Fortunes to be made in the great lithium rush

Lithium is a key ingredient for modern batteries.

One of colonial Australia’s first experiences of the transformative power of new technology was before and during the first gold rush, which began in May 1851. Edward Hargraves brought to Orange in NSW new prospecting technology and techniques learned in the Californian goldfields.

Reflecting the transformative power of the technology in Victoria, the Geelong Advertiser noted on October 14, 1851: “There are, we should say, about a thousand cradles at work, within a mile of the Golden Point, at Ballarat.”

The subsequent boom in NSW and then at Ballarat and Bendigo in Victoria transformed the early colonies, as well as the bank accounts of those selling the pans and cradles that enabled the new prospecting techniques.

Technology has maintained its power to transform revenues, environments, communities and the world order. Of course, fortunes are also lost when incumbent technologies are rendered redundant.

Today, with momentum building to tipping point levels for battery electric vehicles (BEV), there will again be fortunes made and lost. Underestimating the transformative impacts and failing to unearth the pan and cradle sellers of the coming BEV boom will be an expensive mistake.

More than 14 countries and 20 cities around the world have proposed banning the sale of fossil fuel-powered passenger vehicles (primarily cars and buses) in the near future.

Consequently, global car and truck manufacturers have conga-lined their announcements of planned transitions from ICEs (internal combustion engines) to BEVs. VW’s recent announcement of a €25bn ($39bn) program to develop a comprehensive range of EVs — from affordable to luxury and performance, a network of tens of thousands of fast charging stations across the world, as well as additional “gigafactories” and battery recycling plants — is a convincing sign that BEV has reached a tipping point.

Demand for batteries will come not only from the global pivot by car manufacturers to BEVs. Large power utility projects are increasingly adopting battery technologies, as are residential power consumers.

According to the International Renewable Energy Agency’s Electricity Storage and Renewables, Costs and Markets to 2030 report: “Electricity storage will play a crucial role in enabling the next phase of the energy transition. Along with boosting solar and wind power generation, it will allow sharp decarbonisation in key segments of the energy market.”

In 2018, Europe was reported by Wood Mackenzie to have the second-highest level of energy storage in the world with 600MW of battery power, noting: “An impressive (range) of large utility projects has been commissioned in 2018, including a number of approximately 50MW behemoths.” And Wood Mackenzie expects continued strong growth in installations.

Meanwhile, a virtuous circle of declining battery prices, leading to increasing demand, leading into increasing investment in battery technology, is well entrenched. In 2010, a 1KWh capacity lithium-ion battery pack cost more than $1000. Two years ago, prices were $156.

Cheap batteries will of course lower the cost of manufacturing cars as well as commercial and residential storage solutions, accelerating their adoption. Unsurprisingly, EV purchases have skyrocketed from just over 500,000 in 2015 to over two million vehicles in 2018 and three million in 2020.

You do not need to perform difficult computations to see that demand for the upstream elements required to manufacture batteries will trigger a new gold rush.

According to Roskill Information Services, in 2017, 48 per cent of the global market for lithium products was estimated to be based on batteries. As demand surges it will also put pressure on the demand for lithium by ceramics, glass, lubricating grease, polymer, continuous casting mould flux powder and agrochemical manufacturers.

According to Roskill’s June 2020 forecast, Li-ion battery demand will increase more than ten-fold by 2029, reaching in excess of 1800GWh capacity. The pipeline capacity of battery gigafactories is reported by Roskill to exceed 2000GWh in 2029, at more than 145 facilities globally. But that forecast was made nearly a year ago.

Today, it is reported 180 gigafactories alone either exist or are under construction, and a calculation of demand planned by major battery and automotive entities suggests capacity of 3000GWh by 2030.

These estimates compare to the 455GWh of Li-ion battery production capacity in 2020 as reported by S&P Global Market Intelligence.

Estimates therefore are for a near seven-fold increase in the next nine years.

According to the Australian government’s 2018 report The Lithium-Ion Battery Value Chain: “Australia is developing its lithium extraction capacity faster than any other country. Forecast output from existing Australian operations and planned projects tracked by the West Australian Department of Mines indicates a potential supply of more than 1 million tonnes LCE (lithium carbonate equivalent) by the early 2020s.”

Importantly, this projection indicates underlying industry demand for lithium at a higher rate than forecast by many analysts. For example, McKinsey forecast only 669,000 tonnes of global LCE demand in 2025.

With the world’s third-largest reserves of lithium (behind Chile and China) and being the largest producer of hard-rock or mineral lithium spodumene (Chile’s lithium is sourced from brine deposits, not hard rock spodumene), Australia has a comparative advantage in its access to the minerals vital for making lithium-ion batteries.

In fact, Australia’s lithium reserves are estimated to amount to over 18 per cent of the world’s resource and we also produce nine of the 10 elements required for lithium-ion battery anodes and cathodes. The tenth element for production is graphite, of which Australia also has commercial reserves.

Roger Montgomery is founder and chief investment officer at Montgomery Investment Management.

www.montinvest.com