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Lithium Power International
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== Lithium market and price assumptions == '''Lithium demand: Explosive growth driven by energy storage needs''' The lithium market is undergoing a profound transformation due to the rapid increase in the use of batteries in electric vehicles (EVs) and electronics. Historically, the vast majority of lithium was consumed in industrial applications such as speciality glass and lubricants, with (rechargeable) batteries representing only a small proportion of the overall consumption. However, driven by expanding energy storage needs (both e-mobility and grid related), lithium battery demand has experienced explosive growth in recent years (EV batteries now represent c 55% of total lithium demand). Thanks to the favourable EV demand fundamentals driven by decarbonisation and climate targets, this trend is expected to continue until at least 2030. In its latest earnings release (Q421), Albemarle provided an update on its lithium demand forecast, suggesting total global lithium consumption of 1.5mtpa LCE in 2025 and 3.2mtpa in 2030. For comparison, in September 2021, the company expected lithium demand to grow to 1.1mtpa by 2025 and 2.5mtpa by 2030. Out of this total, lithium used in EV batteries was expected to expand at five- and 10-year CAGRs of 48% and 22% from 2020. We note that lithium demand in industrial applications exhibits growth rates similar to GDP of c 2–5% pa. Albemarle’s latest lithium consumption growth assessment suggests a five-year total lithium demand CAGR of c 25% by 2025. In the same vein, in its Q321 earnings release, SQM expected global lithium demand to exceed 1mtpa in 2025. In the shorter term, based on the Resources and Energy quarterly report (REQ) published by the Australian government, lithium demand reached 0.49mt LCE in 2021 versus 0.31mt in 2020, an increase of almost 60%, and is forecast to increase to 0.72mt LCE in 2023. These ambitious expectations are underpinned by the growing EV adoption. While EV penetration and sales estimates vary depending on the source, we note that in its 2021 global EV outlook, the International Energy Agency (IEA) expected global EV stock across all transport modes to expand from 11m vehicles in 2020 to over 145m in 2030 (a c 30% CAGR) under the stated policy (base case) scenario (STEPS). This suggests annual EV sales exceeding 25m in 2030. In a more ambitious sustainable development scenario (SDS), the IEA sees global EV stock rising to 230m vehicles in 2030. In terms of battery capacity, this means 1.6TWh under STEPS and 3.2TWh under SDS. Assuming that an average battery uses c 0.8kg/kWh of lithium (it varies slightly based on the cathode chemistry, but NCM811 and LFP batteries use roughly the same amount of lithium), the IEA’s current EV forecasts imply lithium consumption of c 1.3mt for STEPS and 2.6mt for SDS in 2030. '''Lithium supply: Australia is likely to fill the gap''' Given the strong EV and battery market fundamentals, the key question is whether the new lithium supply will be able to meet rising demand. While our analysis suggests that there is no shortage of lithium projects globally, there is clearly a limited number of projects that are either in development or at the FID stage and could therefore be brought in production in the short term (a typical project development timeline from resource definition to commercial production is up to seven years and could be further extended for battery-grade lithium due to the strict quality and testing requirements). The main reason for the relatively slow supply-side response is the unprecedented speed of the EV market transformation, driven by government policies and the protracted period of low lithium prices that discouraged investments in new supply. In Exhibit 13 we provide a list of selected advanced lithium projects outside China. Assuming no major project delays, our analysis suggests that at least some 300ktpa LCE of upstream lithium capacity (ex China) could come on stream in the next two to three years. We note that the current capacity estimate takes into account the ongoing upgrade at SQM, which is yet to be fully reflected in the market, as well as the recent increase in spodumene concentrate capacity at Albemarle’s Greenbushes. This analysis could be viewed in conjunction with production estimates in the December REQ that suggest global lithium output of 615kt LCE in 2022 (vs 485kt LCE in 2021) and 821kt in 2023. This is broadly in line with our assessment of the capacity roll out. The main lithium producing regions are Latin America, Australia and China. Latin America is the biggest source of lithium from brines, while Australia is a major supplier of primary concentrates that are converted into higher value-add products such as hydroxide. Chile has traditionally been one of the largest producers of lithium (coming solely from Salar de Atacama), and although both SQM and Albemarle are expanding capacity, due to its strict permitting and regulations the country appears to be gradually losing its position (at least in the greenfield space) to Argentina. The latter has seen a string of greenfield lithium brine projects coming to the market. Some of these are in development and shown in Exhibit 13, but there are a number of relatively advanced projects that could potentially reach the market in the medium term (see Exhibit 11). Finally, of note is a significant increase in both upstream and midstream lithium processing capacity in Australia. The recently announced restart of the Wodgina mine, which was decommissioned in 2019 due to low lithium prices, together with the greenfield Mt Holland project will add further to the currently operating large-scale Pilgangoora, Greenbushes and Mt Marion operations. Combined these assets could represent more than 500kt LCE concentrate capacity. This upstream capacity is expected to be matched by the hydroxide processing capacity that is being built in Australia and Asia/China. Overall, while lithium produced from brines often represents higher-quality ‘battery-grade’ material and the brine lithium projects are likely to be in demand, they are relatively small in scale and it appears that the main market balancing supply will come from Australia in the form of spodumene concentrate. '''Lithium price expectations: Short-term market squeeze''' Our price expectations assume that the market is likely to remain tight in the short term as the general shortage of new lithium capacity will be amplified by inevitable project delays. Coupled with high double-digit demand growth, this should provide support to the lithium prices. A higher price is also required to incentivise new project development. Following a period of weak demand and low prices in 2020–21 on the back of the COVID-19 related economic slump, the lithium market has seen a strong recovery starting from the end of last year, with contract and spot pricing enjoying sharp increases across all major products. The spot carbonate price delivered to China has recently exceeded the US$50,000/t level compared to the average 2021 price of only c US$7,000/t. Contract prices should follow the spot level but remain at lower levels. Based on the current market fundamentals, we conservatively model the average contract hydroxide price at US$25,000/t in 2022–24, then gradually falling to our long-term price assumption of US$18,000/t in 2027. We assume a US$1,000/t price difference between carbonate and hydroxide, which is lower than the historical levels (driven by the traditional value chain for industrial applications) but could also be conservative given high carbonate demand in China due to the growing use of LFP batteries. We understand that the spot carbonate price is on par if not at a premium to hydroxide. Our long-term lithium price assumptions are underpinned by the following considerations: * The cash production cost of carbonate of c US$3,000–4,000/t for brines (outside China) and the cash cost of hydroxide production of c US$5,000–7,000/t for the Australian spodumene conversion route. Despite the industry-wide cost pressures, our long-term lithium prices provide enough headroom for a healthy internal rate of return in normal market conditions. * As we noted earlier, in general we see no shortage of greenfield lithium projects in Australia, Latin America, the United States and Africa. In the near term, the demand-driven market is likely to result in a period of high lithium prices, which should incentivise new capacity, but we expect supply to eventually catch up with demand. We note a number of large-scale spodumene operations in Australia and Africa potentially coming on stream, with processing capacity being added in Australia and China. * The inevitable increase in lithium recycling. Given the average EV battery life of c 10 years, with growing EV adoption we will eventually see a gradual increase in battery recycling, which could at some point represent a significant part of supply (similarly to other commodities). * Technological changes. While lithium-ion batteries currently dominate the market for larger, energy intensive applications such as transport, it is highly likely that new technologies will emerge that may use either less lithium or no lithium at all. That said, in the rechargeable battery space, it is unlikely that any such new technologies will become commercial in the next five to 10 years.
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