The recent grounding in the Suez Canal of the Ever Given, a 20,000 TEU container ship, has highlighted the fragility of global oil supply and need for more resilient supply chains as well as alternative energy sources. The good news is that a shift is already underway and investors are betting on it. By this, I mean decarbonization and how 2021 is going to be a pivotal year despite the pandemic
The battle lines are being drawn around the most important aspect of the Energy Transition: security of supply of raw materials, in particular high-purity lithium. It is clear that the oversupply of lithium, which characterized the market in 2018-2019, is almost at an end, as investors drive share prices higher. We are seeing in the market, a scramble to tie up lithium resources as governments look to develop homegrown lithium supply chains and provide subsidies.
Stakeholders are also realizing that not all lithium is created equal and developing low-cost sustainable supply chains is a must. For example, electric vehicles (EVs) require high purity lithium chemicals while the ceramics and grease businesses can use lower quality material. Prices for lithium or cobalt are well off their recent cyclical lows and have more room to run higher as momentum behind EV sales continues.
So what does this mean for lithium producers and developers and trends in 2021 and beyond?
Capital is the fuel that breathes life into a supply chain’s nodes of production and is the bridge between ore in the ground and the eventual lithium-ion battery in a car.
The threat of a structural shortage of energy metals has always loomed in the back of investors’ minds but this is hardly credible as the problems of both high prices and low prices tend to be solved through human innovation and capital availability. It has been encouraging to see the amount of capital raised in the sector with Albemarle (US$1.3 billion); SQM (US$1.1 billion); Lithium Americas (US$500 million); Piedmont Lithium (US$122.5 million); Vulcan Resources (US$92 million); and Sigma Lithium (US$33.3 million) among some of the more notable recent equity raises in the lithium sector.
Investors can expect more capital raises in 2021 as lithium producers diversify their sources and tap new pools of investors in different markets. While this scale of capital accumulation is something the industry only dreamed about in recent years, it still isn’t enough to meet an expected tripling of lithium demand by 2025 and a doubling again to 2030. While more capital is needed, the trick for investors is to gauge how company management teams are deploying this capital as it will surely dictate returns in the future.
With the lithium market roughly 350,000 tonnes in size today and forecast to grow to roughly to one million tonnes in size by 2025, the capital to feed this growth in the supply chain needs to be raised and invested today — not in two or three years. While it does appear that the pathway to one million tonnes of demand is (relatively) clear, growth in the lithium business from one million to two million tonnes by 2030 is far less certain, and could serve to not only limit EV sales in the future, but also further concentrate the existing supply chain structures centered in Asia.
A major factor dictating how capital is raised is the industry’s newfound focus on sustainability. Many junior mining companies, at the behest of large EV players such as Tesla or (eventually) Volkswagen are positioning themselves as producers of “clean” metals. This is rooted in minimizing carbon dioxide emissions in the mining and refining process and is an emerging requirement for any large funding package or off-take deal. This is a noble goal and with the help of technology can perhaps be achieved.
A recent example is the multi-year lithium off-take agreement between BMW and Livent. Under the deal, BMW has agreed to purchase lithium chemicals produced by Livent in Argentina which is produced using direct lithium extraction (DLE) technology designed to minimize water use. Another example is Sigma Lithium and its plan to produce green lithium with a low carbon footprint starting in 2022 as 95% of all energy produced in Brazil is hydroelectric. Many more deals of this type across all energy metals are to be expected and it is incumbent upon the miners to leverage technology to achieve decarbonization goals across supply chains. Some low-cost producers are moving faster than others.
The market has been through an eventful four years with the boom, bust, and recent boom again in the energy metals. Turbocharged growth, opaque pricing dynamics and oligopolistic market structures imply that the only constant is heightened volatility, which means investors, companies, or stakeholders involved in the electrification thematic need to be much more vigilant than in the past.
Cycles in the energy metals sector have been vicious. Could lithium be facing a robust bull market over the next decade? The years 2018 and 2019 were characterized by a severe oversupply of lithium feedstock thanks to rather short-lived high prices in 2016-2017. The subsequent bust sent a new breed of generalist investor rushing for the exits, and we have only just begun to see them warm up to the EV thematic again as a pinch in battery quality raw material looms thanks to recent years of under-investment in mining capacity.
The long timeframe for mine capital raising and building does not match up with the shorter term demand spikes for lithium-ion batteries and this timing challenge is at the heart of the cyclical mismatch. The market could see a material battery grade lithium shortage by 2023 pushing pricing to heights seen in 2017. This bodes well for any lithium producer in 2023. The current travails of the global automotive industry and semiconductor availability could be a warm-up for what is to come with Tier 1 lithium-ion battery availability.
While the wheels of government move slowly, they can help to accelerate change. This is precisely what is happening with respect to the decarbonizing of economies. If recent announcements in the U.S. or EU are any indication, governments will play an increasingly involved role in the rebuild of lithium-ion supply chains. This is one of the most positive outcomes of the Covid-19 outbreak. U.S. President Joe Biden’s Build Back Better thematic which is reportedly focused on green infrastructure and the European Green New Deal, have effectively allocated hundreds of billions of dollars towards the “greening” of these two large economies.
President Biden, in particular, is proposing to spend US$174 billion on EV infrastructure development. While the details are still coming to the fore, this type of largesse is long overdue and one of the only realistic ways (coupled with participation from deep liquid capital markets) to compete with the Chinese state-supported capitalist/communist economic model.
The four most dangerous words in investing are “this time it’s different.” While supply and demand will ultimately dictate pricing levels for the energy metals, robust demand fundamentals accelerated by Covid-19 and other supply chain disruptions, underpinned by collapsing battery technology costs and regulatory support for decarbonization, point to a volatile but dynamic coming decade. It appears that the West is up to the challenge.
— Chris Berry is president of House Mountain Partners, an energy metals advisory firm. He wrote this commentary exclusively for The Northern Miner.