A warning in oil circles about the possibility of a spike in demand argues that “the stone age did not end for lack of stones”. When it comes to electric vehicles, there are more fears that the electric age will collapse due to a lack of lithium.
Lithium-ion batteries power smartphones, laptops and electric vehicles. When I wrote this in 2016, Citigroup analysts were speculating about the transformational effect on lithium demand if, in 2020, electric battery sales hit 1 million. Ultimately, more than 2 million were sold that year – and nearly 5 million in 2021, not counting plug-in hybrids.
There was more than enough lithium to meet this extra demand – so much so that prices started falling in 2018 and didn’t bottom out until 2020. But since then prices have been rising. Battery-grade lithium carbonate in China fetched more than $40,000 a ton in recent spot trades, according to Benchmark Mineral Intelligence, a London-based market data and intelligence provider, from less than $6,000. dollars 18 months ago. Even though prices paid under long-term contracts have not risen as quickly, it is clear that the market has tightened considerably.
Political risk also appears to be increasing. Serbia has just blocked plans by Rio Tinto Plc to develop what would have been Europe’s biggest lithium mine, following widespread protests. In Chile, the world’s second largest supplier, the election of a young left-wing president – and, it seems, Swiftie – who called for the creation of a national lithium mining company, has raised concerns about future plans there.
Predictions of an impending lithium shortage have been heard for years, but they are now becoming a consensus. There’s a certain irony in the way oil fans and propellants of its apparent enemy, lithium, both warn that a shortage of investment will fuel shortages and painful price spikes. It is important to remember that the dynamics here are familiar, even if the context of the energy transition is new.
“It’s kind of a ‘duh’ moment,” says Emily Hersh, a lithium expert who is now chief executive of exploration and development company Luna Lithium Ltd., referring to long-held expectations of a shortage. But, she adds, “lithium is cyclical like any other raw material.”
There is no real shortage of lithium resources per se; everything is a question of economic and political support for development. I remember the nervous atmosphere at a lithium conference in 2018, when some predicted that South American producers would quickly tap into their reserves and overwhelm the market. This cycle of hope and despair is familiar to anyone who has watched, say, the oil market for decades – and it is indeed a vital, if sometimes destabilizing driver of investment. The recent rally and rampant panic over shortages is needed to stimulate activity and stave off these shortages.
Likewise, while political risk may increase, the issue is too complex to describe by saying, for example, that a left-wing government in Santiago portends death. In the case of Chile, the long lead times needed to develop projects and the licenses already held by incumbents suggest that even a forceful new president would need time to have a significant effect on supply. Hersh, who has lived in South America for years, also cautions against reading too much of what Chilean politicians are saying. Although this country is vital for the supply of lithium, lithium represents only a tiny part of the Chilean economy – unlike copper, for example – and this makes lithium an easy topic of political discussion while the debate on a new constitution is intensifying.
Serbia’s sudden decision against Rio, meanwhile, must be seen in the context of the upcoming elections there. As frackers have discovered in the United States, commodity producers must protect their social license to operate if they are to avoid a backlash. Lithium can be vital in fighting climate change; but that doesn’t give the industry a free pass to ignore the problems associated with brine water management and the usual mining concerns.
Above all, political risk is embedded in the energy of all types. Have you heard recently about Ukraine, Russia and gas flows in Europe? Or from the Middle East? Decades and billions of dollars have been spent building and defending oil supply chains. Lithium and other critical minerals will require their own security devices. It’s a problem that needs to be tackled, yes, but it’s not really new.
A structural problem facing the electric vehicle boom sets it apart from traditional vehicles. When automobiles became popular a century ago, the oil industry that supplied them was already quite developed; Standard Oil was broken up in 1911. Basically, oil producers were looking for a new outlet as electric light killed the demand for kerosene lamps. Thus, the marriage of the automobile with gasoline occurred at a time when there was already a glut of fuel (and fixed capital) looking for a market.
One hundred years later, the marriage of the automobile with lithium involves the simultaneous development of electric vehicles and the mineral supply chain for their batteries. Additionally, Morgan Bazilian, director of the Payne Institute at the Colorado School of Mines, points out that lithium pricing remains largely opaque (as is the case with the carbon emissions that electric vehicles are supposed to address). This exacerbates an already huge challenge: transforming the global fleet of more than a billion vehicles into electric models. Benchmark Minerals estimates that meeting the targets set at last year’s COP 26 climate conference would require 17 times more lithium than was produced in 2021.
So let no one doubt that over the next few decades we will need a lot more lithium. The optimism inherent in this situation is reason enough to believe that providers and governments will find a way to exploit it.