Short-term obstacles around the world threaten to slow the now-booming demand for lithium

Lockdowns in China and economic troubles in Europe may dent demand for lithium, a key ingredient in batteries used in electric vehicles.

A series of short-term obstacles around the world threaten to slow the now-booming demand for lithium, a key ingredient in the batteries powering electric vehicles. Picture: Getty Images

A series of short-term obstacles around the world threaten to slow the now-booming demand for lithium, a key ingredient in the batteries powering electric vehicles.

Market analysts at UBS warned in a client note released Thursday of growing risks to downstream demand for the precious commodity.

They said lockdowns in China to curb the latest outbreaks of the Omicron variant of Covid have created risks to vehicle output.

In addition, demand for lithium in developed markets such as Europe may fall as a result of higher power prices, rising interest rates and fears of a looming global recession.

“These factors may have knock on impacts for upstream battery raw material prices (such as lithium) in the near-term,’’ they wrote.

“We still like the EV thematic (and its relevant commodities) term but are cautious short-term air pockets.’’

Ongoing mobility restrictions in Shanghai and other major cities across China have created “headwinds for passenger vehicle sales and output” among a host of other issues.

“UBS’ China Autos team had flagged impacts to passenger vehicle output/demand as early as March,’’ the note said.

Preliminary data from equipment manufacturers last month reveal a mixed picture.

Early numbers from smaller domestic brands show clear impacts from mobility restrictions. But market leader BYD’s saw a lift in sales, helping alleviate concerns about output and sales.

Tesla’s Gigafactory in Shanghai is now operating again at 80 per cent capacity after it was previously shut down in late March.

Meanwhile in Europe, a combination of high energy prices, inflation and other economic challenges is taking a toll on lithium demand.

Supply constraints have played a part in plunging car sales, which fell 18.8 per cent in March compared to the same period a year earlier.

“Risks of demand destruction are also increasing,’’ the note said.

“A sharp fall in consumer confidence, driven by the ongoing Russia-Ukraine conflict and with implications for power prices, inflation and recession fears have increased risks around downstream demand in the near-term.

“In contrast to China, EU government policy is tightening. Future macro direction hinges upon the Russia-Ukraine conflict which will also have direct implications on power / oil prices.”

Taken together, these different factors mean there is now a greater likelihood of a “short-term imbalance’’ in what is otherwise a fast-growing market.

“We acknowledge rising risks to the overall autos market as a result of COVID-19 in China and growing global recession risks,’’ the note said.

“However, we think that EVs are so heavily undersupplied with order backlogs stretching out to 1.5 years in some cases (i.e. VW has sold out of EV’s until 2023) that production/parts will be the limiting factor.

“Still, we believe a potential slowdown in downstream output coupled with continued brownfield expansions and greenfield developments in the upstream lithium market may lead to a temporary air-pocket.”

Originally published as Short-term obstacles around the world threaten to slow the now-booming demand for lithium