Galaxy, Orocobre, agree the world will not get enough lithium in time
The world is heading for a lithium bottleneck because even though there are enough reserves of the resource available, producers say it can't get into the battery supply chain in time for the anticipated uptick in electric vehicles.
That is partly because capital markets have declined to support a sufficient level of lithium production, and because forecasts for electric vehicle usage keep being upgraded on both energy intensity and demand.
Anthony Tse, the chief executive of Galaxy Resources, told the UBS Australasia conference in Sydney on Monday that his best estimate of investment in lithium production over the past 18 to 24 months was $US2 billion.
"Among private equity deals, public equity, public debt, private debt plus announcement of capital developments from some of the major corporates, we can't get past $US2 billion of announced capital to be spent."
That leaves the industry under-capitalised by $US6 billion to $US7 billion.
The major issue there is if you look at the 200,000 tonnes last year that was produced, let's assume an average selling price of $US15,000 a tonne.
"The global sales of the lithium business last year were only $US3 billion. So you've got a $US3 billion global sales market asking for $US6 billion of capital to be deployed not over the next seven or eight years, but over the next three to four years, in order to meet the demand in 2025."
Galaxy is internally modelling on a forecast for 50 kilowatt/hour batteries, from 40 kWh, for 2025.
Neil Kaplan, chief financial officer of Orocobre, tended to agree. "We see the market remaining extremely tight, as we all know last year 750,000 vehicles were sold, just about a 1 per cent penetration. 2020, our guess is around 4.5 per cent; 2025, 15 per cent; 2040 – long time out – but we expect that to be over 50 per cent at that point."
Mr Kaplan predicated this on supportive government policy, including China's expectation of 4.5 million electric vehicles on the road by 2020.
"It's tough to bring a project online. We had our hiccups along the way. Last financial year we produced 12,000 tonnes, roughly 6 per cent of the world's production," he said. "There are going to be widespread bottlenecks."
Mr Tse owns a Tesla model S with an 85 kWh battery, and a model 3 has a 60 kWh battery.
"When we're running our own internal analysis we don't necessarily just look at penetration rates and number of vehicles to be sold," he said.
"What is important is looking at the average kilowatt hour intensity – average energy intensity – per vehicle. And just to extrapolate that a little bit: for example China up until last year was running in the mid-low 30 kilowatt hours per vehicle, this year it's probably trending towards 40 [kWh]."
Critically, "the difference between assuming a 40 kilowatt hour per vehicle intensity versus a 50 kilowatt hour per vehicle intensity has the impact of bumping up your implied LCE or lithium carbonate equivalent demand by up to 20, 25 per cent within any given time frame, let's say by 2025. And that is going to be quite substantial."
Market growth forecasts implied three to 3½ new projects every year performing at capacity. The appetite for commercial and mass transit vehicles running several hundred kWh batteries would further inflate that.
"To say that between now and 2025 it could go to 50 kWh per vehicle, that's not a very big stretch," Mr Tse said.
"There's one thing to say there's a lot of reserves in the world, there's another thing to say those reserves can actually be economically extracted at a viable level to bring online meaningful production."
On Monday, ASX lithium aspirant Altura Mining Limited appeared to be the next cab off the rank in spodumene concentrate production in Australia.
The company is examining an expansion that would boost production from start-up capacity of 220,000 tonnes a year to 440,000 tonnes at its $170 million Pilgangoora lithium project in Western Australia's Pilbara.
"Everyone's rushing to supply as quickly as possible to take advantage of a very tight market and increasing prices," Mr Kaplan said, believing Orocobre and Galaxy to be well positioned. UBS analysts Glyn Lawcock and Lachlan Shaw said their base case for electric vehicles was compelling. Last year the lithium market was about 200,000 tonnes. That rises by five times to 2025 as a base case, with most of the growth coming in the later years.
In May, they bought a Chevy Bolt and pulled it to pieces to find out what was in the car and the cost of the components, leading them to find that cheaper materials will lead consumers to buy more electric vehicles.
"There's plenty of lithium everywhere, therefore this market is in a bubble, therefore current spot prices [will] come down," Mr Shaw said paraphrasing the lithium sceptics.
"We think it's harder to get to the high-grade lithium you need for batteries but nevertheless when we look at our base case demand numbers and we overlay known supply coming through," he said, the market remains tight this year and next year.
"It starts to get a little bit easier moving towards the end of the decade. On that basis we do see current lithium prices coming back from around high-teens, maybe $US20,000 a tonne, back closer towards $US12,000 to $US15,000 a tonne over that time frame."
Source: Australian Financial Review Website for tomorrow’s 15th November 2017 morning edition
