29 November 2023

Looking at the projections for electric vehicle (EV) sales, and then at all the metals these EVs will require to furnish their battery packs, it is easy to look at the suite of “new energy” metals and imagine a fountain of riches flowing to miners and project developers, another so-called, marketing-hype-driven “supercycle” to rival or even outdo the decade-long boom in base metals fueled by the build-out of China.

The reality has proven far less rosy. This note focuses on spodumene as a proxy for lithium generally, but the same principles apply to nickel, manganese, cobalt, graphite, and even to some extent to copper.

Spodumene is the most prevalent hard rock source of lithium and is sold to refiners at a price based on a reference grade of 6% contained lithium oxide. Mined historically for a range of applications including such prosaic uses as ceramics, lubricants and fluxes, spodumene has emerged as a major source of lithium for EV batteries, with supply roughly on a par with lithium brines.

Spodumene prices recently took off in the 2017-18 period, rising to around $800 per ton for reference-grade material. Within two years the price had dived to less than $400 per ton, some producing operations were on care and maintenance, and the unfortunate Alita Resources was in administration after declaring bankruptcy in late August 2019, dragged down alongside falling prices. Investment into lithium projects also slowed markedly, pushing out the timeframe for lithium supply growth.

Meanwhile global EV sales were accelerating, roughly doubling in unit terms from 2017 to 2019 and continuing to grow through the first year of the pandemic. Just as lithium supply was shrinking, demand was growing rapidly, with the predictable outcome of a rebound in prices. From trough to peak, spodumene prices climbed 20-fold in little more than two years, topping out at a shade above $8,000 per ton in December of 2022. Yet by 10 November 2023 the price has fallen more than 75% to sit (for now) at $2,000 per ton.

It is easy to look at these wild gyrations and roll one’s eyes. Nonetheless, what we have seen (and will likely see again at least once before the end of the decade) is the natural price evolution in a rapidly growing commodity market. The price spike of 2017-18 generated huge interest in lithium and led to rapid expansions by existing producers, all in a still-nascent environment for hard rock lithium mining. The increase in supply relative to incremental battery demand was large, some demand growth faltered (notably Tesla meeting production goals) and the lithium market rapidly became grossly oversupplied. So down went the price.

Cheaper lithium of course helped spur EV demand (although CPM would argue that better manufacturing operations at Tesla, plus incentives in China, were much more influential in expanding EV supply), and regulatory changes especially in the EU signaled to auto makers that the internal combustion engine is considered by at least some policy makers a sunset product. Consequently, the lithium price soared on the back of renewed scarcity.

As ever with commodities, a high price is the absolute best way to stimulate new supply and lower prices. In the case of lithium there has been a scramble to expand existing mines wherever remotely possible, particularly in Australia. As a result Australia has become by far the largest lithium supplier, accounting in 2022 for close to 50% of global lithium supply.

However, new production sources have emerged at a rate that is remarkable in the mining industry. Chinese firms including Sinomine and Huayou Cobalt have brought mine developments in Zimbabwe into production at a breathtaking pace; Zimbabwe in a couple of years has muscled its way into the ranks of the top five lithium producers. Some industry observers predict that on the back of expanded African supply (including some puzzling operators in Nigeria) we could see spodumene prices fall to around $1,200 per ton in 2024.

So what does one make of this? On the one hand, a floor in the $1,000 per ton range is a huge drop for spodumene from its peak. In the other hand, it is far above the $375 per ton price kissed by the market in 2020. And the drastic fall in lithium prices may help spur the adoption of EVs at least to some small extent. But the (much) lower lithium price does mean that some mining projects, especially earlier stage green field mines, may be delayed. Financing just gets harder in a less exuberant market. This dynamic sets up another potential turn of the price merry-go-round, as EV volume growth drives increased lithium demand, while supply-side expansions are slowed by lower prices and reduced liquidity until demand again overtakes supply and prices soar.

These kinds of price movements are inevitable in any rapidly growing commodity market. It is absurd to imagine that moment to moment new supply will match new demand even in established markets, let alone new, uncertain, developing markets. Instead, we are doomed to see peaks and troughs as the market grows, and given the projected rate of growth the magnitude of such swings is likely to be high for the foreseeable future. Large tonnage deficits eventually become small in a growing market, while large percentage deficits remain large.

All this uncertainty appears to us to create room for the majors. The lithium industry remains the preserve for the most part of second and third tier miners. The global majors, along with gigantic energy companies like Exxon, are reported to be waiting in the wings but are not yet active participants. For them, the boom-bust-boom cycle of the lithium market (and by extension other battery chemical elements) creates the opportunity to enter at the trough and avoid the perennial latecomer’s problem of asset prices.

So CPM sees no obvious end to the volatile price cycle in the lithium market, absent a decisive (and perhaps improbable) lurch away from EVs. Lower than forecast EV volumes may lead to moderation in price swings, yet they will remain an important force in the market throughout lithium’s rapid growth phase. Market highs will trigger investment, some of it speculative, while troughs are likely to drive consolidation and the entry of global leaders in mining and energy.