest exporters of copper, ordered several mines to close in November 2021 amid environmental protests. As a result, four mines in the southern Ayacucho region could be barred from further expansion, which would dent the copper, silver and gold portfolio of large UK-based minerals producer Hochschild Mining. In addition, the Las Bambas copper mine in southern Peru that produces 400,000 tpa of the material – or about 2% of global supply – will reportedly shut production due to transportation issues. Political instability in neighboring Chile, another major producer, further adds to the supply problems.
In recent years, mining investors have been primarily focusing on the lowest-risk projects, while also offering high dividends. Coupled with the ongoing issues of pandemic lockdowns, work stoppages and delays, copper supply growth has decelerated.
A supply deficit could cause projects in many industries to experience lengthier lead times, especially when considering copper demand from all sectors combined is projected to grow 32% by 2040, compared with 2020 levels. This includes the contributions of solar, onshore/offshore wind, hydroelectric, biomass and nuclear. Demand for oil and gas is expected to fall, with global production of these fossil fuels also expected to decrease.
Since 75% of mined copper is used in electrical wires, power grids and motherboards, it is an indispensable commodity. Due to continued demand growth outpacing available supply, intermittent supply shortages would likely significantly impact raw copper rather than semi-finished product inventory.
New copper resources continue to be discovered – such as Grasberg in Indonesia and Kamoa-Kakula in the Democratic Republic of Congo (DRC) – yet many remain undeveloped as potential mines can suffer from low ore grades or because fiscal or political uncertainty in the host country. Interestingly, UK brokerage Marex Spectron sees the potential for 2022 offering a copper surplus, saying in December 2021 that major new projects – such as Teck’s QBII mine in Chile and Anglo American’s Quellaveco project in Peru – could add 200,000 tpa. Ivanhoe’s mine in the DRC could add another 70,000 tpa, while the ramp-up at Freeport’s Grasberg mine could add a further 110,000 tpa. However, despite this supply growth potential, projects will require a politically stable environment, and their operators must be mindful of the emissions targets to entice would-be investors.
Mining companies are still among the highest dividend payers, and new copper discoveries remain undeveloped mainly due to perceived risks. Overall, any copper supply shortages will almost certainly encourage greater recycling levels to boost availability.
Rystad Energy